Lehman Brothers: The Bankruptcy That Shook the World

A cardboard box holds less than you'd think. A photo of your kids, a coffee mug, a phone charger, the papers from a drawer you never quite got around to sorting. On the night between Sunday and Monday, September the fifteenth, two thousand eight, hundreds of people stream in and out of a Manhattan skyscraper, filling boxes just like that. Outside, the cameras are waiting. By morning, the same scene will be playing out in London and around the world: people in suits, clutching years of work inside a box made of cardboard. And above their heads, the name of the company that has just ceased to exist: Lehman Brothers.

This was no ordinary bank. It had lived through the American Civil War, two world wars, the crash of nineteen twenty-nine and the Great Depression that followed. On September the eleventh, it had lost offices in the Twin Towers and seen its headquarters badly damaged, and yet within a few months it was back on its feet. For a hundred and fifty-eight years, it survived almost everything. And in the end, it fell in a single weekend. How does that happen? To understand it, you have to start a long way back: with a small shop in the American South, and a product that has nothing to do with money at all. Cotton.

In eighteen forty-four, a young Jewish man from Rimpar, a village in Bavaria, arrives in Montgomery, Alabama. His name is Henry Lehman. He opens a shop selling fabric, tools and everyday goods to the farmers of the area. In eighteen forty-seven his brother Emanuel joins him, and in eighteen fifty the youngest, Mayer. The sign over the door changes: Lehman Brothers. Five years later, Henry dies of yellow fever. The other two carry on. And by then, their business has already taken a turn that will shape the next hundred and fifty years.

The farmers of Alabama rarely have cash. What they do have is cotton. The Lehmans start accepting bales of cotton as payment for their goods, and soon discover that the real profit isn't on the shelf, but in reselling that cotton. Shopkeepers become middlemen, and middlemen become something close to bankers: they give today, on the promise of being paid tomorrow, when the harvest comes in. But it's worth saying plainly what lay behind that harvest. The cotton of the American South was picked by enslaved people, and the census of eighteen sixty lists Mayer Lehman himself as the owner of seven human beings.

In eighteen fifty-eight, three years before the Civil War breaks out, the brothers open an office in New York, at the heart of American trade. The war splits the country in two and devastates the South. Mayer stays in Alabama, on the side of the Confederacy. The business survives all the same, and after the war the Lehmans move their center of gravity to New York for good. In eighteen seventy, they help found the city's Cotton Exchange. By now they understand that the valuable thing isn't the cotton itself. It's the trust between the one who sells and the one who buys, between the one who lends and the one who promises to pay it back.

Over the decades that follow, Lehman Brothers slowly leaves goods behind and turns to money itself. It helps young companies raise capital and finances the industry of a country growing at breakneck speed. From nineteen twenty-five it's run by Robert Lehman, Emanuel's grandson, who will lead it for forty-four whole years, steering it through the crash and the Depression. And through all that time, the firm has a feature that's easy to overlook, but explains a great deal: it belongs to its partners. They make the decisions, and they risk their own money. If they bet wrong, it isn't some faceless shareholder who loses. They do.

Robert Lehman dies in nineteen sixty-nine, the last member of the family at the helm. Hard years follow, full of internal feuds and losses, and in nineteen eighty-four the firm is sold to American Express for three hundred and sixty million dollars. Ten years later, Lehman becomes independent again, this time as a company listed on the stock exchange. Taking charge is a tough, ambitious banker named Richard Fuld, who will keep the job for fourteen years. On the surface, the name on the door is the same. Underneath, something important has changed: the money being risked no longer belongs mainly to the people making the decisions. And the bonuses are paid out every year, while the losses may not show up until much later.

In the early two thousands, America is in the grip of a real estate fever. House prices climb year after year, interest rates are low, and mortgages are handed out to almost anyone who knocks on the door, even people with no steady income. Lehman doesn't sit on the sidelines. It has already bought its own companies that make exactly these kinds of loans. It gathers up thousands of mortgages, bundles them into securities and sells them to investors all over the world, while keeping plenty of them for itself. In essence, it's the same game as the cotton in Montgomery: you give today, on the promise that someone will pay tomorrow. Only now, many of the people making that promise will never be able to keep it.

To make even more, Lehman doesn't just bet its own money. It borrows. By two thousand seven, for every dollar of its own, it has around thirty borrowed. That means a small drop is enough to wipe out all of its own money. As long as prices keep rising, the strategy looks like genius: profits multiply, bonuses swell. But when American house prices start falling, from two thousand six onward, the same arithmetic runs in reverse. And it forgives no one.

The first big crack appears in March two thousand eight. Bear Stearns, another major Wall Street investment bank, runs out of cash in a matter of days. But it isn't allowed to fall: JPMorgan buys it, with the backing of America's central bank, the Federal Reserve. The market draws its own conclusion: if things go wrong, the government will be there. All eyes then turn to Lehman, the smallest of the big investment banks still standing. In June it reports a loss of nearly three billion dollars. Fuld looks for a buyer or an investor, but refuses to sell cheap. He believes his firm is worth more than the market says. And time is running out.

On Tuesday, September the ninth, word gets out that talks with the Korea Development Bank, the last serious hope, have broken down. Lehman's share price falls forty-five percent in a single day. On Wednesday, the firm reports a loss of nearly four billion dollars for one quarter alone. And then begins the thing every bank fears, from a shop in Montgomery to a tower in Manhattan: the others stop trusting it. Clients pull their money out. Banks demand more collateral before they'll keep doing business with it. A firm that lives on money borrowed from one day to the next discovers that nobody wants to lend to it anymore.

On Friday, September the twelfth, in the evening, the United States Treasury Secretary, Henry Paulson, summons the heads of Wall Street's biggest banks to the offices of the Federal Reserve Bank of New York. His position is clear: Lehman has to be saved by the private sector, by its own competitors. There will be no public money — not a penny, as one of the people in the room would later recall. Paulson has already taken fierce criticism for the rescue of Bear Stearns and, just five days earlier, for the rescue of the two giants of the mortgage market, Fannie Mae and Freddie Mac. He fears that if he saves Lehman too, he'll send the market a dangerous message: take all the risks you like, the taxpayers will pick up the bill.

There are two possible buyers on the table. The first is Bank of America, which won't move without government support. When it doesn't get it, it walks away, and that same weekend turns instead to another bank terrified it will be next, Merrill Lynch, and agrees to buy it. That leaves Britain's Barclays. By Saturday night, everything suggests a deal is close: the Wall Street banks agree to jointly take on Lehman's most toxic pieces, and Barclays will take the rest. For a few hours, disaster seems to have been avoided.

On Sunday morning, it all comes apart. Barclays' leaders tell the Americans that the British regulator won't approve the deal. The problem is a guarantee: until the purchase is complete, someone has to stand behind Lehman's obligations, and British law requires a vote of Barclays' shareholders for that, which would take weeks. The Americans ask for the vote to be waived. The British refuse. Britain's finance minister, Alistair Darling, would admit years later that he was the one who vetoed it. If Lehman was such a good deal, he wondered, why wouldn't a single American bank go near it?

That same afternoon, at the Federal Reserve Bank of New York, government officials put a question to Lehman's lawyers that they weren't expecting: are you planning to file for bankruptcy tonight? Harvey Miller, the firm's veteran bankruptcy lawyer, tries to explain that a collapse like this would be Armageddon for the markets. The officials don't dispute that it will be bad. But they insist it would be worse for the markets to open on Monday with no decision made at all. And then, as Miller himself would later tell it, they more or less throw the Lehman team out. Leaving the building, he turns to his colleagues and says, dryly: "I don't think they like us."

When they get back to Lehman's headquarters on Seventh Avenue, they find pandemonium. Photographers, cameras, a protester with a sign against Wall Street, and hundreds of employees coming and going: the people with the cardboard boxes. Inside, the board of directors hears the news in shock. One of its members, a seasoned economist, asks how something like this could be happening in America. In the early hours of Monday, Lehman Brothers files for bankruptcy. With more than six hundred billion dollars in assets and around twenty-five thousand employees worldwide, it is the largest bankruptcy in the history of the United States. To this day.

On Monday, the Dow Jones index loses more than five hundred points, its biggest fall since September the eleventh. But the real shock comes on Tuesday, from a place nobody was watching. In America, money market funds are seen as almost as safe as a bank account. One of the largest holds short-term Lehman debt worth seven hundred and eighty-five million dollars, which is suddenly worth nothing. For the first time in fourteen years, a fund like this can't give back a full dollar for every dollar entrusted to it. Panic spreads. And that same day, America's central bank, with the blessing of the government that has just let Lehman fall, lends eighty-five billion dollars to the insurance giant AIG, so that it doesn't collapse too.

The wave doesn't stop at America's shores. In Hong Kong, tens of thousands of ordinary savers, many of them retired, had bought something at their local bank branch that was presented to them as a safe alternative to a savings account, with a slightly better return. They were called "minibonds." Most of them didn't even know that their value depended on an American bank called Lehman. Overnight, a lifetime of savings seemed to be gone. For months, elderly people marched through the streets of the city in protest. In July two thousand nine, the banks agreed to buy the bonds back at sixty or seventy percent of their value, with the higher share going to the oldest investors. From a shop in Alabama to a bank counter in Hong Kong, the chain of promises had gone global.

Over the months that followed, the crisis grew into the worst recession since the nineteen thirties. In the United States alone, nearly nine million jobs were lost, and in Europe the wave found countries that were already fragile, Greece among them. Ever since, one question has never stopped being argued over: could Lehman have been saved? The chairman of America's central bank, Ben Bernanke, later argued that there was no legal way to do it, because Lehman didn't have enough collateral for a loan that size. But other economists, going through the documents from those days, found no trace of any such discussion, and believe the decision was, above all, a political one.

And if people still disagree about the government's responsibility, the questions about responsibility inside the firm itself came much faster. Three weeks after the bankruptcy, Richard Fuld sat down in front of a committee of Congress. A congressman asked him whether it was fair that he had kept almost half a billion dollars, while his company had gone bankrupt and the economy was in crisis. Fuld replied that the figure was smaller, around three hundred million over eight years. It's true that his own shares were wiped out along with the firm. But the question was never really about one man. When the Lehman brothers made a mistake, they paid for it out of their own pockets. Lehman's mistake in two thousand eight was paid for by an employee carrying a cardboard box, a retiree in Hong Kong, and millions of people who lost their jobs in the recession without ever having heard the name Lehman.

But the story of Lehman didn't end that Monday. Within days, Barclays did end up buying its American business, along with the skyscraper on Seventh Avenue, and Japan's Nomura took over much of its operations in Asia and Europe. Winding up everything else took years. Lehman's American brokerage firm finally closed its books in two thousand twenty-two, fourteen years later. And in October two thousand twenty-five, a British court closed the file on its European arm with an unexpected conclusion: enough money had been recovered to pay every one of its creditors in full, with interest.

That doesn't mean Lehman was healthy. The American parent company left enormous losses behind it, and many creditors got back only part of what they were owed. But it does say something deeper about what a bank really is. It isn't a vault full of money. It's a promise, and it stays standing only as long as other people believe in it. And once that belief is gone, panic can do damage in a single night that takes years to repair. Even the word itself carries the secret: "credit" comes from the Latin "credere," which simply means "to believe." Lehman Brothers was born when three immigrants in Alabama gave credit to farmers with empty pockets, believing in their harvest. It died when the world, in the space of a weekend, stopped believing in it.

And so the story ends where it began, with a cardboard box. Inside it, a mug, a photograph, a few papers. But what was lost that night could never fit in any box. It was trust, the invisible foundation the whole skyscraper stood on. And the foundation that every bank in the world, even today, still stands on.