Lehman Brothers Bankrupt - Why and how it happened.

As a prospective MBA student and one really keen on investment banking - Lehman Brothers is a big name to me. It is the same with many prospective and current MBA students across top B-Schools all over the world - IIMs, ISB, Wharton, Harvard and what not? A glimpse at Wharton's MBA placement statistics for 2007 shows that Lehman recruited 18 grads. It could be around the same number of students placed across other top B-Schools here in USA. And the doomsday came on 15th September. Lehman filed for Chapter 11 Bankruptcy. This is what it posted on its website at midnight of the 14th.

"Lehman Brothers Holdings Inc. Announces It Intends to File Chapter 11 Bankruptcy Petition; No Other Lehman Brothers' U.S. Subsidiaries or Affiliates, Including Its Broker-Dealer and Investment Management Subsidiaries, Are Included in the Filing."

It is indeed a red letter day in USA's corporate history. A 158-year old company has filed for a bankruptcy and wrecked Wall Street and rattled the global finance system. Also rubbing salt to the finance industry's wound, is Merrill Lynch's demise (read as acquisition) by Bank of America. Two majors down on a day. But what actually happened at Lehman? This is my two cents on the issue.

"Know when to stop before you begin" goes the saying. Lehman got this messed up. Investment banking was always about high-stake bets and huge borrowings but it also demands high level of strategy. It is believed that Lehman borrowed too much money and invested it in 'very high' risk domains, namely real estate. Success in IB is proportional to the ability of that company to take risks. But there is thin line that separates risk from imprudence or over-confidence. More so when we speak of real-estate investments in this economy. Clearly Dick Fuld, Lehman's CEO got his priorities and numbers wrong. 

But as the credit crunch worsened, Lehman's leverage - borrowings relative to capital - continued to grow. This is in contrast to other major IBs. One instance of Lehman's miscalculated investment is its leveraged buyout of Archstone, a big apartment developer. Lehman paid $22.2 billion for this transaction (in partnership with Tishman Speyer) in Oct 2007. By then, real estate woes have already begun. But how prudent is that investment? Lehman's shares have lost 94% of their value since the beginning of this year due to its exposure to subprime debt crisis.

And on 15th of September came the bang. The filing shows that Lehman is closing its doors with more than $600 billion of debt. The bank has total debts of $613 billion against total assets of $639 billion. Its filing with the Bankruptcy Court of the Southern District of New York shows that Lehman had more than 100,000 creditors. The move into bankruptcy came after last-minute talks with Barclays PLC  and Bank of America faltered Sunday, leaving few options for the 158-year-old firm.

Many of us know that Lehman is actually a 14 year company with a 158-year name. That is because it was acquired by American Express in 1984 and spun-off in 1994 as a standalone company. Sadly, over the last week or so, Lehman was like a bug dying on your windscreen: you want to focus on the road but are compelled to watch the stricken insect’s last moments.

Good-bye Lehman.