Museums and Collections
Lessons from Lehman Brothers
Courtesy of the Lehman Brothers Records, Baker Library, Harvard Business School
Courtesy of the Lehman Brothers Records, Baker Library, Harvard Business School
Snapshots from an exhibition. A 1957 portrait in the “partners’ room” at Lehman Brothers is the very image of mid-century finance: white, male partners, in fine suits, surrounded by a felled forest of wood paneling, high ceilings, and heavy, formal drapes. A cartoon from the December 1957 Fortune magazine, a cutaway of the headquarters at 1 William Street, depicts “A Wednesday Morning at Lehman Brothers,” with such telling details as the “five telephone operators…busy placing the first of 250 to 350 daily long-distance telephone calls,” as 30 clerks, on a different floor, mail corporate dividend checks to Lehman customers.
Scroll forward a half-century, by which time trading has grown enormously in importance (the exhibition shows a crowded trading floor in 1981, above). Lehman Brothers, with record earnings of $4.2 billion, earns Fortune’s rank as “most admired securities firm.”
Nine months later, on September 15, 2008, the firm was bankrupt, its balance sheet riddled with the lending and investment-banking innovations of the day: failing subprime mortgages, mortgage-backed securities, collateralized debt obligations, and other leveraged loans. The collapse of an iconic firm became the iconic moment in the financial crisis and ensuing Great Recession—resulting in grave economic losses worldwide, national debt crises across Ireland and southern Europe, displacement of millions of homeowners and investors, and changes in finance and politics that continue to reverberate around the globe.
“Lehman Brothers: A History, 1850-2008,” mounted last autumn by Baker Library Special Collections at Harvard Business School (HBS) and on display until this July 12, draws on the Lehman archives donated in 2002 and augmented in 2008. Its opening coincided with a symposium on the tenth anniversary of the financial crisis organized by Gund professor of finance and banking Robin Greenwood and Converse professor of finance and banking David Scharfstein. Although the firm’s demise naturally colors contemporary memory, its story has much to say about the growth and role of finance in the United States and worldwide.
Before the fall, of course, there was the rise of the firm—from the unlikeliest and most modest of origins. As the meticulous exhibition documents, the company dates to 1844, when Henry Lehman, a German Jew, migrated to the United States and began peddling household and farm goods around Mobile, Alabama, before settling in Montgomery and opening a general store. Brothers Emanuel and Mayer joined in 1847 and 1850, and the Lehman Brothers enterprise prospered by selling goods in exchange for payments in cotton. A transition into brokering the commodity naturally evolved, with a New York office to support that business opening in 1858. Mayer is documented as having owned slaves, and the firm worked to circumvent the Civil War blockade on shipping cotton from the Confederacy to northern manufacturers, sometimes sending it via England. Postwar, the firm helped found the New York Cotton Exchange, and branched out into other commodities (coffee, sugar, cocoa, petroleum), and, as fiscal agent to Alabama, began selling state bonds—its first venture into municipal finance.
Courtesy of Alabama Department of Archives and History.
In the late nineteenth and early twentieth centuries, Wall Street, of course, was a sharply tiered, class-based industry. With traditional firms like J.P. Morgan dominating the rising business of underwriting securities for established industries like steel manufacturers and railroads, the scrappy outliers—Lehman, Henry Goldman’s firm—pioneered in raising funds for new industries like retailing, including such companies as Sears, Roebuck, F.W. Woolworth, and R.H. Macy. (That carried over, later in the century, to Lehman’s role in financing upstart industries like airlines, cinema and films, and the early computer companies.) As finance evolved to meet clients’ needs, Lehman developed new instruments such as short-term commercial paper for institutional borrowers and various kinds of pooled investment vehicles.
The value of such products and services should not be minimized: they powered the growth and investment of scores of economically important companies. HBS’s Lehman archives encompass more than 900 “deal books”—the bound records of financing transactions. In a bit of fortunate timing, the exhibition has on display the book recording the initial public stock offering of Levi Strauss & Co., in March 1971. The company, which subsequently went private, is in the news again because it returned to public ownership, floating new shares, earlier this month.
All the while, Lehman remained a family firm, through four generations of male descendants, ending with Robert Lehman, who led the company from 1925 until his death in 1969. (He may be best known today for the huge bequest of art left to the Metropolitan Museum, now displayed in the Lehman Wing, opened in 1975). Locally, the family presence is memorialized in Lehman Hall (1924-25), on the diagonal corner of Harvard Yard facing the Square, reflecting the gift of Arthur Lehman, A.B. 1894, and Adele Lehman. Originally the bursar’s and business office, it is now used as Dudley House, the social and community space for graduate students.
Like the rest of Wall Street, Lehman encountered choppier waters as its management evolved in the era after family leadership. Recessions, oil crises, and inflation played havoc with investment banks in the 1970s and 1980s; deregulation and technology also transformed firms’ operations and profitability. Lehman’s results became more volatile as it became more deeply involved in trading, and changed hands, becoming part of American Express’s financial-services enterprise and then emerging as an independent corporation again. Perhaps not surprisingly, its explosive growth in the first years of the new millennium reflected new strategies and new management’s all-out commitment to mortgage-backed securities and derivatives. Lehman bought its own mortgage-lending firms and diversified into other kinds of consumer and small-business loans (often at the riskier end of the spectrum). It prided and marketed itself as a vertically integrated producer and distributor of such products worldwide, from loan origination through servicing, securitization, and trading capabilities.
When the underlying mortgages and loans began to fail, the firm, which had borrowed enormously to bulk up its investment portfolio, was fatally exposed, its hundreds of billions of dollars of assets turning into a black hole of incalculable losses. The exhibition quotes Mark T. Williams, in Uncontrolled Risk (2010): “Lehman had broken two basic investment rules: it bought at the top of the market and it failed to diversify its bets.” Its desperate struggle to sell off units and recapitalize over the weekend of September 13-14, 2008, ended the next day; the exhibition shows its website displaying, in somber gray and white, the news that “Lehman Brothers Holdings Inc. has filed for bankruptcy protection in the U.S.”
Much has been learned from its collapse, and from the surrounding financial and economic calamities. The exhibition displays some of HBS’s many teaching cases based on Lehman’s demise. Regulatory changes effected thereafter, and a more subdued U.S. mortgage market, have dampened the risk of a systemic repeat failure driven by poorly underwritten home loans and an excessively sanguine view of the underlying credit risk.
But many of those regulatory changes are now being relaxed, and the financial press has begun to raise warnings about the spread of leveraged lending in the market for corporate loans, accompanied by derivatives and other securities based on those deals—a sign, perhaps, that memories of 2007-2008 are becoming dangerously attenuated. If so, HBS’s retrospective exhibition may have considerable prospective value as well.
A superb online version of the exhibition website and HBS Lehman archives can be accessed here.