The real reason Lehman Brothers collapsed

Lehman Brothers was once the fourth-largest investment bank in the United States. It had survived the railroad bankruptcies, the Great Depression, and two world wars. But in September 2008, it filed for the largest bankruptcy in American history with over $600 billion in debt, millions of livelihoods shaken, and a global financial system left on the brink of collapse.

This week, we look at how Lehman Brothers became a financial giant, how risky bets destroyed it, and how its collapse changed global finance forever:

• 🏛️ Becoming a Wall Street powerhouse

• 💥 The biggest bankruptcy in history

• 📉 How the collapse changed finance

— Investor Briefcase Team

Lehman Brothers began in 1844 when Henry Lehman opened a dry goods store in Montgomery, Alabama. His brothers Emanuel and Mayer soon joined, and the family turned their store into a commodities brokerage, helping Southern farmers bring cotton to market. By the 1860s, Lehman Brothers was growing through the Civil War economy.

After relocating to New York in 1870, the firm shifted toward banking. Through the early 20th century, Lehman financed railroads, helped fund General Motors, and assisted in taking dozens of companies public. The firm fought through the Great Depression and cemented its reputation through postwar expansion.

By the 1990s, Lehman was known as one of the most respected names in finance. The firm advised on high-profile mergers, participated in major IPOs, and expanded across Europe and Asia. Its culture was competitive but deeply rooted in long-standing relationships and financial discipline.

That started to shift in the early 2000s. Richard Fuld, a fixed-income specialist who had joined the firm in 1969, became CEO in 1994 and began pushing for more aggressive growth. Fuld modernized Lehman’s trading operations and turned it into a popular name in the rapidly growing mortgage and credit markets.

By 2007, Lehman Brothers had more than 28,000 employees in over 20 countries and held more than $600 billion in assets. Its Total Return Swap and structured credit desks were seen as one of the best in the industry. It had become the fourth-largest investment bank in the United States, outlasting centuries of financial upheaval.

It seemed like Lehman was too big and too embedded in the system to fail.

In the early 2000s, Lehman ramped up its exposure to mortgage-backed securities. As housing prices rose, the firm made aggressive bets on subprime mortgage portfolios, complex derivatives, and real estate investments. Its Real Estate division, led by a group nicknamed "the axe men," deployed capital into every corner of the U.S. housing market.

Lehman took on massive leverage to amplify its returns, sometimes borrowing $30 for every $1 it held. In 2007 alone, Lehman underwrote over $85 billion in mortgage-backed securities. When the housing market started to crack in 2007, Lehman’s balance sheet was filled with illiquid assets that couldn’t be priced or sold. Investors grew nervous, short sellers circled, and its stock price started sliding.

Richard Fuld remained defiant. He turned down potential lifelines, including merger talks with Bank of America and overtures from Korea Development Bank. Inside the firm, morale fell apart. Senior executives left, and divisions were at odds over how to respond to mounting losses.

On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy. It listed $613 billion in debts, making it the largest bankruptcy filing in American history.

The firm’s collapse caused widespread panic across the financial system. Credit markets froze and stocks plummeted. What had seemed like a contained housing crisis became a full-blown global meltdown.

Sponsored by Mode Mobile

This tech company grew 32,481%..

No, it's not Nvidia. It's Mode Mobile, 2023’s fastest-growing software company according to Deloitte.

Nasdaq ticker $MODE secured—invest at $0.30/share before their share price changes on 5/1.

Invest in Mode's pre-IPO offering at just $0.30/share.

_{*An intent to IPO is no guarantee that an actual IPO will occur. Please read the offering circular and related risks at invest.modemobile.com.
*The Deloitte rankings are based on submitted applications and public company database research.}

The immediate aftermath was chaos. Major banks hoarded cash and global stock markets lost trillions. Panic spread beyond Wall Street into everyday life as companies slashed jobs and governments rushed to intervene. While some profited from the chaos, more than 8 million lost their jobs.

In response, the U.S. government enacted emergency measures, including TARP (the Troubled Asset Relief Program), which injected $700 billion into financial institutions. Globally, central banks cut interest rates to zero and launched massive liquidity programs.

In the years that followed, governments worldwide passed sweeping regulatory reforms aimed at preventing another Lehman moment. The Dodd-Frank Act in the U.S. introduced stricter capital requirements, tighter oversight of derivatives trading, and new tools to wind down failing banks without shocking the entire system.

Richard Fuld, once one of Wall Street’s most powerful figures, faced lawsuits, congressional hearings, and intense public backlash. Though he denied wrongdoing, his reputation never recovered. He eventually returned to a quieter life running a small investment firm, but has remained largely out of the public eye.​

More than a decade later, the collapse of Lehman Brothers remains a symbol of how quickly overconfidence, leverage, and a few bad bets can bring down even the oldest institutions.

Sponsored by RYSE

Is this startup the next billion dollar buyout?

Imagine investing in Ring before its $1.2B buyout by Amazon

Or Nest, before Google's $3.2B acquisition.

By the time we hear about industry-changing companies, it’s usually too late. But right now, there’s a smart home startup making their way to homes in America. This tech startup is RYSE, and unlike Ring, you can still invest before their $1.90 round closes May 30.

Like how Ring disrupted home security, this company is revolutionizing smart blinds & shades.

With $10M+ in revenue, 200% YoY growth, and sold in 127 Best Buy stores, they are primed for massive expansion and forecast 5X in revenue this year.

Earn up to 25% in free shares.

_{Past performance is not indicative of future results. Email may contain forward-looking statements. See US Offering for details. Informational purposes only.}

More Stories
Other major collapses in finance

> Archegos Capital Management: In 2021, Bill Hwang’s family office imploded after using extreme leverage through total return swaps to amass concentrated bets on a handful of tech and media stocks. When margin calls hit, Archegos defaulted, causing over $10 billion in losses across multiple global banks.

> MF Global: Led by former Goldman Sachs CEO Jon Corzine, MF Global collapsed in 2011 after making a $6.3 billion bet on European sovereign debt using client funds. Its bankruptcy was one of the largest on Wall Street since Lehman, and led to calls for tighter regulation on commodities brokers..

> Bear Stearns: One of the first casualties of the 2008 financial crisis, Bear Stearns collapsed after heavy exposure to toxic mortgage-backed securities. The firm lost investor confidence rapidly and was forced into a fire sale to JPMorgan Chase for just $2 per share, down from a high of $133.

Each week we profile the most notorious investment stories.

Got an idea for a story? Email us at [email protected]