The Lehman Brothers collapse: the day the 2008 crisis went global

Where did Lehman Brothers come from, and how did it make money?

Lehman Brothers was founded in 1850 in Montgomery, Alabama, and operated for 158 years with about 25,000 employees worldwide (Wikipedia). It grew into one of the largest US investment banks, earning fees from trading, advice, and the packaging of loans into securities. Its name stood for stability and for long relationships with major clients.

The firm also owned mortgage lenders. It bought Aurora Loan Services, an Alt-A lender, in 1997 and BNC Mortgage, a subprime lender, in 2000. By 2006 the 2 units were lending almost $50 billion per month. Lehman therefore produced mortgage loans and kept large positions in them, which tied its fate to the housing market.

How leveraged was Lehman Brothers when the collapse came?

In 2008 Lehman held about $680 billion of assets supported by roughly $22.5 billion of capital, and its ratio of assets to equity rose from about 24 to 1 in 2003 to 31 to 1 in 2007 (Wikipedia). The EQOS Asia 2008 back-test (2026) lists 30.7 to 1 from the 10-K filing and a bankruptcy threshold of 3.3%.

At that ratio a drop of 3.3% in asset values erases the equity. The reasons behind this exposure, including mortgages and the Repo 105 accounting, are set out on the page why did Lehman Brothers fail. Leverage explains why the firm had so little room to absorb the losses that arrived in 2008.

What happened to Lehman Brothers in the weeks before 15 September 2008?

On 9 June 2008 Lehman announced a loss of $2.8 billion, its first since the spin-off from American Express (Wikipedia). On 9 September its shares fell 45% to $7.79 after talks with a South Korean investor were reported on hold. The next day it announced a $3.9 billion loss and plans to sell a majority of its investment management business.

Talks with Bank of America and Barclays ended over the weekend of 13 and 14 September without a buyer. The Treasury rejected Bank of America’s terms, so that bank bought Merrill Lynch instead, and regulators in the United Kingdom vetoed the Barclays deal on 14 September. Lehman had run out of partners within 5 days.

How large was the Lehman Brothers bankruptcy in September 2008?

Lehman Brothers filed for Chapter 11 on Monday 15 September 2008 in the US Bankruptcy Court for the Southern District of New York. Reports of the filing cite $613 billion of bank debt and $639 billion of assets (Wikipedia), while the study lists $619 billion of debt, the largest default in history at that date (EQOS Asia 2008 back-test, 2026).

The detailed account of the filing, the creditors, and the size comparison with earlier bankruptcies sits on the Lehman Brothers bankruptcy page. For this overview, the key point is the scale. A failure of this size touched banks, funds, and companies in dozens of countries, which explains why the crisis went global that week.

How did the Lehman Brothers collapse spread across the global markets?

The Dow closed down just over 500 points, or 4.4%, on 15 September 2008 (Wikipedia). The Reserve Primary Fund, a money market fund, fell below $1 per share after losses on $785 million of Lehman commercial paper, the first such drop since 1994. Money market funds supply short-term cash to firms, so the shock reached companies outside finance.

Barclays agreed to buy core North American assets in a revised deal of $1.35 billion approved on 20 September, and Nomura agreed to buy the Asia-Pacific franchise for $225 million. The sales moved Lehman’s businesses to new owners across 3 regions. Banks in Singapore and Hong Kong could feel the shock through funding and trade channels.

What role did Richard Fuld play in the Lehman Brothers collapse?

Richard S. Fuld Jr. served as chairman and chief executive of Lehman Brothers from 1 April 1994 until 15 September 2008 (Wikipedia). He testified before the US House Oversight Committee on 6 October 2008. The page on Richard Fuld and Lehman covers his decisions in the last year, including talks with investors and the choices that shaped the final weekend.

Public documents are the right basis for any judgement on individuals. The court-appointed examiner Anton R. Valukas released his report on 11 March 2010, and it describes the facts that investors and regulators can use. This overview keeps to the documented events and leaves the assessment of any person to those sources.

What did public data show before the Lehman Brothers collapse?

The study applies its Codex to public data from 2006 and 2007 and finds a φ(S) score of 0.234 for the global financial system, with 6 of 9 dimensions in the critical zone. It also projects the point of no return at about 1.1 year after mid-2006, a window that ends before Lehman fell (EQOS Asia 2008 back-test, 2026).

The score is a measurement that you can recompute from SEC, BIS, FDIC, and Case-Shiller data. The EQOS Asia method page explains the 9 dimensions, and the Λ simulator lets you estimate a score for your own exposure in 10 minutes. A 30-minute pre-diagnostic with the team applies the same reading to your portfolio or business.

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About the author

Stéphane Jambu

President, EQOS Forecast Asia

Stéphane Jambu leads EQOS Forecast Asia and works as a consultant in e-commerce, search visibility, and AI. LinkedIn profile