Lehman Brothers: A Crisis of Value by Oonagh McDonald

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From Cotton Trader to Investment Banker: 1844-
2008 
A brief history 
On 29 January 2008, Lehman Brothers Holdings Inc reported record revenues of nearly 
$60bn and record earnings of over $4bn for its fiscal year ending 30 November 2007. Just 
eight months later, on 15 September 2008, Lehman Brothers sought Chapter 11 
protection in the largest bankruptcy ever filed. Its collapse sent shock waves around the 
world. Everyone remembers the name, Lehman Brothers. Many regard its collapse as the 
cause of 2008's financial crisis. 
The later stages of the existence of Lehman Brothers were dominated by Dick Fuld, one 
of the longest-serving chief executives on Wall Street. Fuld's dominance of the company, 
which he had built up and which he regarded as almost a personal possession, was one of 
the causes of its ultimate failure. 
Lehman Brothers' long history began with three brothers, immigrants from Germany, 
setting up a small shop in Alabama, selling groceries and dry goods to local cotton 
farmers. Their business soon evolved into cotton trading. Henry, the eldest brother, died 
at the age of 33 in 1855; the two younger brothers headed the firm for the next four 
decades. The firm began to expand, setting up a commodities trading business in New 
York in 1858. That gave Lehman a foothold in Manhattan's financial community, a fact 
which was of especial importance after the Civil War, when the firm had to rebuild itself, 

selling bonds for the state of Alabama, servicing that former Confederate state's debt and 
interest payments. In 1870 Lehman Brothers led the way in the formation of the New 
York Cotton Exchange, the first commodities futures trading venture. Mayer Lehman 
was appointed to the Cotton Exchange's first board of directors. Lehman Brothers' 
commodities futures trading business grew to include other goods, and the firm also 
helped to set up the Coffee Exchange and the Petroleum Exchange. 
This was followed in the 1880s and 1890s by Lehman Brothers' development of the 
Southern railroad system, just as JP Morgan and Kuhn Loeb led the financing of the 
Northern railways. Lehman observed the trend of issuing bonds to raise capital, and 
expanded its commodities business to include the trading of securities. 
Raising capital during the Great Depression and the 1930s was obviously extremely 
difficult. Lehman was one of the first firms to develop a new form of financing, now a 
standard practice known as private placement. The loans between blue-chip borrowers 
and private lenders included strict safeguards and restrictions concerning lender safety, 
enabling borrowers to raise much-needed capital and lenders to receive a suitable level of 
return. Lehman Brothers continued to be an innovative firm, willing to take the risks of 
investing in new areas of commerce. It was one of the early backers of retail firms such 
as Sears, Woolworth's and Macy's, and then the entertainment industry, including 20th 
Century Fox and Paramount Pictures. The company then turned to oil, financing the 
TransCanada pipeline, and oil servicing companies such as Halliburton. When electronic 
and computer technology became drivers of the economic expansion of the 1950s, there 
was Lehman, still seeking investment opportunities. In the 1960s, Lehman Brothers 
developed its capital market trading capacity, especially in commercial paper. It became 
the official dealer for US Treasuries.1 
The last member of the Lehman family to have actively led the company (which he did 
from 1925), Robert Lehman, died in 1969, having steered it through an important period 
of growth in a period in which new developments had dramatically changed the world. 
Lehman began to expand globally, opening offices in Europe and Asia, eventually 
merging with a leading investment bank, Kuhn, Loeb & Co. Following the death of 
Robert Lehman, the firm struggled under the leadership of Frederick Ehrman, who had 
been at Lehman Brothers since World War II. He was replaced by Peter Peterson, a 
former US Secretary of Commerce in the Nixon administration, who had little experience 
of banking, still less as a trader. Nevertheless, he turned the company around, and in the 
last five years of his stewardship the company became extremely profitable. His chief 
problem was Lew Glucksman, head of trading, who worked long hours and regarded the 
bankers (as opposed to the traders) with disdain. Peterson tried to keep Glucksman on
side but neither the additional bonuses nor shared leadership prevailed. Glucksman 
wanted to run the firm himself, but patently lacked the skills to do so, appointed his own 
people to important positions, pushed out some partners from the seventy-seven and 
others decided to go, each taking their capital with them. Dick Fuld, Glucksman's 
protégé, was in charge of all trading, but was unable to answer questions about his 
strategy at partners' meetings.

Lehman Brothers: A Crisis of Value by Oonagh McDonald