Wall Street’s fourth-largest investment bank (at the time), Lehman Brothers Holdings Inc., filed for bankruptcy in September 2008, with $691 billion worth of assets. Dubbed the Lehman Brothers scandal, this was the world’s largest bankruptcy filing. It all started with the rise of the US housing bubble in the 2000s, which affected the mortgage market, and naturally, the subprime mortgage market.

In this article, our Business2Community experts outline how Lehman Brothers got to the point of bankruptcy, despite being one of the biggest investment banks in the US. You’ll find analyses from official reports, news articles, financial studies, and expert comments in one place, providing valuable business lessons for big and small companies alike.

Lehman Brothers Scandal – Key Facts

  • During the 2000s housing market boom in the US, Lehman Brothers got involved in subprime mortgage-backed securities.
  • Housing prices fell in 2007, which raised alarms about Lehman’s heavy reliance on leverage.
  • The firm declared bankruptcy on September 15, 2008, leading to massive financial losses, regulatory changes around the world, and numerous lawsuits.

The Story of the Lehman Brothers Scandal

Risky mortgages lie at the core of the Lehman Brothers scandal. When the housing market crashed, Lehman Brothers started experiencing losses and eventually filed for bankruptcy in 2008. This became one of the key events of the global financial crisis and Great Recession.

Here is a timeline of events that led the company to bankruptcy:

Lehman Brothers Before the 2000s

In 1844, Henry Lehman opened a shop in Alabama. When his brothers joined his business, they changed the company’s name to Lehman Brothers. Lehman became the Lehman Corporation in 1929, operating as an investment company.

American Express acquired Lehman in 1984 to merge it with Shearson. Nine years later, Lehman spun off from American Express and once again changed its name to Lehman Brothers. In 1994, the company listed its stock on the New York & Pacific stock exchanges.

This was also the year Richard Fuld became Lehman’s CEO. Fuld was the first and last Lehman CEO after the American Express spin-off.

Early 2000s: Lehman Brothers Gets into Mortgage-Backed Securities

In the early 2000s, US housing prices were rising. Between 2003 and 2004, Lehman Brothers acquired five mortgage lenders with BNC Mortgage and Aurora Loan Services focusing on ALT-A loans. These types of loans are known for their relaxed lending standards, allowing borrowers to secure loans without providing full documentation.

Graph showing the housing prices in the US between 1991 and 2023

The rising housing prices combined with low interest rates created a profitable mortgage market. As a result, Lehman Brothers, like many other financial institutions, heavily invested in subprime mortgage-backed securities, packages that include subprime mortgages and loans. Borrowers with poor credit scores and financial histories usually turn to these types of mortgages. Investment banker Michael Burry, as featured in the movie The Big Short, was predicting the dangers of this type of mortgage at this time but his warnings fell on deaf ears.

In 2006, Lehman Brothers consolidated $146 billion of mortgages, representing a 10% increase from 2005. The investment bank’s mortgage-backed securities unit remained profitable until 2007.

2007: Housing Prices Drop

When the housing market started declining in 2007, the value of mortgage-backed securities plummeted. Suddenly, the bundles of subprime mortgages that were advertised as safe blew up and started to take down multiple large banks with them.

2007 presented other warning signs for Lehman Brothers. First, New Century Financial, a major subprime mortgage lender, filed for bankruptcy in early 2007. Then, by August 2007, two hedge funds at Bear Stearns investment bank collapsed.

new century collapse cnbc

In its 2007 earnings report, Lehman Brothers declared a record revenue, while noting a US housing recession in the second half of the year.

2008: Collapse of Lehman Brothers

Those failing subprime mortgages became an even bigger problem for Lehman Brothers in 2008. In March 2008, Lehman’s shares fell by 48%.

By June 2008, the company sold $130 billion of assets and reported that it expected a loss of $2.8 billion. This would be Lehman’s first loss since it spun off from American Express in 1994.

CEO Richard Fuld said he wanted to raise capital of $6 billion through investors. As for other measures, the investment bank increased its liquidity pool to $45 billion, decreased gross assets by $147 billion, and reduced exposure to residential and commercial mortgages by 20%.

Despite these efforts, the Lehman stock continued to fall. In the first week of September 2008, the company saw a 77% decrease in its stock.

Chart showing the stock of Lehman Brothers Holdings, with a highlight on June 2008

Investors were alarmed by the firm’s heavy reliance on borrowed money, so they withdrew their funds and refused repo funding.

Lehman Brothers started seeking acquisition options. Throughout the summer of 2008, the company engaged in negotiations with potential buyers such as Korea Development Bank and Bank of America.

In an interview with Knowledge at Wharton, Madelyn Antoncic, former chief risk officer at Lehman Brothers, said the firm was in a state of denial. Lehman had refused the Korea Development Bank’s offer of investing in the company for a 50% equity stake, as well as their second offer of $5.3 billion for a 25% stake.

On September 15, 2008, Lehman Brothers filed for bankruptcy. As the world’s largest bankruptcy, Lehman’s failure caused a shock in the global financial markets. By the time it went bankrupt, the company had $691 billion worth of assets.

lehman bankruptcy nyt

2010: Anton Valukas Report on Lehman’s Accounting Practices

In 2010, examiner and attorney Anton Valukas released a 2,200-page report about Lehman’s accounting practices, adding to the Lehman Brothers scandal.

According to the Valukas report, Lehman Brothers used “Repo 105”, an accounting loophole, to temporarily remove up to $50 billion of debt from its balance sheet to cover its debt and leverage.

The report also mentioned Ernst & Young helping Lehman conceal its debt. Said Richard J. Herring, a finance professor at Wharton School of the University of Pennsylvania:

Their main role was to help the firm misrepresent its actual position to the public

Another Wharton finance professor Jeremy J. Siegel argued that the report confirmed Lehman’s main problem of excessive borrowing.

Ernst & Young faced accusations of facilitating the accounting fraud that masked Lehman’s financial troubles. In 2015, the company settled a lawsuit for $10 million, acknowledging no wrongdoing.

The Consequences of the Lehman Brothers Scandal

Lehman’s collapse is an important event in the Great Recession of 2008 to 2009, the worst economic downturn since the Great Depression.

Here are some of its important consequences:

Global Financial Implications

The bankruptcy erased almost 5% of the S&P 500 in one day. The Federal Reserve Bank of New York’s Research and Statistics Group estimates Lehman’s value destruction for its creditors to be between $46 billion to $63 billion. Its estimated loss to the US economy based on lost output is predicted to be between $1 trillion and $10 trillion.

According to Knowledge at Wharton, Lehman Brothers was connected to 950,000 transactions at the time of bankruptcy. The fact that such a large organization failed broke the confidence of bankers, investors, and consumers. Bankers were hesitant to make loans, even to companies with good credit scores.

Regulatory Changes

Christine Lagarde, former Managing Director of the International Monetary Fund (IMF), notes that post-crisis has brought new regulations. For example, the IMF increased its financial resources and modernized its lending frameworks to better support countries during crises. This includes paying nearly $500 billion to countries affected by crises between 2008 and 2018 and giving out zero-interest loans to low-income countries.

The US, Europe, and other regions have also implemented regulations after Lehman filed for bankruptcy:

  • Financial Stability Board (2009): FSB regulates the financial stability of member countries, and provides outreach to non-member countries.
  • Dodd-Frank Wall Street Reform and Consumer Protection Act (2010): The Dodd-Frank Act was established to prevent the excessive risk-taking that caused a crisis in the financial industry in 2008.
  • Financial Stability Oversight Council (2010): Operating under the Dodd-Frank Act, FSOC was established to monitor the stability of the US financial system.
  • Volcker Rule (2010): Proposed by the Federal Reserve Chairman Paul Volcker, the Volcker Rule limits banks’ trading and investing activities.
  • European Market Infrastructure Regulation (2012): European countries adopted an infrastructure regulation to monitor financial stability.
  • Basel III Framework (2010): The Basel Committee on Banking Supervision developed measures for banks’ regulation and risk management. The new regulations raised capital and liquidity standards for commercial banks.

Debts and Lawsuits

When Lehman Brothers collapsed, it had $613 billion in debt. In 2009, a year after the bankruptcy, Bloomberg reported that Lehman’s creditors had filed over 16,000 claims. Wilmington Trust said it was owed $73 billion, while Lehman’s landlord in London claimed $4 billion.

In a 2018 lawsuit, the company agreed to pay $2.4 billion to end the mortgage claims. This was significantly lower than the $11.4 billion some hedge funds were looking at, as the judge said the trustees failed to meet a “burden of proof” on the breach of 72,000 loans.

Job Losses and Acquisitions

As Lehman failed, 25,000 employees lost their jobs, with some of them transitioning to Nomura Holdings and Barclays. After the bankruptcy filing, Barclays bought most of Lehman’s US assets and Noumura acquired its Asia Pacific, Europe, and Middle East franchises.

Although Lehman Brothers didn’t survive the financial crisis, 2008 saw important acquisitions in the finance industry, such as JPMorgan Chase’s acquisition of Bear Stearns in March and Bank of America’s acquisition of Merril Lynch in September.

Congressional Hearing

In a congressional hearing, Lehman Brothers CEO Richard Fuld said he took full responsibility for the bankruptcy but questioned the government’s decision to let Lehman fail.

Despite the company’s downfall, Fuld’s salary of $484 million, bonuses, and stock options were viewed as excessive and emblematic of “Wall Street greed”.

What Can We Learn From the Lehman Brothers Scandal?

Very few bankruptcies have shaken the world like the Lehman Brothers scandal. Today, years after the historic event, individuals, businesses, and policymakers still talk about its impact and what lessons can be drawn.

Here are three key lessons:

Risk Management

“I found myself in an institution that didn’t have much of an appetite whatsoever for risk management, which is why they got into that spot to begin with [in 1998], and they were also having liquidity problems,” said Lehman’s former chief risk officer Madelyn Antoncic in her interview with Knowledge at Wharton.

The company was involved in high-risk activities, but as they were bringing in money, these risks were overruled. Businesses, especially financial institutions, must have robust risk management frameworks, no matter how much money they are making or how big the enterprise is.


Lehman’s inability to secure sufficient liquidity contributed to its collapse. For business professionals, ensuring access to liquid assets during times of financial stress can help with difficult periods.

Ethics, Organizational Culture, and Regulations

The Lehman incident highlighted gaps in the global financial system, as many regulations were introduced in the US and abroad.

Long-term sustainability must come before short-term profit for companies. However, ethics in finance still has a lot to improve. Former Managing Director of the IMF Christine Lagarde gives post-Lehman financial scandals as an example of poor financial ethics. Wells Fargo’s 2016 cross-selling scandal, Wirecard’s 2020 fraudulent account reporting, and Luckin Coffee’s 2020 overstatement of sales only scratch the surface.

“Ethics is not only important for its own sake, but because ethical lapses have clear economic consequences. Good regulation and supervision can do a lot, but they cannot do everything. They must be complemented by reform within financial institutions,” says Lagarde.


What was the main reason for the Lehman Brothers collapse?

Who was the CEO of Lehman Brothers when it failed?

Who was blamed for Lehman?