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Mark ở vũ trụ khác · Another Universe Anatomy of a Business Failure · Finance · Investment banking

Lehman Brothers

quarter-end

Lehman Brothers Holdings Inc. · 15 September 2008 · New York

Whata 158-year-old investment bank files for bankruptcy
Size$639 billion in assets, the largest bankruptcy in US history
Root causetoo much borrowing, too much real estate, and quarter-end numbers made to look better
Main sourcesValukas examiner's report (March 2010), Chapter 11 filing, FCIC (2011)

Source: Lehman Brothers Holdings Inc. Chapter 11 petition, 15 Sep 2008 ($639 billion assets as of 31 May 2008); Lehman 2007 Form 10-K (founded 1850).

Re-read in 1 minute

Essence

158 years, one weekendFounded in 1850, filed for bankruptcy in the early hours of Monday 15 Sep 2008.
About 30x leverageEnd of 2007: $691 billion of assets on $22.5 billion of equity.
$50 billion off the books on closing day"Repo 105": at the end of Q2 2008, $50.38 billion of assets temporarily left the balance sheet.
The warning came from insideA senior vice president wrote a letter alleging accounting improprieties in May 2008.
Nobody convictedThe examiner found "colorable claims". That is not a verdict.

Source: Lehman 2007 Form 10-K (1850; $691 billion assets, $22.5 billion equity); Chapter 11 petition (15 Sep 2008); Valukas report, vol. 3, and Valukas Senate testimony of 6 Apr 2011 ($50.38 billion); Valukas report, vol. 3 (May 2008 letter).

Part 1

The question of the case

A 158-year-old bank: how could it collapse in a single weekend? The answer is not in that weekend but in the years before it: borrowing too much, holding too much real estate, and making quarter-end numbers look better than reality.

2006–2007Speeding upBorrowed money poured into commercial real estate and leveraged loans, just as the market started to turn.
→
late 2007 – mid 2008Dressing the booksEvery quarter-end, tens of billions of dollars of assets briefly left the balance sheet. Leverage looked lower than it was.
→
Sep 2008Loss of trustTwo loss-making quarters, no buyer, no rescue money. Bankruptcy filed in the early hours of 15 Sep.
Part 2

What happened

A peak at the end of 2007, a fall in nine months. Dates from Lehman's SEC filings, the bankruptcy filing and the FCIC report.

Illustrative rise-and-fall line. 1850: founded. 1994: spun off from American Express, listed. End of fiscal 2007: total assets $691 billion, the peak. 9 June 2008: Q2 loss of about $2.8 billion announced. 10 September 2008: preliminary Q3 loss of about $3.9 billion. 15 September 2008: Chapter 11 filing, $639 billion in assets. 1850founded 1994listed end 2007peak: $691bn in assets 9 Jun 2008loss ~$2.8bn 10 Seploss ~$3.9bn 15 Sepbankrupt illustrative line, not to scale
158 years up, nine months down. Two losses in a row drained market confidence, and just five days after the Q3 loss announcement Lehman filed for bankruptcy.Source: Lehman 2007 Form 10-K (1850; total assets $691.1 billion at 30 Nov 2007); Lehman Form 8-K of 9 Jun 2008 (Q2 loss ~$2.8 billion) and 10 Sep 2008 (preliminary Q3 loss ~$3.9 billion); Chapter 11 petition of 15 Sep 2008.
1850 · FoundedMore than a century and a half before the collapse.
1994 · Spun off from American ExpressLehman became an independent listed company.
2006–2007 · Going against the cycleAs the US housing market started to sour, Lehman grew commercial real estate and leveraged lending sharply, such as the 2007 Archstone deal.
End of 2007 · The peakTotal assets of $691.1 billion on $22.5 billion of equity, about 30.7 times.
Mar 2008 · Bear Stearns rescuedJPMorgan bought Bear Stearns with Fed support. Investors started asking: who is next?
9 Jun 2008 · Q2 lossNet loss of about $2.8 billion. At the end of that quarter, $50.38 billion of assets had briefly left the books through Repo 105.
10 Sep 2008 · Q3 lossPreliminary loss of about $3.9 billion, mainly from writedowns on real estate and mortgage assets.
12–14 Sep 2008 · Weekend at the New York FedBank of America chose to buy Merrill Lynch. The Barclays deal fell through because the UK regulator did not approve a guarantee. The US government put in no money.
15 Sep 2008 · Chapter 11Filed at about 1:45 a.m. Assets of $639 billion, debts of $613 billion (as of 31 May 2008).
22 Sep 2008 · Barclays buys the North American businessApproved by the bankruptcy court on 19 Sep. The bad real estate stayed with Lehman.

Source: Lehman 2007 Form 10-K (1850, $691.1 and $22.5 billion; the 30.7x ratio is calculated from these two figures); Valukas report, vol. 1 (Archstone, strategy) and vol. 3, testimony of 6 Apr 2011 ($50.38 billion); FCIC (2011), ch. 18 (Bear Stearns, weekend of 12–14 Sep); Lehman Form 8-K of 9 Jun and 10 Sep 2008; Chapter 11 petition; Barclays Form 6-K of 22 Sep 2008. 1994 spin-off from American Express: press reports, June 2008 (secondary source).

Part 1

What happened

158 years$691 billion2 losing quarters15 Sep 2008
Part 2

Why

leverageRepo 105limits raisedmyths
Part 3

Work lesson

look mid-periodpurpose testprotect the messenger
Part 3

Why: five layers of causes

Strategy layer: borrowing a lot to bet big

leverage · countercyclical growth10-K 2007; Valukas, vol. 1
At the end of fiscal 2007 Lehman had $691.1 billion of assets on $22.5 billion of equity, about 30.7 dollars of assets per dollar of equity. A fall of about 3.3 percent in asset values would wipe out the equity. $691.1bnassets $22.5bn equity ≈ 30.7 times each $1 of equity carries about $30.7 of assets assets down ~3.3% and equity is gone (1 divided by 30.7, Mark's illustrative arithmetic) end of fiscal 2007 · 30 Nov 2007
High leverage makes big profits when prices rise, and wipes out equity very fast when they fall. The Valukas report describes Lehman choosing to "double down" on commercial real estate and leveraged lending after the market had turned, hoping to profit from a countercyclical strategy.Source: Lehman 2007 Form 10-K ($691.1 and $22.5 billion; 30.7x and 3.3% are calculated from these figures); Valukas report, vol. 1, business strategy section (summarised by Seton Hall Law, Denbeaux, secondary source).

Accounting layer: Repo 105, assets that vanish on closing day

Repo 105 · quarter-end window dressingValukas, vol. 3
How Repo 105 worked. A few days before quarter-end, Lehman handed over securities worth at least 105 percent of the cash received and booked it as a sale, not a loan. The cash paid down debt. The balance sheet shrank on closing day. A few days later Lehman bought the securities back and the debt returned. Quarter-end amounts: $38.6 billion in Q4 2007, $49.1 billion in Q1 2008, $50.38 billion in Q2 2008. Q4 200738.6 Q1 200849.1 Q2 200850.38 balance sheet mid-quarter dips on closing day,back a few days later $ billion of assets briefly off the books at each quarter-end · illustrative line, not to scale
The assets did not disappear; they were "lent out" over closing day. Because the collateral was 105%, Lehman booked the deal as a "sale" rather than a "loan". No US law firm would confirm it was a true sale, so Lehman relied on an English-law opinion and ran the deals through its London arm.Source: Valukas report, vol. 3, Repo 105 section; Valukas Senate testimony of 6 Apr 2011 (38.6 / 49.1 / 50.38 billion dollars). English-law opinion: Valukas report, vol. 3, via ABA Journal Mar 2010 and The Economist 12 Mar 2010 (secondary sources).

Motive layer: one number the market was watching

net leverage targetValukas, vol. 3
Net leverage at the end of Q2 2008: Lehman reported 12.1 times. Had Repo 105 been booked as ordinary borrowing, the figure would have been 13.9 times. Lehman reported12.1x as ordinary repo13.9x net leverage at the end of Q2 2008 · end of May 2008
Markets and rating agencies were watching exactly this number. Valukas wrote that Lehman "reverse engineered" its net leverage ratio for public consumption. In April 2008 Bart McDade, who later became president and tried to curb Repo 105, called it "another drug we r on".Source: Valukas Senate testimony of 6 Apr 2011 (12.1 and 13.9); Valukas report, vol. 3 ("reverse engineered", McDade email, via The Economist 12 Mar 2010, secondary source).

Organisation layer: limits raised, the messenger sidelined

risk limits · whistleblower · auditorValukas, vols. 1 and 3

Limits raised

In the second half of 2007 Lehman persistently breached its own "risk appetite" limits. By year-end the breaches were gone, but by raising the limits, not by cutting risk.

Risk left uncounted

From about May to August 2007, a $2.3 billion bridge equity position in the Archstone deal was left out of the risk usage calculation.

The whistleblower letter

In May 2008 senior vice president Matthew Lee wrote a letter alleging accounting improprieties. On 12 June he met auditor Ernst & Young; according to Valukas, he raised Repo 105. In June he lost his job in a round of layoffs.

Source: Valukas report, vol. 1 (risk limits, Archstone $2.3 billion) and vol. 3 (Matthew Lee, E&Y), via Risk.net, Seton Hall Law (Denbeaux), The Economist 12 Mar 2010 and Public Integrity (secondary sources).

Valukas concluded there were colorable claims against CEO Richard Fuld and three chief financial officers over misleading 2007 10-K and Q1 and Q2 2008 10-Q reports, and against auditor E&Y for failing to question the disclosures. He found no colorable claims over the risky business decisions themselves: US law lets managers make business mistakes, but not misreport them.

Source: Valukas House testimony of 20 Apr 2010; Valukas report, vol. 1, executive summary.

Weekend layer: three doors close

no buyer · no bailoutFCIC, ch. 18
The weekend of 12 to 14 September 2008. Door one: Bank of America, which chose to buy Merrill Lynch. Door two: Barclays, where the UK regulator did not approve the guarantee needed to keep Lehman alive until closing. Door three: the Fed and the US Treasury, which put in no public money; Bernanke later said Lehman lacked enough collateral. Result: bankruptcy filed in the early hours of 15 September. Bank of Americachose to buyMerrill Lynch✗ closed BarclaysUK regulator did notapprove the guarantee✗ closed (14 Sep) Fed · Treasuryno public money"not enough collateral"✗ closed 15 Sep 2008, about 1:45 a.m.: Chapter 11 filed the doors closed over a weekend, but the house had been burning for quarters
The weekend was the final push, not the root cause. Whether Lehman could have been saved is still debated: Bernanke said the Fed could not lend because Lehman lacked collateral; economist Laurence Ball (2016, 2018) argues the Fed had the authority and the decision was political.Source: FCIC (2011), ch. 18; Chapter 11 petition (15 Sep 2008); Bernanke, Jackson Hole remarks, 21 Aug 2009; L. Ball, NBER Working Paper 22410 (2016) and the book The Fed and Lehman Brothers (Cambridge, 2018). Barclays on the morning of 14 Sep: Fortune, Dec 2008 (secondary source).
Part 4

Fact-check: what is true and what is myth

13 things often said about Lehman, checked against the Valukas report, Lehman's SEC filings, the bankruptcy filing and the FCIC. Tap each line for the reasoning.

Two asset figures. End of fiscal 2007, at 30 November 2007: $691.1 billion, per the 10-K. In the bankruptcy filing: $639 billion, a figure as of 31 May 2008. 30 Nov 2007 · 10-K$691.1 billion 31 May 2008 · bankruptcy filing$639 billion
Two figures, not a contradiction but different dates. The bankruptcy filing used the end-of-Q2 2008 number, a closing date on which Repo 105 was at its highest.Source: Lehman 2007 Form 10-K; Chapter 11 petition of 15 Sep 2008 (figure as of 31 May 2008, as reported by AP the same day); Valukas testimony of 6 Apr 2011 (Repo 105 in Q2 2008).
SOLID"The largest bankruptcy in US history"

The Chapter 11 petition of 15 Sep 2008 listed $639 billion of assets and $613 billion of debts (as of 31 May 2008). The previous record was WorldCom (AP, 15 Sep 2008, secondary source).

SOLID"A 158-year-old bank"

2007 10-K: founded in 1850. From 1850 to 2008 is 158 years.

SOLID"Lehman pushed about $50 billion off its books at quarter-end"

$50.38 billion at the end of Q2 2008 (Valukas testimony, 6 Apr 2011). The assets were not sold for good: a few days after closing day, Lehman bought them back.

CAUTION"Repo 105 is what brought Lehman down"

Repo 105 hid leverage; it did not create losses. The losses came from real estate and mortgages (8-K of 10 Sep 2008) on a heavily borrowed balance sheet. Repo 105 made investors see it later.

CAUTION"The Fed had no legal power to save Lehman"

That is Bernanke's argument (2009): Lehman lacked collateral. Laurence Ball (NBER 2016, book 2018) disagrees: the Fed had the authority, Lehman had enough assets, and the decision was political. The question is still open.

CAUTION"Repo 105 was illegal in the US, so it was done in London"

No US law firm would opine it was a "true sale"; Lehman relied on a Linklaters opinion under English law, so the deals went through its London arm. Valukas did not conclude Linklaters was wrong. Secondary sources summarising vol. 3.

CAUTION"Fuld knew all about Repo 105"

Fuld told the House (20 Apr 2010) he had no recollection of hearing about Repo 105. Valukas said there was evidence to the contrary. This is the examiner's view, never tested in court.

CAUTION"Lehman was just unlucky with the housing crash"

The crash was real. But Valukas describes a choice to "double down" after the market had turned, breaching risk limits and then raising them (vol. 1).

FALSE"Lehman collapsed only because the government didn't save it"

The word "only" is wrong. Two losing quarters (~$2.8 and ~$3.9 billion), leverage of about 30x and hard-to-sell real estate came before the weekend of 13–14 Sep. The government closed the last door; it did not set the house on fire.

FALSE"People went to prison over Repo 105"

No one was charged. Valukas's "colorable claims" are not a verdict. The SEC closed its investigation in 2012 without bringing a case (secondary source).

FALSE"No one inside raised the alarm"

Matthew Lee's letter in May 2008; Bart McDade's "another drug we r on" email in April 2008 (Valukas report, vol. 3, via secondary sources).

FALSE"The auditors knew nothing"

Valukas: Ernst & Young knew Lehman used Repo 105 and did not challenge it. E&Y disputed this, then settled for $99 million with investors (2013) and $10 million with the New York Attorney General (2015), without admitting wrongdoing (secondary sources for both settlements).

FALSE"Creditors lost everything"

By the 30th distribution (April 2025), the Lehman estate had paid creditors $129.4 billion, of which $96.4 billion went to third-party creditors. Many still lost money, but not everything.

Source: Chapter 11 petition (15 Sep 2008); 2007 10-K; Lehman Form 8-K of 9 Jun and 10 Sep 2008; Valukas report, vols. 1 and 3; Valukas testimony of 20 Apr 2010 and 6 Apr 2011; Bernanke (2009); Ball (2016, 2018); Lehman Brothers Holdings Inc. Plan Trust Form 8-K (2025). E&Y settlements and SEC closing its probe: D&O Diary Dec 2013, CFO.com Apr 2015 (secondary sources).

Part 5

Assessment

Scores are Mark's assessment based on the sources in Part 8, not figures from a study.

Avoidable
4/5
Warnings came early
5/5
Transparent investigation
4/5
Accountability made clear
2/5
Done right after the collapse
  • Court-appointed independent examiner, 2,209-page public report
  • Congress set up the FCIC and took public testimony
  • Creditors repaid $129.4 billion over the years
Not done right
  • No one charged, the SEC closed its probe
  • The auditor settled without admitting fault
  • The earliest messenger lost his job

Source: Valukas testimony of 20 Apr 2010 (2,209 pages); Plan Trust Form 8-K (2025, $129.4 billion); E&Y settlements and SEC: secondary sources as in Part 4.

Lehman did not fall because of one weekend. It fell because of years of over-borrowing, and because of numbers chosen to look fine on exactly the day people looked.

More: why "valid on paper" can still be window dressing

Valukas did not say every repo was wrong. What he pointed to was purpose: Repo 105 was used most heavily right around quarter-end and was not disclosed, so readers of the reports saw lower leverage than reality.

This is where the lesson enters an ordinary office. A technique can be within the rules and still mislead the reader. The question worth asking is not "is it allowed?" but "if it weren't reporting day, would we do this?".

Source for "More": Valukas report, vol. 3 and testimony of 20 Apr 2010; the rest is Mark's commentary.

Part 6

Work lesson: be careful when numbers are "dressed up" at period-end

Applies to any number with a closing date: month-end sales, tickets closed at sprint end, quarter-end inventory, the metric you report upward.

Four habits: look at mid-period numbers, not only closing day; ask the purpose test: if it weren't for the report, would we do this; don't raise limits just to clear breaches; and protect whoever says "this number isn't real". 1 · look mid-periodthe 15th and the 30thaverages, not just endpoints 2 · purpose test"if not for the report,would we do it?" 3 · don't raise limitslog every increasewho approved, why 4 · protect the messenger"this number isn't real"is information, not a crime A number that looks good on closing day is not necessarily the real number.
Each habit patches one failure at Lehman. Leverage that only looked good on closing day, deals done for the report, limits raised to clear breaches, and a warning letter that went nowhere.Source: the failures come from the Valukas report, vols. 1 and 3, and the testimony of 6 Apr 2011; the steps are Mark's suggestions.
Compare the 15th with the 30thSelf-check: take your team's main metric mid-period and at period-end. A big gap deserves a "why".
Count what lands in the last 3 daysWhat share of orders, tickets or contracts falls in the last 3 days of the period? A rising share is a signal.
A log for every limit increaseBudget, deadline, risk threshold: each increase records who approved it and why. Two in a row means a meeting.
A channel to say "this number isn't real"Who on the team may say it, to whom, and how they are protected. Write it down before you need it.
"Another drug we r on."Bart McDade on Repo 105, email of April 2008, quoted in the Valukas report, vol. 3 (via The Economist 12 Mar 2010, secondary source).
Part 7

Further reading

Valukas report (2010), vol. 1 summary and vol. 3 on Repo 105Long, but the summary reads like an incident review. The Repo 105 section includes internal emails.
FCIC, The Financial Crisis Inquiry Report (2011), ch. 18September 2008 day by day, from the Fed, the Treasury and the banks.
Laurence Ball, The Fed and Lehman Brothers (2018)The dissenting view: the Fed could have saved Lehman. Read alongside Bernanke's argument to see both sides.
Anatomy of a Business Failure #09: WeWorkSeparate a good story from unit economics.
Part 8

Primary sources

Primary documents first: the court-appointed examiner's report, the bankruptcy filing, company filings with the SEC, the congressional commission report. Secondary sources are labelled.

  1. Anton R. Valukas, Examiner, Report of Anton R. Valukas, Examiner, In re Lehman Brothers Holdings Inc., Ch. 11 Case No. 08-13555 (JMP), Bankr. S.D.N.Y., 11 Mar 2010, 9 volumes (vol. 1 summary; vol. 3 Repo 105 section). jenner.com/lehman
  2. Anton R. Valukas, testimony before the House Financial Services Committee, "Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner", 20 Apr 2010. govinfo.gov
  3. Anton R. Valukas, testimony before the Senate Banking Subcommittee on Securities, Insurance and Investment, 6 Apr 2011. banking.senate.gov
  4. Lehman Brothers Holdings Inc., voluntary Chapter 11 petition, Bankr. S.D.N.Y., Case No. 08-13555, 15 Sep 2008.
  5. Lehman Brothers Holdings Inc., Form 10-K for fiscal 2007 (ended 30 Nov 2007). sec.gov/Archives
  6. Lehman Brothers Holdings Inc., Form 8-K, Exhibit 99.1, 9 Jun 2008 (Q2 loss) and 10 Sep 2008 (preliminary Q3 results). sec.gov (9 Jun) · sec.gov (10 Sep)
  7. Barclays PLC, Form 6-K, 22 Sep 2008 (completion of the purchase of Lehman's North American business). sec.gov/Archives
  8. Lehman Brothers Holdings Inc. Plan Trust, Form 8-K, Exhibit 99.1 (2025), 30th distribution. sec.gov/Archives
  9. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, Jan 2011, ch. 18 "September 2008: The Bankruptcy of Lehman". fcic-static.law.stanford.edu
  10. Ben S. Bernanke, "Reflections on a Year of Crisis", Jackson Hole, 21 Aug 2009.
  11. Laurence Ball, "The Fed and Lehman Brothers", NBER Working Paper 22410 (2016); book of the same name, Cambridge University Press (2018). nber.org
  12. Secondary sources: The Economist, 12 Mar 2010 (McDade email, liquidity pool, Matthew Lee); ABA Journal, Mar 2010 (Linklaters); Risk.net and M. Denbeaux, Seton Hall Law (risk limits, Archstone); Public Integrity (Matthew Lee); Fortune, Dec 2008 (morning of 14 Sep); D&O Diary, Dec 2013 and CFO.com, Apr 2015 (E&Y settlements); ProPublica, Apr 2010 (Fuld testimony).