How does a company with over 150 years of history suddenly vanish? This is the story of Lehman Brothers, a firm that rose with Wall Street, bet big on real estate, and crumbled under the weight of its own ambition.

In the saga of the Global Financial Crisis (GFC) , no name looms larger or more tragically than Lehman Brothers. When the firm filed for bankruptcy on 15 September 2008, it marked the largest corporate collapse in US history and became a defining moment of the crisis. It was the event that turned a contained financial panic into a global catastrophe.

But Lehman’s fall didn’t happen overnight. It was the result of years of high-stakes risk-taking, questionable accounting, and a fatal miscalculation about government support. Here's a step-by-step look at how one of the most storied names on Wall Street came crashing down.

How Lehman Brothers began

Lehman Brothers was founded in 1850 by Henry Lehman, a German immigrant who opened a dry goods store in Montgomery, Alabama. When his brothers Emanuel and Mayer joined him, the company began trading cotton, which was then the economic lifeblood of the South.

This trade led the brothers into the world of commodities and financial intermediation, and by the late 1800s, they had relocated to New York. From there, Lehman Brothers evolved into a key player in investment banking. It helped fund the growth of the US railroad network, and later, major corporations like Sears, F.W. Woolworth Company, and R.H. Macy & Company (Macy’s).

From merchant bank to Wall Street giant

Throughout the 20th century, Lehman weathered market crashes, world wars, and the Great Depression. In 1984, it merged with Kuhn, Loeb & Co., another investment banking powerhouse, and was acquired by American Express shortly thereafter. The marriage was short-lived, and in 1994, Lehman was spun off as an independent public company.

Under the leadership of CEO Richard Fuld, who would later be nicknamed “The Gorilla” for his aggressive leadership style, the firm entered a new era of growth. Lehman doubled down on trading, investment banking, and most critically, real estate finance. Between 1994 and 2007, the firm transformed into a profit-generating machine and a key fixture of the global financial system.

The real estate gamble

In the early 2000s, low interest rates and financial innovation helped fuel a housing boom across the US. Lehman Brothers was one of several Wall Street firms that rode this wave, but it did so more aggressively than most.

Lehman became deeply involved in the mortgage market. It bought mortgage lenders like BNC Mortgage and Aurora Loan Services, which allowed it to originate loans directly. These loans, often to borrowers with poor credit histories, were then bundled into mortgage-backed securities (MBS) and sold to investors around the world.

But Lehman didn’t just underwrite and sell these products. It held billions of dollars of them on its own books, often in the form of collateralised debt obligations (CDOs), which offered higher returns but were far riskier.

A dangerously leveraged balance sheet

As its mortgage exposure grew, so did Lehman’s use of leverage: the practice of borrowing to amplify returns. At its peak, Lehman’s leverage ratio reached over 30 to 1, meaning it had just $1 in actual capital for every $30 it borrowed. This razor-thin margin for error made the firm incredibly vulnerable to even small declines in asset values.

Such a high level of leverage magnified both profits and risk. While the housing market soared , this strategy paid off. But when prices began to fall, it turned into a nightmare. As mortgage defaults rose and housing prices declined in 2006 and 2007, the value of Lehman’s mortgage assets plummeted and wiped out its capital cushion.

Early warning signs and growing panic

In June 2007, Lehman shut down BNC Mortgage due to rising delinquencies. In August, the credit markets began to seize up. Although the firm reassured investors that it had diversified its risks, many analysts weren’t convinced.

Things came to a head in March 2008. Bear Stearns, another major investment bank with similar exposure, collapsed and was acquired by JPMorgan Chase in a deal brokered by the US Federal Reserve. The episode sent tremors through Wall Street and cast doubt on the stability of similar firms, including Lehman.

Yet Lehman continued to report relatively modest losses and insisted that its liquidity position was strong. It raised capital from investors, sold off some assets, and explored a plan to spin off toxic real estate holdings into a separate entity. But none of these moves restored market confidence.

Creative accounting: the Repo 105 scheme

One of the most controversial aspects of Lehman’s downfall was its use of a loophole known as Repo 105 . These were repurchase agreements – short-term loans that Lehman structured to appear as asset sales. Just before each quarter’s end, Lehman would use Repo 105 transactions to move billions in liabilities off its balance sheet.

The goal was simple: make the firm appear less leveraged than it really was. While technically legal under certain accounting standards, this practice was deeply misleading and masked the true fragility of Lehman’s financial position. When this accounting trickery was revealed during post-mortem investigations, it severely damaged the firm’s credibility and cast doubt on how much regulators and auditors really knew.

The search for a saviour

By September 2008, Lehman’s share price had plummeted by 77%. Credit rating agencies threatened downgrades. Hedge funds and trading partners began pulling their business. The firm was hemorrhaging cash and rapidly running out of options.

Behind the scenes, government officials, bankers, and regulators scrambled to find a buyer. Talks were held with Bank of America and Barclays, but both negotiations collapsed. Bank of America chose to acquire Merrill Lynch instead, while Britain was reluctant to approve the Barclays deal unless the US government offered a financial backstop. But, the government refused.

This decision proved pivotal. Unlike Bear Stearns or AIG, Lehman was allowed to fail.

The collapse and bankruptcy

On 15 September 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection, listing over $600 billion in assets. This made it the largest bankruptcy in US history.

The fallout was immediate and severe. Global markets plunged. Credit markets froze. Counterparties scrambled to unwind complex contracts linked to Lehman’s debts. The firm’s collapse sparked a wave of panic selling , forced liquidations, and a full-blown crisis of confidence across the global financial system.

Why wasn’t Lehman saved?

Many still debate why Lehman was allowed to fail when other institutions were rescued. Treasury Secretary Hank Paulson and Federal Reserve Chair Ben Bernanke later argued that they lacked the legal authority to save the firm. Without a willing buyer or adequate collateral, they claimed, there was simply no viable option.

Critics, however, argue that the decision was a grave miscalculation. The lack of support sent a chilling message to markets: no institution was too big to fail. In hindsight, many believe that allowing Lehman’s collapse intensified the crisis and forced governments to launch even larger rescue programs just weeks later.

The legacy of Lehman Brothers

More than a routine corporate failure, Lehman's downfall represented a deep rupture in the global financial system. It exposed the fragility of highly leveraged financial institutions and the dangers of underregulated mortgage markets. It also highlighted the interconnectedness of global finance, where the fall of one player can endanger the entire system.

In the aftermath, the US and other countries enacted sweeping financial reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act. These aimed to improve oversight, increase transparency, and ensure that no firm could again become so systemically dangerous.

Beyond a cautionary tale

While Lehman Brothers is often cited as a cautionary tale about greed, risk, and hubris, it also serves as a historical marker. It was the tipping point that revealed just how far financial institutions had drifted from prudent, long-term strategies into a world of short-term profits and unchecked leverage.

To market historians and investing enthusiasts alike, the story of Lehman’s ascent and demise encapsulates an era marked by financial excess, systemic fragility, and a pivotal turning point in modern economic history.