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The Great Depression And The Glass Steagall Act

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Lehman Brothers was founded by German immigrant Henry Lehman and his two brothers Emanuel and Mayer in 1850. Lehman Brothers was able to overcome many obstacles– “the railroad bankruptcies of the 1800s, the Great Depression of the 1930s, two world wars, a capital shortage when it was spun off by American Express in 1994, and the Long Term Capital Management collapse and Russian debt default of 1998.” (Investopedia) But the collapse of the housing market was one obstacle they could not overcome.
During the Great Depression the Glass-Steagall Act was enacted in 1933. The legislation prevented commercial and investment banks from competing with each other and protected their balance sheets by having each sector focus on certain transactions.
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The firm recognized profits from 2005 to 2006, and in 2007 it reported a record net income of $4.2 billion on revenues of $19.3 billion. In the same year, Lehman Brothers’ stock reached an all-time high of $86.18 per share, giving it a market capitalization close to $60 billion.” (Investopedia) The bursting of the housing bubble was imminent. Defaults on subprime mortgages were at a seven-year high. The stock market had its biggest single-day drop in five years on March 13. “In the post-earnings conference call, Lehman 's chief financial officer (CFO) said that the risks posed by rising home delinquencies were well contained and would have little impact on the firm 's earnings. He also said that he did not foresee problems in the subprime market spreading to the rest of the housing market or hurting the U.S. economy.” (Investopedia) Bear Stearns, another investment bank, had two hedge funds fail with the credit crisis in August. Lehman Brother’s stocks fell strongly and it shut down its BNC unit in the same month.
Lehman Brothers underwrote the most mortgage-backed securities, gaining a portfolio four times that of its shareholders’ equity at 85 billion dollars. At the end of 2007 in the fourth quarter, Lehman’s stocks rebounded. The firm however, did not take that opportunity to reduce its large mortgage portfolio. That large portfolio coupled with its high degree of leverage at 31 made Lehman Brothers very vulnerable to the deteriorating market conditions. In
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