Lehman Brothers
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Lehman Brothers Holdings, Inc. Template:Nyse, founded in 1850, is a diversified, global financial services firm. It is a market leader in investment banking, equity and fixed income sales, research and trading, investment management, private equity, and private banking. It is a primary dealer in the U.S. Treasury securities market. Its primary subsidiaries include: Lehman Brothers Inc., Neuberger Berman Inc., Aurora Loan Services, Inc., SIB Mortgage Corporation, Lehman Brothers Bank, FSB, and the Crossroads Group. The Firm's worldwide headquarters are in New York City, with regional headquarters in London and Tokyo and offices throughout the world.
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History
Under the Lehman Family, 1850-1969
In 1844, twenty-three year old Henry Lehman emigrated from Rimpar, Germany to the United States, settling in Montgomery, Alabama, where he opened a dry goods store, simply titled "H. Lehman". Following Henry to the United States were brothers Emanuel in 1847 and Meyer, youngest of the three brothers, in 1850. In the 1850's Southern United States, "cotton was king"; one of the most important, if not the most, important crops in the country and before long the three brothers were routinely accepting raw cotton from customers as payment for merchandise. Before long they developed a successful second business trading in cotton, that within a few years grew to become the most significant part of their operation. Following Henry's untimely death from yellow fever in 1855, the remaining brothers continued to focus on their commodities trading and brokerage operations.
By 1858, as the brothers witnessed the shift in cotton's center from the South to New York City, where factors and commission houses were based, Lehman Brothers opened its first branch office there, at 119 Liberty Street. Thirty-two year old Emanuel relocated to New York to run the office. In 1862, they teamed up with a prosperous cotton merchant named John Durr to form Lehman, Durr & Co. Following the American Civil War, the company helped finance Alabama's reconstruction. Soon, the Lehmans moved their headquarters to New York City where they helped found the New York Cotton Exchange in 1870; Emanuel would sit on the Board of Governors without interruption until 1884. The Firm also dealt in the emerging market for railroad bonds, and entered the financial advisory business.
Lehman Brothers became members of the Coffee Exchange as early as 1883 and finally the New York Stock Exchange in 1887. The firm also began to develop international interests in Europe and Japan, as well as expertise in merchant banking. In 1899 they underwrote their first public offering, the preferred and common stock of the International Steam Pump Company.
Despite the 1899 offering of International Steam, the Firm's real shift from being a commodities house to a house of issue did not begin until 1906. The Firm was among the first to recognize the potential of issuing stock as a way for companies to raise capital, in contrast to the issuance of debt, which had historically been the method. In that year, under the guidance of Philip Lehman, the Firm partnered with Goldman, Sachs & Co., to bring the General Cigar Co. to market, followed closely by Sears, Roebuck & Company. During the following two decades, almost one hundred new issues were underwritten by Lehman Brothers, many times in conjunction with Goldman, Sachs. Among these were F.W. Woolworth Company, May Department Stores Company, Gimbel Brothers, Inc., R.H. Macy & Company, The Studebaker Corporation, The B.F. Goodrich Co. and Endicott Johnson Corp.
Following Philip Lehman's retirement in 1925, his son Robert "Bobbie" Lehman took over as head of the firm. Under his leadership, Lehman Brothers' rise to pre-eminence among New York investment firms began. The company weathered the capital crisis of the Great Depression by focusing on helping private funders and companies connect, while the equities market recovered. This was the foundation of today's venture capital industry. By 1928, the Firm had outgrown its premises in the Farmers Loan & Trust Building and moved to its now famous One William Street location.
In 1929, the Firm created the Lehman Corporation, an investment company, wholly separate from Lehman Brothers, but with many common officers and directors. Years later, the Firm would characterize its first foray into asset management, via the Lehman Corporation, as "the most important single chapter in its history".
In the 1930s, Lehman Brothers underwrote the initial public offering (IPO) of the first television manufacturer, DuMont and helped fund the Radio Corporation of America (RCA). They also helped found the emerging oil industry, including the companies Halliburton and Kerr-McGee. In the 1950s, Lehman Brothers underwrote the IPO of Digital Equipment Corporation. Later, they would arrange the acquisition of Digital by Compaq.
Robert Lehman also recognized that in order for the Firm to prosper and grow, it needed to look beyond family members as potential partners and look to the outside world. With that revelation, in 1924, John M. Hancock became the first non-family member to become a partner, followed by Monroe C. Gutman and Paul Mazur in 1927.
Robert Lehman passed away in 1969 and since that time, no member of the Lehman family has led the company. Robert's death left a void in the company, which coupled with a difficult economic environment, brought hard times to the Firm. In 1973, Pete Peterson, Chairman and Chief Executive Officer of the Bell & Howell Corporation, was brought in to save the Firm.
Into the Arms of a Giant (1969-1994)
Under Peterson's leadership as Chairman and CEO, the Firm acquired Abraham & Co. in 1975, and two years later merged with the venerable, but struggling, Kuhn, Loeb & Co., to form Lehman Brothers, Kuhn, Loeb Inc. Peterson led the Firm from significant operating losses to five consecutive years of record profits with a return on equity among the highest in the investment banking industry.
Notwithstanding the Firm's success, hostilities between the Firm's investment bankers and traders (who were driving most of the Firm's profits) was becoming palpable. In response, in May 1983, Peterson promoted Lewis Glucksman, the Firm's President, COO and former trader, to be his co-CEO. Glucksman introduced changes in personnel, and in the determination of bonuses and partnership interests. These measures had the effect of increasing tensions, which when coupled with Glucksman’s management style and a downturn in the markets, created a bitter struggle for power in which Glucksman prevailed and Peterson was ousted, leaving Glucksman as the sole CEO.
Upset bankers, who had soured over the power struggle, left the company. Steve Schwarzman, chairman of the firm's M&A committee, recalled in a February 2003 interview with Private Equity International that "Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional." The company suffered under the disintegration, and Glucksman was pressured into selling the Firm to American Express in April 1984, for $360 million and became Shearson Lehman/American Express.
In 1988, Shearson Lehman/American Express and E.F. Hutton & Co. merged as Shearson Lehman Hutton Inc. Hutton shareholder and actress, Dina Merrill, became a director of newly merged firm. Following its spin-off from American Express, Merrill has continued to serve as a director of Lehman Brothers Holdings Inc., where she is a member of the Nominating and Corporate Governance Committee and the Compensation and Benefits Committee.
On Their Own Again (1994-present)
In 1993, American Express sold the retail brokerage and asset management operations of Shearson Lehman Brothers Inc. to the Primerica, retaining the institutional trading and investment banking operations, which it spun off in an initial public offering as Lehman Brothers Holdings Inc. in 1994. Lehman Brothers Holdings Inc. common stock commenced trading on the New York & Pacific stock exchanges, under the ticker symbol "LEH".
Following their 1994 IPO, the company was repeatedly subject to rumors that it would be acquired; rumors the company regularly denied. Indeed, under the leadership of the Firm's CEO, Richard S. (Dick) Fuld, Jr.. the firm has prospered, growing well beyond its initial strength in fixed income trading and research.
2003 SEC Litigation
In 2003, the U.S. Securities and Exchange Commission (SEC) settled charges against Lehman Brothers arising from an investigation of research analyst conflicts of interest. As part of the "global settlement", Lehman agreed to pay $25 million as disgorgement and an additional $25 million in penalties. One-half of the total of these payments, $25 million, was paid in connection with the SEC action and related proceedings by the National Association of Securities Dealers and New York Stock Exchange and placed into a distribution fund for the benefit of the firm's customers. The remainder was paid to resolve related proceedings by state regulators. Lehman Brothers agreed to a federal court order requiring the firm to make changes in the operations of its equity research and investment banking departments. In addition, Lehman agreed to pay, over five years, $25 million to provide the firm's clients with independent research, and $5 million for investor education.
Allegations
Specifically, the Commission alleged that Lehman tied the financial compensation of analysts directly and indirectly to the analyst's success in generating investment banking revenue from public companies. Furthermore, Lehman used the promise of future research coverage to obtain valuable IPO underwriting business and marketed to companies the ability of Lehman analysts to move the market for a stock.
In one instance, an analyst who covered Razorfish Inc. told an institutional investor in an email, "well, ratings and price targets are fairly meaningless anyway . . . but, yes, the `little guy' who isn't smart about the nuances may get misled, such is the nature of my business."
Reforms
Lehman agreed as part of the settlement to implement structural reforms and provide enhanced disclosure to investors. It agreed to sever links between research and investment banking, such that: research and investment banking are physically separated with completely separate reporting lines; analysts' compensation cannot be based directly or indirectly upon investment banking revenues; investment bankers may no longer evaluate analysts; investment bankers will have no role in determining what companies are covered by the analysts; and research analysts will be prohibited from participating in efforts to solicit investment banking business, including pitches and roadshows. Lehman agreed to disclose on the first page of each research report whether the firm does or seeks to do investment banking business with that issuer, and when Lehman decides to terminate coverage of an issuer, Lehman will issue a final research report discussing the reasons for the termination. Lehman also agreed to publish quarterly on its website a chart showing its analysts' performance, including each analyst's name, ratings, price targets, and earnings per share forecasts for each covered company, as well as an explanation of the firm's rating system.
References
- Schack, Justin. (May 2005). "Restoring the House of Lehman". Institutional Investor, p. 24-32.
- Auletta, Ken. Greed and Glory on Wall Street: The Fall of the House of Lehman. Random House, 1985
- Geisst, Charles R. The Last Partnerships. McGraw-Hill, 1997
- Lehman Brothers. A Centennial - Lehman Brothers 1850 - 1950. Spiral Press, 1950
- Wechsberg, Joseph. The Merchant Bankers. Pocket Books, 1966
Reference Information
Partners
At 134 years old, Lehman Brothers was Wall Street's oldest partnership when it was acquired by American Express in 1984. Listed below, is a partial list of the firm's partners.
- Henry Lehman (1850-1855)
- Emanuel Lehman (1850-1907)
- Mayer Lehman (1850-1897)
- Meyer H. Lehman (1880-1904)
- Sigmund M. Lehman (1882-1908)
- Philip Lehman (1885-1947)
- Arthur Lehman (1901-1936)
- Harold M. Lehman (1914-1933)
- Thomas Hitchcock, Jr. (1937-1944)
- Herbert H. Lehman (1908-1928)
- Edward J. Bermingham (1936-1939)
- Frederich L. Schuster (1943-1948)
- Arthur H. Bunker (1945-1949)
- Robert Lehman (1921-1969)
- Allan S. Lehman (1908-?)
- John M. Hancock** (1924-?)
- Monroe C. Gutman (1927-?)
- Paul Mazur (1927-?)
- William J. Hammerslough (1930-?)
- John D. Hertz (1934-?)
- Joseph A. Thomas (1937-?)
- John R. Fell (1940-?)
- William S. Glazier (1940-?)
- Frederick L. Ehrman (1941-?)
- Harold J. Szold (1941-?)
- Philip Isles (1941-?)
- Paul E. Manheim (1944-?)
- Francis A. Callery (1950-?)
- Herman H. Kahn (1950-?)
- Morris Natelson (1950-?)
- Jerome S. Katzin (1977-1984)
- Harvey M. Krueger (1977-1984)
** First non-family member to be admitted to the partnership.
Principal Locations (first year of occupancy)
- 119 Liberty Street, New York, NY (1858)
- 176 Fulton Street, New York, NY (1865-1866?)
- 133-35 Pearl Street, New York, NY (1867)
- 40 Exchange Place, New York, NY (1876)
- The Farmers Loan & Trust Company Building, 16 William Street, New York, NY (1892)
- One William Street, New York, NY (1928) *
- 55 Water Street, New York, NY (1980) **
- 3 World Financial Center, New York, NY
- 745 Seventh Avenue, New York, NY (2002)
* Designated as a landmark by the New York City Landmarks Preservation Committee in 1996.
** Sales and trading personnel had been in this location since 1977, when they were joined by the firm's investment bankers and brokers.
External links
- Lehman Brothers - official website