Lehman Brothers — a 158-year-old investment bank and pillar of global finance — collapsed in September 2008 after massive losses on mortgage-related securities.
During the housing boom, Lehman aggressively expanded into subprime mortgages, commercial real estate, and highly leveraged structured products.
When housing prices fell and defaults surged, these assets dropped sharply in value.
Liquidity evaporated as lenders pulled funding, repo markets froze, and counterparties lost confidence.
Efforts to find a buyer (Barclays, Bank of America) failed when no government backstop was offered.
Lehman filed for bankruptcy on September 15, 2008 — still the largest bankruptcy in U.S. history.
The failure triggered global panic, froze credit markets, and became the defining event of the 2008 Financial Crisis.

What Drove the Collapse

Excessive leverage and risky balance sheet: Lehman operated with leverage of 30-to-1 or higher, making it extremely vulnerable to even small declines in asset values.
Heavy exposure to housing: The firm held massive positions in subprime mortgages, commercial real estate, and illiquid structured credit products that collapsed when housing turned.
Liquidity dependence on short-term funding: Lehman financed long-term, illiquid assets through short-term repo markets. When confidence disappeared, funding vanished almost instantly.
Failed rescue negotiations: Potential buyers backed out without government support, leaving Lehman with no path to recapitalization.
Systemic interconnectedness: Lehman’s collapse rippled across the entire financial system, freezing money markets, triggering runs on other institutions, and causing widespread losses.
Core problem: Lehman wasn’t just wrong on housing — its entire model relied on continuous confidence and short-term liquidity, which vanished overnight.

The Investor Lessons

Liquidity risk can destroy even large, well-known institutions long before they are technically insolvent.
Excessive leverage amplifies fragility; small valuation changes can become existential threats.
Duration mismatch — borrowing short to invest long — creates silent vulnerabilities that only appear in stress.
Market confidence is an asset: once lost, funding disappears faster than assets can be sold.
Correlated exposures across institutions mean that crises spread rapidly; diversification can fail at the system level.
Transparency and disciplined risk management matter more than short-term profitability or growth.
Lehman remains a lesson in how modern failures unfold: slowly at first, then suddenly — when the market stops believing the numbers.

Lehman Brothers Collapse (2008)