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Bank on It

Why Lehman Brothers wasn’t too venerable to fail.

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The fall of Lehman Brothers was treated solemnly in the press. The second big Wall Street bank to be taken down by the mortgage crisis and a much more important player than the first, Bear Stearns, it was constantly referred to as a 158-year-old institution, its humbling somehow unprecedented.

Or maybe it wasn’t so unprecedented. Stories about Wall Street tend to work under the assumption that as it is now, so it ever was. Goldman Sachs, Lehman Brothers, Morgan Stanley—weren’t these always the big players? Well, no, and there’s no better lesson in this than the history of Lehman itself.

The original great Jewish bank on Wall Street was Kuhn Loeb, founded in 1867. Together with J.P. Morgan, it was a major conduit between European capital and American industry at the turn of the century. When railroad baron E. H. Harriman went up against Morgan (a man whose control of U.S. banking no one has come close to matching), it was Kuhn Loeb’s Jacob Schiff whom he turned to. Kuhn Loeb was also John D. Rockefeller’s banker. After World War II, the conventional list of the top Wall Street banks consisted of Morgan Stanley, Kuhn Loeb, and Dillon Read.

But not for long. Dillon Read shrank until it was eventually swallowed up by SG Warburg, which itself was consumed by the Swiss giant UBS. And Kuhn Loeb merged with a smaller firm called … Lehman Brothers in 1977. Together, they formed Lehman Brothers Kuhn Loeb.

Lehman Brothers Kuhn Loeb had a run of about seven years before it blew up in a tornado of internal rivalry. Its top bankers, Pete Peterson and Stephen Schwarzman, quit to form the mega private-equity fund Blackstone Group, and what was left of the once great Lehman Brothers Kuhn Loeb, short of capital, was sold for a song to American Express in 1984. American Express merged Lehman Brothers with two other brokerages it had acquired to form Shearson Lehman Hutton. (E.F. Hutton, another venerable Wall Street firm, got scooped up after a scandal, involving the interest on brokerage deposits, so tawdry that it makes the Superman III plot of stealing leftover parts of pennies look like true financial genius.) Then American Express changed direction, decided that credit cards weren’t such a bad business after all, sold off pieces of its mini-empire, and in 1994 spun off what was left into a new Lehman Brothers under the current CEO, Richard Fuld.

That’s how far the current Lehman Brothers roots really go back. What the bond powerhouse shares with the original Lehman, or the later Lehman Brothers Kuhn Loeb, or Shearson Lehman Hutton, is really little more than a name. A diminished Lehman is terrible news for its employees and its shareholders. But that is the history of the investment-banking business: When times get tough, the venerable, immovable grand institutions of the banking world blow up. And the top bankers jump ship, ready to rebuild the whole edifice, under the old name or a new one, ready to ramp up and reconstitute the whole shebang, like a freeze-dried back-of-the-comic-book sea monkey, just in time for the next wave of financial opportunity.

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