History of Lehman Brothers - Harvard Business School, Historical Collections

With a special focus on recognizing the potential of promising industries and helping finance the expansion of these enterprises, Lehman Brothers has played an important part in the financial and commercial history of the United States for more than 150 years. The history of the firm offers an inside look at the emergence and growth of American industry and technology as well as the establishment of the modern corporation.

In 1844, Henry Lehman immigrated from Rimpar, Germany, to Montgomery, Alabama where he established a small shop selling groceries, dry goods, and utensils to the local cotton farmers. By 1850, his two brothers, Emanuel and Mayer, had joined him in the business, and they named it Lehman Brothers. After Henry Lehman's death in 1855 at the age of 33, the two younger brothers headed the firm for the next four decades. During their tenure, only family members—sons, brothers, and cousins—were permitted as partners. This was a policy that continued until the 1920s.

Soon after its founding, Lehman Brothers evolved from a general merchandising business to a commodities broker that bought and sold cotton for the planters living in and around Montgomery, Alabama. "King Cotton" dominated the economy of the southern United States in the 1850s. As the business grew, a brief partnership was formed with cotton merchant John Wesley Durr to build a cotton storage warehouse, enabling Lehman Brothers to engage in larger sales and trades. A New York office was opened in 1858, giving the firm a stronger presence in the commodities trading business as well as a foothold in the financial community.

With much of its operations tied to the southern economy, Lehman Brothers did not escape the hardship of the Civil War. The firm was rebuilt after the war, concentrating its operations in the New York office. In 1870, Lehman Brothers spearheaded the formation of the New York Cotton Exchange, the first commodities futures trading venture. Mayer Lehman was appointed to its first board of directors. As Lehman Brothers' commodities sales and trading business grew to include other goods, the company also helped to establish the Coffee Exchange and the Petroleum Exchange.

Because of its Southern heritage and Northern connections, Lehman Brothers was designated to be the Alabama government's fiscal agent to help sell the state's bonds in 1867. This was no simple assignment, given the credit rating of the Southern states at that time. The firm was also assigned to service the state's debts, interest payments, and other obligations, beginning a long tradition in municipal finance.

The rapid development of the railroads helped transform the country from an agrarian to an industrial economy in the years following the Civil War. The boom in railroad construction resulted in tremendous activity on Wall Street, as companies turned to financial markets to raise funds for expansion. Kuhn, Loeb & Co., which merged with Lehman Brothers nearly a century later, was one of the leading financial advisors and underwriters to the railroad industry. The firm was engaged in the financing of the Chicago and North Western Railroad, the Pennsylvania Railroad, the Baltimore & Ohio, and the Great Northern, along with the reorganization of the Union Pacific.

Railroad bonds were a milestone in the developing capital markets. To raise the huge amount of money needed to fund the industry's expansion, underwriters began reaching beyond their traditional sources of financing. Bonds were structured at affordable prices and sold to individual investors, bringing masses of first-time investors into the market. Noting this trend, Lehman Brothers expanded its commodities business to include the sales and trading of securities. In 1887 the firm became a member of the New York Stock Exchange, marking the evolution of Lehman Brothers from a commodities business to a merchant-banking firm. The New York office provided the presence to build a securities trading business, and Lehman Brothers aggressively pursued this area. The firm was also becoming more involved in financial advisory, which provided the foundation for developing the underwriting business in the early 1900s.

For a 20-year period beginning in 1906, Emanuel's son, Philip Lehman, and Henry Goldman, the dominant partner in the firm of Goldman, Sachs, formed an alliance to fund the emerging retail industry. The two firms jointly underwrote securities issues for some of the most famous names in the retailing industry, including Sears, Roebuck & Co.; F.W. Woolworth Co.; May Department Stores; Gimbel Brothers, Inc.; and R.H. Macy & Co.


Robert Lehman, Philip's son, became a partner in the firm during the 1920s and quickly moved into the leadership role. Robert Lehman led the firm from 1925 until his death in 1969, a period of significant growth for the firm. His business philosophy centered on his belief that consumption, not production, would determine America's future prosperity. To that end, he steered the firm to back emerging industries geared toward mass consumption. His commitment to identifying growth industries led the firm to become active in the financing of airlines and motion picture companies as well as continuing Lehman Brothers' substantial support of the retailing industry.

Lehman Brothers was an early backer of the entertainment business, advising on the consolidation of the Keith-Albee and Orpheum theaters in the 1920s. This merger created the nation's largest vaudeville circuit, with more than 700 theaters and a seating capacity of 1.5 million. As the motion picture industry developed in the 1930s, Lehman Brothers helped fund Radio-Keith-Orpheum (RKO), Paramount Pictures, and 20th Century Fox.

The firm was also interested in the growth of the communications industry in the 1930s, underwriting the first public offering of the leading televised company at that time, Allan B. Dumont Laboratories. In addition, the firm helped fund the Radio Corporation of America (RCA).

The Depression made it difficult even for strong companies to raise capital during the 1930s. To help mediate risk and encourage investment, Lehman Brothers was one of the first firms to devise a new method of financing known as the private placement. These loans between blue-chip borrowers and private lenders included strict safeguards and restrictions for lender safety, enabling borrowers to raise needed capital and lenders to receive an appropriate return with a tolerable level of risk. Innovative at the time, the private placement is a standard financing technique today.

The first half of the twentieth century was also an era of immense expansion in the oil industry. Lehman Brothers became involved, financing Murphy Oil and the TransCanada pipeline, as well as supporting the oil service business of Halliburton and the development of Kerr-McGee's oil and gas exploration and production business.

Economic expansion in the 1950s was driven by the arrival of electronic and computer technology. Lehman Brothers quickly sought investment opportunities in these areas, helping to launch Litton Industries as well as underwriting Digital Equipment Corporation’s first public offering.

In the 1960s the firm greatly expanded its capital markets trading capabilities, particularly in commercial paper. This led to the firm's designation as an official dealer for U.S. Treasuries. In the 1960s and 1970s, when many U.S. companies began to expand internationally, Lehman Brothers inrceased its global presence as well, opening offices in Europe and Asia. The firm’s international stature was further enhanced in 1977 through the merger with the distinguished investment bank, Kuhn, Loeb & Co.

As significant advances in electronic technology and computer science contributed to economic expansion during the 1970s, Lehman Brothers sought opportunities in applied science and technology. Among their new investments were future industry leaders such as QUALCOMM, a developer of digital wireless communication systems, and Loral Corporation, a manufacturer of defense electronics.

In the 1980s, financial advisory centered on mergers and acquisitions as major corporations moved to expand both domestically and internationally. Lehman Brothers acted as an advisor on several large U.S. and cross-border transactions, including Bendix/Allied, Chrysler/American Motors, General Foods/Philip Morris, and Genentech/Hoffman-LaRoche.

The development of personal computers and the elements that made them user-friendly gave rise to a field of related industries in the 1980s, ranging from microprocessors to video games. The fast pace of high-tech research and development enabled tiny start-up ventures with expertise in design, programming, and engineering to become major international corporations seemingly overnight. Lehman Brothers bought into these new markets by backing companies like Intel, the company that introduced the world’s first microprocessor, raising funds to expand its business to meet the demands of the nascent personal computer market.

Advanced research techniques developed during the mid-1980s helped create a new healthcare industry—biotechnology. Lehman Brothers was very active in assisting many new companies in this industry, such as Cetus, obtain the capital base necessary to fund research and development.

In 1984, Lehman Brothers was acquired by American Express and merged with its retail brokerage Shearson to form Shearson Lehman Brothers. American Express began to divest its financial services by business lines in 1992 and eventually, in 1993, the firm was spun off and once again became known solely as Lehman Brothers. In 2000, Lehman celebrated its 150th anniversary. The company's World Trade Center offices were destroyed by the 2001 terrorist attacks, and eventually it moved into its new global headquarters in midtown Manhattan in 2002. Today, the firm continues its tradition of identifying emerging industries and supporting their expansion and growth as well as maintaining long-term relationships with industry leaders.

Source: Harvard Business School, Historical Collections, Baker Library