Part IThe Story
Shortly before one o'clock on the morning of Monday, September 15, 2008, Lehman Brothers Holdings announced that it would file for Chapter 11 protection. It listed $613 billion in bank debt, $155 billion in bond debt, and assets of $639 billion. It was the largest bankruptcy filing in American history, and it arrived the way most death notices do, at night. By daylight the employees had begun coming out of 745 Seventh Avenue with their boxes: files, desk photographs, anything that carried the company logo. The procession ran all day and into the next. The Dow closed down just over 500 points. Within two days the New York Stock Exchange had delisted the stock, and the name that had hung over a dry-goods counter on Court Square in Montgomery, Alabama, in 1850 belonged to a legal estate.
Walk a few blocks north from that tower and cross Sixth Avenue, and on West 54th Street you reach a five-story limestone house. John H. Duncan designed it in 1899 for a banker named Philip Lehman, and the city designated it a landmark in 1981. Philip had been dead sixty-one years on the morning of the boxes. In that house, in 1911, he began buying pictures, and the collection that grew from them, enlarged over six decades by his son, now fills its own wing at the Metropolitan Museum of Art. Downtown, at the firm's offices at 16 William Street, between 1901 and 1925 he turned his father's cotton brokerage into the institution that was being carried out of Seventh Avenue in cardboard. He made it a house of issue.
I would guess that few of the people holding boxes could have told you who he was, though his surname was on the building. That is a peculiar fate for the man who arguably invented the Lehman Brothers that mattered. Philip was the middle Lehman. He came after the immigrant founders, whose story became a three-act play, and before his son Robert, whose racehorses and Old Masters made him one of the great American patricians. He left almost nothing quotable. In the record available to me there is no ringing maxim, no famous letter, and no interview. What he left were transactions, a house, and a habit of collecting. And according to one secondhand account, he left a rule about handwriting that the people who inherited his name forgot to keep.
By the Numbers
Philip Lehman's House of Issue
24Years as managing partner of Lehman Brothers, 1901–1925
1906Year of the first joint underwriting with Goldman, Sachs: General Cigar Co.
9Landmark retail and industrial issuers named in the firm's early house-of-issue run, from Sears to Studebaker
1924Year the partnership admitted its first non-family member
1911Year Philip began collecting art at 7 West 54th Street
~3,000Works later donated to the Met by the Robert Lehman Foundation
$639BAssets listed in the 2008 bankruptcy, 61 years after his death
What the Brothers Carried
The family name was a translation before it became a brand. Abraham Lehmann, a cattle merchant in the Franconian town of Rimpar near Würzburg, had been born Abraham Löw. He swapped the Yiddish surname for a German one, and his sons would later drop the second n for America. Several of his children stayed in Bavaria. Three left.
Hayum went first, in 1844, at twenty-three. He landed at Mobile, became Henry, loaded a wagon with merchandise, and spent about a year working the Alabama River, trading goods for cotton. In Montgomery he opened a store on Commerce Street, then moved it to 17 Court Square, selling what the trade called "Southern Domestics": sheets, shirts, yarn, cotton rope, and the coarse fabric called osnaburg. He presented himself to farmers as their friend, a man who would deal with them when the banks would deal only with merchants. He used bargaining skills learned in the Bavarian countryside and took cotton as payment for what he lent. Mendel came in 1847 and became Emanuel; the sign became H. Lehman & Bro. Mayer came in 1850, and the sign became Lehman Brothers.
None of this was abstract. Cotton was Alabama's highest-grossing cash crop, and nearly all of it was grown by enslaved people, who made up almost 45 percent of the state's population in the 1860 census. That census lists Mayer Lehman as the owner of seven people, "three males and four females ranging in age from 5 to 50." The bales the brothers accepted across their counter came from forced-labor plantations, and within a few years trading those bales had overtaken the store. Henry did not live to see what it became. On November 17, 1855, he died of yellow fever in New Orleans at thirty-three.
The two survivors split the map. Mayer was the Southerner of the pair. He supported the Confederacy, and in 1864 Governor Thomas H. Watts appointed him a commissioner to look after Alabama soldiers held in Northern prisons. Emanuel was the Northerner. By 1858 the center of the cotton trade had moved to New York, where the factors and commission houses were, so Lehman opened an office at 119 Liberty Street and Emanuel, about thirty-one, went to run it. The firm survived the war partly by doubling itself: in 1862 Mayer joined a Montgomery cotton merchant named John Wesley Durr to form Lehman, Durr & Co. After Appomattox the brothers moved headquarters to New York. Alabama named them the state's fiscal agent, and in 1870 they helped found the New York Cotton Exchange. Emanuel sat on its board until 1884.
In plain terms, the founders were brokers of a single commodity whose value depended on a system the war had destroyed. They were very good at it. They also tended to treat the commodity as permanent. The next generation would have to decide whether the family's skill was cotton or the trading itself.
The Son Born on the Wrong Side of the War
Philip Lehman was born in New York City on November 9, 1861, seven months into the Civil War. His uncle was in Montgomery that year on the Confederate side of the line, and his father was on Liberty Street on the other. He was the second of four children of Emanuel and Pauline Sondheim. Pauline had married at about sixteen, in May 1859, and she died in 1871 at roughly twenty-eight, when Philip was nine. The sources at hand say nothing about how that loss shaped him, and I won't pretend to know. The facts are that he grew up motherless in a widower's house and that he went into his father's business.
His family life was efficient to the point of comedy. On January 3, 1884, he married Carrie Lauer, a young woman of nineteen. The next morning's New York Times reported that Philip's elder sister Harriet had married Sigmund M. Lehman, Mayer's son and her own first cousin, "last evening" at Emanuel's house, No. 16 East Forty-sixth Street. The headline announced "A Young Couple With $80,000 to Begin Life." Two of Emanuel's children married on the same January night, and one of them married a Lehman. Whether it was a double wedding or a father's single well-organized evening, the record I have doesn't say. The family was already folding its capital back into itself.
Sources disagree on when Philip became a partner. Harvard's Baker Library says 1885; other accounts say 1887. The firm joined the New York Stock Exchange in 1887, which matters more. By 1892 it had moved to 16 William Street, the address where Philip would do his consequential work. In 1899 it underwrote its first public offering, the preferred and common stock of the International Steam Pump Company. Mayer had died at home in June 1897. In 1901, at thirty-nine, Philip became managing partner.
By then his cousins filled the office. Mayer's sons Arthur, Sigmund, and Herbert were all in the firm; Herbert joined in 1899 and became a full partner in 1908. Henry's son Meyer H. was there too. Mayer had raised his sons on obligation: every Sunday he took Arthur, Irving, and Herbert to Mount Sinai Hospital to show them the needs of the poor. Herbert became the forty-fifth governor of New York and later a United States senator. Irving became Chief Judge of the New York Court of Appeals. Arthur co-founded the Federation of Jewish Philanthropies and the Museum of the City of New York. Mayer's branch went into public service.
Emanuel's branch, through Philip, went into the market. When Philip died, the Times obituary would call him "Cousin of Ex-Governor." The cousins were the famous ones. He was the one who ran the business.
The Indignity of the Five-and-Ten
The decisive year was 1906. The firm's own historians date the "real shift" from commodities house to house of issue to that year, despite the International Steam Pump deal seven years earlier. Philip did not make the move alone. His partner was his friend Henry Goldman of Goldman, Sachs & Co., a firm that in 1906 was in much the same position: well-connected and ambitious, but shut out of the banking that respectable money did.
That banking was railroads and steel, and it was Morgan's. J. P. Morgan and the established houses that controlled heavy industry had no interest in retail, which they considered risky, vulgar, and not quite a business. Philip saw that a gap left by snobbery is still a gap. Lehman and Goldman together brought the General Cigar Co. to market, then Sears, Roebuck and Company, the mail-order house whose catalog went into every rural mailbox in the country. Then F. W. Woolworth Company, the five-and-ten. Then May Department Stores, Gimbel Brothers, R. H. Macy & Company. Then the Studebaker Corporation, B. F. Goodrich, and Endicott Johnson.
— Stephen Birmingham, Our Crowd: The Great Jewish Families of New YorkIn an era when no self-respecting private banker would deign to back retail stores, textile manufacturers, clothing or cigarette makers—to say nothing of the indignity of mail-order houses and five-and-ten operations—Philip Lehman led his cousins directly into such businesses with quickly profitable results.
The word indignity carries much of that sentence. Two German-Jewish houses, shut out of the Protestant establishment's preferred industries, built a franchise from the industries that establishment found beneath it. Cigars. Catalogs. Dime stores. Shoes. Tires. These were businesses whose customers were ordinary Americans, and the 1906 bet amounted to a belief that ordinary Americans buying ordinary things was a better long-term credit than a railroad.
Peter Chapman, in The Last of the Imperious Rich: Lehman Brothers, 1844–2008, lays out the logic. Underwriting, he writes, "was a potential means of transforming Lehman Brothers from an old commodities brokerage trading mainly in cotton—a product that in the United States was no longer as lucrative as it used to be—into a modern 'house of issue.'" It is a cautious, accountant's way of describing what was really a change of identity. The firm had made its money handling a physical thing, cotton baled and weighed. Philip was moving it toward financing the future earnings of companies, and sometimes companies that did not yet exist in the form the stock described. That was a different trade, and a riskier one. It also meant that a Lehman partner, for the first time, would have to judge whether a story was true.
The firm's 1950 centennial history, Lehman Brothers: A Centennial, published three years after Philip died, called him "especially" sensitive to "the amazing industrial and technological" changes of his time. In the excerpt available to me, the sentence breaks off there. That fits a man who appears in the record mostly as a direction of travel.
Whatever Fits in a Man's Own Hand
There is one story about how Philip judged a deal, and I should say plainly how far it is from its source. In 1966 the journalist Joseph Wechsberg published The Merchant Bankers, a survey of the Rothschilds, Barings, Warburgs, and Lehmans. Decades later the podcaster David Senra retold it. In that retelling, Philip had a rule: he would reject any deal he could not understand from his own handwritten notes. If the logic would not reduce to what a man could write down at his desk in his own hand, the logic was wrong, or it was hiding something.
The story also has a villain. The rule, the account goes, kept Lehman Brothers away from Ivar Kreuger, the Swedish "Match King," whose international match monopoly was financed with securities sold widely in America and collapsed after his death in 1932 into one of the largest frauds of the century. Kreuger's empire was built to be impressive and not to be understood, with layers of holding companies and cross-guarantees. On this account Philip looked at it, could not write it down, and passed.
I can't confirm the details beyond the secondhand telling, and you should weigh it that way. It fits the rest of the merchant-banking ethos Wechsberg describes: small partnerships, no committees, reputation used as collateral, and a banker's word that substituted for paperwork because people trusted the banker. Senra's summary of the book puts it as "Complexity in a pitch is a red flag, not sophistication."
The rule matters for this story because of what happened eighty years later. In March 2010 a court-appointed examiner, Anton R. Valukas, reported that Lehman Brothers had been using a maneuver called Repo 105 to move about $50 billion of assets off its balance sheet just before publishing its financial statements. These were repurchase agreements booked as outright sales, which created, in the examiner's words, "a materially misleading picture of the firm's financial condition in late 2007 and 2008." A month later the Times reported that Lehman had routed transactions through a small company called Hudson Castle. Lehman owned a quarter of it, controlled its board, and had supplied most of its staff, and one Lehman executive described it as the firm's "alter ego." By 2008 the firm held $680 billion in assets on $22.5 billion of capital. At that leverage a decline of three to five percent in real-estate values would erase its capital entirely.
No one could have written that down in his own hand, and no one at the top did. The man whose name was on the door is remembered for a rule designed to keep exactly this out.
The Father, the Panic, the Cotton
Emanuel Lehman died on the afternoon of January 10, 1907, at seventy-nine, a year after his son's first deal with Goldman. His last years had been those of a man fully accepted in New York. In 1897 he gave $100,000 to the Hebrew Orphan Asylum of New York, on the condition that it be used "to enlarge and perpetuate its usefulness," a phrase that reads like a banker's covenant. In 1902, when the Mutual Alliance Trust Company opened, he was one of its thirteen directors, alongside William Rockefeller and Cornelius Vanderbilt. The boy from Rimpar who had sold osnaburg on Court Square ended his life on a board with a Rockefeller and a Vanderbilt.
Later in 1907 came the panic, a run on trust companies that the Federal Reserve was created in 1913 to prevent from happening again. The sources I have don't describe how Lehman Brothers came through it. They do show that Philip's firm kept issuing stock in companies that sold things to households, the kind of credit a panic in trust companies could rattle without destroying.
Then he cut the cotton loose. By 1912 Lehman, Durr & Co., the Montgomery partnership that had carried the family through the Civil War, was no longer profitable, and that part of the firm was dissolved. One sentence in the Baker Library's history covers the end of the business three brothers had built from a wagon on the Alabama River. Philip had been managing partner for eleven years, and the founding business went quietly.
In this whole history, letting go of the founding enterprise was probably the hardest thing to do, and it is the move his successors most conspicuously failed to repeat. In 2007, when BNC Mortgage became a liability, Lehman closed it, cut 1,200 jobs in 23 locations, and announced that poor conditions "necessitated a substantial reduction in its resources and capacity in the subprime space." But the firm kept the mortgage tranches it had already manufactured, either because it could not sell them or because it chose not to. The sources disagree on which. Philip closed the cotton business and moved the capital elsewhere. His successors closed the factory and kept the inventory.
Only Sons Need Apply
Under Philip the partnership was a family business in the literal sense. Until the 1920s, only male members of the Lehman family could become partners. Bankers outside the family worked at Lehman Brothers but could not own it. The Brothers in the name was a description.
The door opened in 1924, the year before Philip retired, when John M. Hancock became the first non-family partner. Hancock did what Lehman partners did: he sat on the boards of the firm's clients. In 1927 Monroe C. Gutman and Paul Mazur followed. Gutman was not entirely an outsider. He had married Pauline Ehrich, daughter of Philip's sister Evelyn, so the first opening of the partnership to non-Lehmans included a nephew-in-law. Mazur stayed more than fifty years and died at eighty-six in 1979, by then the kind of institution the firm itself was supposed to be.
The family tree from Philip's generation reads like a genealogy of American assimilation. Philip's daughter Pauline, born in 1887, married Henry Ickelheimer of the banking house Heidelbach, Ickelheimer & Co. Their son, born in 1912, was named Philip Henry, and he later changed his surname from Ickelheimer to Isles. As Philip Henry Isles he became a Lehman partner and a director of the Lehman Corporation before his death in 1960. Löw became Lehmann, Lehmann became Lehman, and Ickelheimer became Isles. Each generation removed a little more of the old country from its name. The grandson's daughter, Tina Barney, became a photographer known for pictures of the moneyed East Coast in its own rooms.
Evelyn's line runs from her daughter Dorothy through the composer William Mayer to Jane Mayer, the investigative journalist, who is Emanuel Lehman's great-great-granddaughter. So the family of the house of issue eventually produced a reporter whose career would include examining what money does to American institutions.
Philip saw none of the later branches. He did see that partnership by blood had a limit. Robert would remove it.
A Limestone Answer
The house at 7 West 54th Street went up in 1899, two years before Philip took over the firm. It had five stories, a limestone front, and an architect, John H. Duncan, whose name was then attached to the Soldiers' and Sailors' Arch in Brooklyn and to Grant's Tomb. A house like that announces that its owner intends to stay. Philip had grown up in his father's house on East 46th Street, which belonged to a man who had arrived with nothing. He built his own house on terms the city has since protected.
In 1911 he started filling it with paintings. This was the era of Joseph Duveen, the dealer who, as one account puts it, "noticed that Europe had plenty of art and America had plenty of money," and who built a career shipping one toward the other. Whether Philip ever bought from Duveen, the sources I have don't say, and I won't guess. Philip's collecting belongs to that same transatlantic flow: European pictures acquired with American money, a family that had recently been European turning itself into an American institution by owning Europe's past.
What matters is how the collection performed over time. Philip willed most of it to Robert. Robert spent sixty years adding to it, became a trustee of the Metropolitan Museum of Art and eventually its first chairman of the board, and in 1957 sent nearly three hundred works to the Musée de l'Orangerie in the Tuileries for a solo exhibition. At the time, no other private American collection had received that honor. After Robert died in 1969, the Robert Lehman Foundation gave close to 3,000 works to the Met, including Matisse, Goya, Toulouse-Lautrec, Vuillard, Rodin, and Valadon. The Robert Lehman Wing opened in 1975, and the museum has called the collection "one of the most extraordinary private art collections ever assembled in the United States."
By 1975 the firm was in the hands of a former Bell & Howell chief executive. Nine years later it was sold for $360 million. Thirty-three years after that it was in bankruptcy court. The collection begun in Philip's front rooms in 1911 has never been bought out, levered, or sold for two dollars. It was meant to be looked at and was never meant to be traded.
The Heir Who Bet on People
Robert Lehman was born on September 29, 1891, sixty-nine years to the day after his great-uncle Hayum was born in Rimpar. He went to Hotchkiss, graduating in 1908, and to Yale, graduating in 1913, where he joined Delta Kappa Epsilon. Here was the full American education Philip had paid for: a grandson of a Bavarian cattle merchant's son, made a Yale man, playing polo with Averell Harriman and Jock Whitney. He married three times. He bred thoroughbreds, five of which ran in the Kentucky Derby.
When Philip retired in 1925, at sixty-three, Robert took over at thirty-four. At the time Lehman Brothers, like Goldman Sachs and Morgan Stanley, was essentially a one-office firm. Robert was often quoted as saying that he "bet on people," and he did. He backed Juan Trippe, who built Pan American World Airways. He sold an interest in the partnership to John D. Hertz, the Yellow Cab and Hertz founder, who sat on the board of General Motors, and who then became the firm's connection on the board of Paramount Pictures when Lehman arranged its financing. In 1928 he arranged the sale of a majority of the Keith-Albee-Orpheum theater group to Joseph P. Kennedy, the deal that led to RKO. Retail, airlines, and pictures were all consumer businesses, his father's 1906 thesis carried into new industries.
In 1929 the firm formed the Lehman Corporation, a closed-end investment company. Its first chairman of the board was Philip, at sixty-seven, four years into retirement. It was a new vehicle that let outside money share in the partners' judgment without becoming partners. It was formed in the year of the crash. The firm weathered the Depression in part, the histories say, by acting as a venture investor while the equity markets recovered.
Robert was still in charge when he died on August 9, 1969, at seventy-seven, after forty-four years leading the firm. No member of the family was left active in the partnership. Philip had lived twenty-two years after handing over the business, long enough to watch his son run it through the Depression, a war, and into the postwar boom. Robert held on until the end and named no Lehman successor, possibly because there was none to name. His only son, Robin, became a cinematographer and filmmaker.
Philip passed the firm to an heir while he was alive to watch. Robert passed it to no one in the family. Each approach had consequences.
The Name Without the Family
What followed is the familiar history, and it reads quickly because it moved quickly. In 1973, with the firm in trouble, the partners brought in Pete Peterson, chairman of Bell & Howell. He took it from heavy operating losses to five consecutive years of record profits. In 1977 he merged it with Kuhn, Loeb & Co., another German-Jewish house founded in 1867, to create the country's fourth-largest investment bank. Then the traders and the bankers turned on each other. In May 1983 Peterson made Lewis Glucksman, a former trader, his co-CEO, and within months Glucksman had pushed him out. Stephen Schwarzman, who chaired the firm's M&A committee, later said that "Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional." The bankers left. In 1984 Shearson/American Express bought what remained for $360 million.
A brokerage owned by a credit-card company does not have a merchant banker's identity. Ten years later American Express spun the firm off as Lehman Brothers Holdings, Inc., and Richard Fuld, a trader who had spent his entire career at the firm, became chief executive. He was nicknamed "the Gorilla," and he ran Lehman for fourteen years. He brought it through the Asian crisis of 1997 and the collapse of Long-Term Capital Management in 1998. On September 11, 2001, Lehman lost one employee in the North Tower and its headquarters at Three World Financial Center to falling debris. Within a week it was trading again from Jersey City, and its bankers were working out of 665 guest rooms at the Sheraton Manhattan. In October 2001 it bought Morgan Stanley's new, still-unoccupied tower at 745 Seventh Avenue for a reported $700 million. In terms of sheer resilience, it was impressive.
In 1997 it bought Aurora Loan Services, a Colorado Alt-A lender, and in 2000 BNC Mortgage, a West Coast subprime lender. It was one of the first Wall Street houses to go into mortgage origination directly. By 2003 it had made $18.2 billion in loans and ranked third in the business. By 2004 the figure was over $40 billion. By 2006 Aurora and BNC together were lending almost $50 billion a month. Its leverage rose from about 24 to 1 in 2003 to 31 to 1 in 2007. One analyst described the result as "a real estate hedge fund disguised as an investment bank."
In 1906 Lehman Brothers began financing the shops where Americans bought sheets and shirts. A century later it was financing the houses those Americans lived in and borrowing against the loans.
In March 2008 the firm reported its fifty-fifth consecutive profitable quarter, $48.9 million, while Citigroup and Merrill Lynch posted billions in losses, and its stock jumped 46 percent. In June it reported a $2.8 billion loss. In early September, with the Korea Development Bank talks collapsing, the shares fell 45 percent in a day to $7.79. Days before the end, executives at Neuberger Berman, the money manager Lehman had bought in 2003, circulated a memo suggesting the firm's top people forgo their multimillion-dollar bonuses to show "that management is not shirking accountability." George Herbert Walker IV, who headed investment management, forwarded his apology to the executive committee: "Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize."
He was embarrassed by the suggestion that the firm be accountable, not by anything the firm had done. By then nothing in the building resembled the man who put his name on the 1906 deals.
The Other Philip Lehman
The name kept circulating after the family left the firm, and here it produces a coincidence that the novelist in me distrusts and the reporter in me has to record.
In 1987 a lawyer named Philip A. Lehman joined the Consumer Protection Division of the North Carolina Attorney General's office. He was born in 1946, went to Harvard and then Catholic University for law school, and served as a naval officer in Vietnam. The sources I have give no family connection to Emanuel's line, and I am not suggesting one. He worked the opposite end of the system from the one his namesake built: complaints, finance-company second mortgages, and borrowers who did not know what they had signed.
When he started, he later said, mortgage lending was "plain vanilla." Community banks made loans to creditworthy people and kept them. The savings-and-loan executives had a joke, the three-six-three rule: "They pay 3% on deposits, they lend at 6%, and they're on the golf course by 3." In the mid-1990s he began seeing things he called "almost shocking." He saw brokers stacking origination fees, document-preparation fees, and processing fees until they reached ten percent of the loan, single-premium credit insurance rolled into the principal, balloon loans where a borrower who paid for fifteen years still owed what he had borrowed, and refinancings designed to strip out equity. When he asked borrowers whether they understood, the answer was always no. When the lenders came to a hearing, they held up the paper and said it was signed.
— Philip A. Lehman, former Assistant Attorney General of North Carolina, oral history interview, February 21, 2020So, at the time it's legal but deceptive, misleading and unethical. But the last resort of these scoundrels is always disclosures. They would say, "It was right on the papers" but disclosures aren't enough, particularly with unsophisticated borrowers.
In 1999, working with Mike Calhoun of what became the Center for Responsible Lending and with counsel from First Citizens Bank, he helped write the country's first predatory mortgage lending act. It passed the North Carolina House 109 to 9 and the Senate 47 to 2. The center estimated it saved borrowers $100 million in its first year. Ameriquest, then the largest subprime lender in the country, left the state in protest. "They made it sound like we'd be in tears that they were leaving the state," he recalled. "No, we said that's fine with us." Then the Office of the Comptroller of the Currency ruled that federal preemption overrode the copycat Georgia law, and the protections stalled at the state line.
For years, he admitted, he could not understand the economics. "No lender makes a loan to a borrower knowing the borrower was probably going to default on the loan. It makes no business sense." Then he followed the paper upstream and found that the loans were being sold, packaged, and resold, so that the originator did not care and the final holder did not know. The buyers at the top were investors who thought, as he put it, "It's an American mortgage loan, what could go wrong?"
That upstream was where Lehman Brothers, through Aurora and BNC, was originating close to $50 billion a month. A Philip Lehman in Raleigh read loan files one at a time and found that the signatures meant nothing. The firm named for the other Philip Lehman was buying those signatures in bulk. The first Philip, if the story is true, refused any deal he couldn't summarize in his own handwriting. The second spent his career showing that a borrower's handwriting on a disclosure form proved nothing.
Two Deaths at Night
The final weekend has been told so often, in films, a play, and a shelf of books, that it barely needs retelling. On Thursday, September 11, 2008, JPMorgan Chase, which cleared Lehman's trades, stopped the more than $100 billion the firm borrowed every day in the interbank market. That weekend Timothy Geithner of the New York Fed gathered the heads of Wall Street to find a private rescue. Bank of America went to Merrill Lynch instead. Barclays seemed to have a deal until Britain's Financial Services Authority refused to waive the rule requiring a shareholder vote. On Sunday afternoon the government summoned Harvey Miller of Weil, Gotshal & Manges to prepare the bankruptcy filing before the markets opened. Employees were already in the building, packing.
On Tuesday, September 16, Barclays' Robert Diamond announced to employees at 745 Seventh Avenue that their company had been bought, and played "God Save the Queen" over the intercom. Nomura paid $225 million for the Asian franchise and $2 for parts of the European business. It took the people and none of the positions. At the end of a seven-hour hearing, Judge James Peck approved the Barclays sale.
— Judge James M. Peck, U.S. Bankruptcy Court, September 2008I have to approve this transaction because it is the only available transaction. Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I've ever sat through.
The damage spread to people who had never heard of 16 William Street. More than 43,700 Hong Kong residents had put HK$15.7 billion into Lehman "minibonds" they had been told were safe. The Reserve Primary Fund held $785 million in Lehman commercial paper and broke the buck. In Germany, structured products linked to Lehman had been sold to retirees, students, and families. Lehman's 110,000 brokerage customers eventually got back all of the $106 billion they were owed, but general unsecured creditors received forty-one cents on the dollar. The brokerage liquidation ended on September 28, 2022, after fourteen years and more than $115 billion in payouts. In October 2025, seventeen years after the collapse, the London arm left administration, having repaid its creditors in full with eight percent interest.
The estate's accounts did eventually balance, which the firm itself could not manage.
Philip Lehman had died long before any of this, on the night of March 21, 1947, at eighty-five, in New York. The cause recorded was old age. Carrie had died ten years earlier. His son was twenty-two years into running the firm, his grandson Philip Henry Isles was a partner, and the paintings were in the house on 54th Street, on their way to Fifth Avenue. The next morning the New York Times ran his obituary on page 13 under a three-part headline. It made no mention of Sears or Woolworth, Henry Goldman, or 1906:
Philip Lehman, 85, Noted Banker, Dies — Lehman Bros. Senior Partner, Cousin of Ex-Governor — Was an Art Collector.
Part IIThe Playbook
Philip Lehman did not write a philosophy of business, and the record preserves very little in his own words. What he left is a pattern of decisions. He financed what the establishment looked down on. He entered a new market alongside a friend. He shut down the founding business. He kept partnership in the family and then opened it. He handed the firm to his son while he was alive to watch. He built something outside the firm that outlasted it. Set beside what Lehman Brothers became after his name stopped meaning anything there, those decisions become a set of principles that cut against much of modern finance. The principles below draw on the evidence in Part I. Where the evidence is secondhand, they say so.
The Principles
- 1.Underwrite what respectable money is embarrassed by.
- 2.Enter a new market on a friend's reputation.
- 3.If you can't write it down yourself, don't do it.
- 4.Close the founding business before it becomes a museum.
- 5.Finance the household, not the smokestack.
- 6.Open the partnership to people who bring someone else's board seat.
- 7.Hand over while you can still watch.
- 8.Build the next vehicle before you need it.
- 9.Own one thing that can't be marked to market.
- 10.Never originate what you wouldn't hold.
- 11.Distrust the disclosure defense.
L
The House of Issue, Built and Unbuilt
Philip Lehman's tenure in the context of the firm's 158-year arc.
1850
Henry, Emanuel, and Mayer trade as Lehman Brothers on Court Square, Montgomery.
1861
Philip Lehman born in New York, November 9.
1887
Firm joins the New York Stock Exchange; Philip a partner by this date.
1899
First public offering: International Steam Pump Company. House at 7 West 54th Street designed.
1901
Philip becomes managing partner.
1906
With Henry Goldman, brings General Cigar, then Sears, Roebuck, to market.
1911
Begins collecting art.
1912
Montgomery cotton partnership, Lehman, Durr & Co., dissolved.
1924
John M. Hancock becomes first non-family partner.
1925
Philip retires; Robert takes over at 34.
1929
Lehman Corporation formed; Philip its first chairman.
1947
Philip dies, March 21.
1969
Robert dies; no family member remains active in the firm.
2000
Firm acquires subprime lender BNC Mortgage.
2008
Chapter 11 filing, September 15.
Principle 1
Underwrite what respectable money is embarrassed by
The 1906 franchise came from contempt, though not Philip's. Morgan and the railroad-and-steel houses treated retail, mail order, and five-and-tens as beneath serious capital. In Stephen Birmingham's phrase, these were businesses no "self-respecting private banker would deign to back." Snobbery is a kind of mispricing. When the dominant players refuse a category on grounds of taste rather than analysis, the category is underpriced and the competition is thin.
Philip's advantage was partly that he was shut out himself. A German-Jewish partnership could not easily win Morgan's industries, so it found other ones. Being excluded from the prestigious business gave him a reason to look closely at the unprestigious one, and the businesses he found there, Sears, Woolworth, Macy's, sold to the fastest-growing customer base in the country.
The principle is not to chase whatever is unfashionable. It is to notice when a sector is being avoided for social reasons rather than economic ones. Social disdain lasts a long time, which means the opening it creates also lasts.
Tactic: List the categories your industry's leaders openly mock, and for each one, write down whether the objection is to its economics or to its image.
Principle 2
Enter a new market on a friend's reputation
Philip did not make the move into underwriting alone. He did it with Henry Goldman, a personal friend whose firm was in the same position. Two outsiders each lent the other credibility, distribution, and capacity to share risk, at a moment when neither could have carried a Sears offering alone.
This is how merchant banking has always worked in Wechsberg's account: the banker's personal standing stands in for a balance sheet. A joint underwriting with a trusted peer reduces the cost of being new. The client sees two houses vouching for the deal, and each house watches the other's work.
It also limits the damage. If the first deals had failed, neither firm would have failed alone. The partnership was a hedge on reputation as much as on capital.
Tactic: Before entering an adjacent market, find the one peer whose standing complements yours and propose doing the first deal together rather than competing for it.
Principle 3
If you can't write it down yourself, don't do it
The handwritten-notes rule comes to us secondhand, through Wechsberg's 1966 book as retold by David Senra, so treat the details with caution. As a principle it holds up regardless. A transaction you cannot reduce to your own short summary is one you do not understand, and a deal you do not understand is either more fragile than it looks or someone is concealing something.
The Kreuger story makes the case. A match monopoly financed through layered holding companies was designed to impress rather than to be understood. Repo 105 makes it eighty years later in the other direction: $50 billion moved off the balance sheet at each reporting date through repurchase agreements recorded as sales, with an affiliate staffed by former employees that one executive called the firm's "alter ego." The firm that once avoided incomprehensible structures ended up building them.
The rule does not oppose sophistication. It opposes complexity used to hide things. If the explanation of a deal keeps getting longer as you probe it, that is a warning sign.
Tactic: Require that every major commitment be summarized by the decision-maker, in his or her own handwriting, on a single page before signing; if it can't be, the answer is no.
Principle 4
Close the founding business before it becomes a museum
In 1912, eleven years into his tenure, Philip let Lehman, Durr & Co. dissolve. It was the cotton partnership that had carried his family through the Civil War and the business his father and uncles had built from Henry's wagon. Chapman notes that cotton "was no longer as lucrative as it used to be." Plenty of family firms have kept their founding line going out of sentiment long after it stopped earning money.
Philip treated the founding business as a source of capital rather than a monument, and moved that capital toward underwriting. He did it after the new business had proven itself, so the firm was not left without income in between.
His successors faced the same choice with mortgage origination in 2007 and handled it poorly. They closed BNC and cut 1,200 jobs, but kept the mortgage tranches already on the books. Closing a business means getting rid of its risk, not just its office.
Tactic: Once a year, ask of each legacy line whether you would start it today; for any "no," set a date to wind it down that includes disposing of its inventory and risk, not just its staff.
⚖
Two Lehman Brothers
Philip's firm and the firm that carried his name in 2008.
| Dimension | Philip's Lehman (1901–1925) | Lehman Brothers Holdings (2008) |
|---|---|---|
| What it financed | Durable Stores, catalogs, cigars, tires | Risk Securitized mortgage tranches |
| Ownership | Family partnership; partners bore losses personally | Public company; 31:1 leverage |
| Founding line | Cotton partnership dissolved, 1912 | BNC closed, 2007, but tranches retained |
| Complexity test | Legible Reportedly: reject what you can't write down | Opaque Repo 105; off-balance-sheet "alter ego" |
| Succession | Handed to son while alive, 1925 | CEO isolated; board reluctant to challenge |
| What survived | Enduring A collection now in its own museum wing | A tower sold to Barclays; European units for $2 |
Principle 5
Finance the household, not the smokestack
Look at the list of Philip's issuers and they share a customer: General Cigar, Sears, Woolworth, May, Gimbel, Macy's, Studebaker, Goodrich, Endicott Johnson. Nearly all of them sold to individual households. Robert extended the same idea into airlines, movie studios, and theaters. The firm's best decades rested on a judgment that the American consumer would outgrow American heavy industry as a source of profit.
The household is a diversified credit. Millions of buyers spread across thousands of small purchases do not all fail at once the way a single railroad can. Philip was financing the retailers that sold to households, and the retailers absorbed the variation among individual customers.
The irony of 2008 is that the firm ended by financing households directly, through mortgages, and lost what the retailer had provided: a buffer between the lender and the individual borrower. Lending to the household through the store worked. Lending to the household through a broker who would not hold the loan did not.
Tactic: When backing a consumer trend, prefer the business that serves many buyers and absorbs their variation over the instrument that ties you to each buyer's individual default.
Principle 6
Open the partnership to people who bring someone else's board seat
Until 1924, only male Lehmans could be partners. When the family partnership finally opened, it opened deliberately. John M. Hancock, the first outsider, did what Lehman partners did and sat on client boards. Under Robert, the firm sold an interest to John D. Hertz specifically because Hertz sat on the board of General Motors, and Hertz then became the firm's connection on the board of Paramount.
These were not passive investors. The firm was adding seats at other companies' tables. Each outside partner brought access to where decisions were made, which compounded into deal flow.
Philip kept the partnership closed for most of his tenure and opened it only at the end, which suggests caution as much as strategy. It is still a useful lesson: when you bring in outsiders, choose them for the network they extend into, not only for their capital.
Tactic: Evaluate prospective partners and senior hires partly by which external decision-making bodies they already sit on, and what deal flow those seats imply.
Principle 7
Hand over while you can still watch
Philip retired in 1925 at sixty-three, and his son took over at thirty-four. He lived another twenty-two years. He was close enough to remain the firm's senior figure and to chair the Lehman Corporation in 1929, but he no longer ran the business. Robert got the firm while his father was still alive to help, and he led it through the crash and the Depression.
Robert did the opposite. He ran the firm until he died in 1969, and his death left no family member active in the partnership. The firm fell into a power struggle within four years and was sold within fifteen. The contrast is about the timing of succession, not about fathers and sons.
A transition with the predecessor still alive allows advice, correction, and a credible handoff. A transition forced by death leaves a vacuum, and in partnerships vacuums tend to fill with conflict, as the Peterson–Glucksman fight showed.
Tactic: Set a succession date while you are still effective, then stay available as an adviser with no operating authority.
Principle 8
Build the next vehicle before you need it
In 1929 the firm created the Lehman Corporation, a closed-end investment company, and installed Philip as its first chairman. It was a new structure that let outside capital share in the partners' judgment without diluting the partnership. Arriving in the same year as the crash, it gave the firm a pool of permanent capital at the moment when transient capital vanished.
The histories record that the firm got through the Depression partly by acting as a venture investor while equity markets recovered. That is easier to do with permanent capital, which redemptions cannot force into selling.
The general point is to build structures that fit the next decade's conditions and to use your retired figures, as Philip was, to give the new structure credibility on the first day.
Tactic: Design at least one capital structure that would still function if your primary funding source disappeared tomorrow, and put your most trusted senior figure in charge of it.
Principle 9
Own one thing that can't be marked to market
Philip began collecting art in 1911. He willed most of the collection to Robert, who added to it for six decades. Close to 3,000 works went to the Metropolitan Museum. The Robert Lehman Wing opened in 1975, nine years before the firm was sold to Shearson and thirty-three before it went bankrupt. The family's most lasting asset was not its stake in the firm.
This is not mainly an argument about art as an investment. It is about building something whose value does not depend on the next quarter's results. The collection was never leveraged and never traded, and it gave the family a public presence that outlived its business.
For an operator, the equivalent might be a body of work, a public institution, a group of protégés, or a reputation for a particular kind of judgment. Each is something that keeps its value when the market for your main business collapses.
Tactic: Identify one long-term project, outside your core business and deliberately unleveraged, that you would be proud of if the business vanished, and give it real time every year.
Principle 10
Never originate what you wouldn't hold
Phil Lehman, the North Carolina regulator, needed years to understand why lenders would make loans they knew would default. "It makes no business sense," he said, until he saw that the originators sold everything immediately, so "the person who originated it doesn't care because they're not going to hold the loan." Separating origination from holding broke the discipline his old community banks had followed.
Philip's firm, as a partnership, had that discipline built in. Partners bore losses with their own money, and the firm's name went on every underwriting. The Lehman Brothers of 2006 originated close to $50 billion a month through Aurora and BNC and then could not sell, or chose not to sell, the lowest-rated tranches. It ended up holding exactly the paper no one else wanted.
Wherever risk can be passed down a chain, care drops at the top of it. The fix is to stay accountable for what you create, whether by holding part of it, staking your reputation on it, or keeping a long-term relationship with whoever bears its consequences.
Tactic: For every product you sell, decide what share of its downside you will keep, and refuse to sell anything where that share is zero.
Principle 11
Distrust the disclosure defense
"The last resort of these scoundrels is always disclosures," Phil Lehman said. Lenders who sold fifteen-year balloon loans and single-premium credit insurance came to hearings holding signed paper. The paper was real and the borrowers' understanding was not. A signature showed only that something had been signed.
This principle is the counterpart of the handwriting rule. The first Philip, by repute, would not commit to a deal he could not summarize himself. The disclosure culture of the 2000s ran the opposite way: it accepted any deal as long as the other side's signature was on a form it could not have understood. One test asks whether the decision-maker understands. The other asks only whether the paperwork exists.
For operators the lesson works in both directions. Don't hide behind disclosures in what you sell, and don't take comfort from them in what you buy. A risk you disclosed is still a risk you created.
Tactic: Before relying on a disclosure, ask whether the person who signed it could explain the key risk back to you in a sentence; if not, treat the disclosure as protecting no one.
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Part IIIQuotes and Maxims
In their words
Philip Lehman left almost no quotable words in the record. The voices below are those of the people around him, his chroniclers, and the namesake who inherited the problem his firm helped create.
— Peter Chapman, The Last of the Imperious Rich: Lehman Brothers, 1844–2008Underwriting was a potential means of transforming Lehman Brothers from an old commodities brokerage trading mainly in cotton—a product that in the United States was no longer as lucrative as it used to be—into a modern 'house of issue.'
— Emanuel Lehman, conditioning his $100,000 gift to the Hebrew Orphan Asylum of New York, 1897To enlarge and perpetuate its usefulness.
— Stephen A. Schwarzman, Private Equity International, February 2003Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional.
— Philip A. Lehman, oral history interview, Duke University, February 21, 2020Well, not to treat mortgage loans as a commodity to sell, to make money off of. These are financial transactions that require a great deal of care and trust and ethics and, unfortunately, require strong regulation and strong laws.
— George Herbert Walker IV, Lehman Brothers, responding to a proposal that executives forgo bonuses, September 2008Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize.
Maxims
- Snobbery is mispricing. When the establishment avoids a business out of taste, the opportunity it leaves can last a generation.
- Borrow a friend's reputation to enter a new market. Two outsiders underwriting together carry more credibility than either one alone.
- Write it down in your own hand. If the deal won't fit on a page you wrote yourself, it isn't a deal you understand.
- Close the founding business on purpose. Sentiment is an expensive reason to keep an unprofitable line running.
- Finance the household through the store. Many customers spread across one business are safer than many individual borrowers tied to you directly.
- Choose partners for their board seats. The best outside partners extend your reach into where other companies make decisions.
- Succeed yourself while you are alive. A handoff the predecessor can watch is stable; a handoff forced by death leaves a vacuum.
- Hold what you originate. If you keep none of the downside of what you sell, you will stop caring about it.
- A signature proves only that something was signed. Disclosures protect the person who wrote them, not the person who signed them.
- Build one thing the market can't value. Philip's collection outlasted the firm.
