Applied Financial Economics, 2012, 22, 375385

The failure of Lehman Brothers and

its impact on other financial
institutions
Mark Anthony Johnsona,* and Abdullah Mamunb
a

Department of Finance, The Sellinger School of Business and Management,

Loyola University Maryland, 4501 North Charles Street, Baltimore,
MD 21211, USA
b
Edwards School of Business, University of Saskatchewan, Saskatoon,
Saskatchewan, Canada

The failure of Lehman Brothers in 2008 was the largest bankruptcy in US

history. Financial markets did not respond well to the news of this
bankruptcy filing as the Dow Jones Industrial Average (DJIA) declined by
more than 500 points by the end of the trading session that day. We
identify key dates surrounding the final months of Lehman Brothers
existence and study the wealth effects experienced by shareholders of other
financial institutions stocks. At one of the first signs of trouble for the 158
year old investment bank, we find that when Lehman Brothers announced
their first quarterly loss, the stocks of depository institutions and primary
dealers declined. Ultimately, on 15 September 2008 when Lehman Brothers
filed for bankruptcy, the stocks of banks and primary dealers declined by
2.90% and 6.00%, respectively, and were the biggest losers that day.
We also study how the size of the depository institutions may have played
a role in the adverse effects they experienced surrounding Lehmans
troubles. We present evidence that it was primarily large banks, savings
and loans and brokerage firms who were impacted the most.
Keywords: too big to fail; banking crisis; event study
JEL Classification: G21; G28; E58

I. Introduction
Two years after its announcement, the largest US
bankruptcy is still mentioned in the popular press and
noticed in the fragile money and capital markets.
Headlines such as A Post-Lehman World
(Lauricella and Gongloff, 2010) and Lehman Bros.
fall still dogging some of areas largest stocks (Haber,
2010) are reminders as to just how meaningful this

particular bankruptcy rattled global and domestic

markets in the midst of the longest recession since the
Great Depression. Lehman Brothers operated
through many economic downturns in its 158-yearold history and came to be recognized as a prominent
investment bank. But the phrase this time is different best describes the most recent US recession,
which was primarily rooted in risky wagers made by
individuals and financial institutions alike in the

*Corresponding author. E-mail: majohnson@loyola.edu

Applied Financial Economics ISSN 09603107 print/ISSN 14664305 online 2012 Taylor & Francis
http://www.tandfonline.com
http://dx.doi.org/10.1080/09603107.2011.613762

375

376
belief of a never-ending home value appreciation
cycle. As housing values began to decline and
homeowners began to default on mortgages, financial
institutions began to falter as the number of
nonperforming loans skyrocketed and these same
institutions struggled to remain liquid while simultaneously posting additional credit to their creditors
accounts.
The collapse of Lehman Brothers has been compared to the near-failure of another large financial
entity the hedge fund Long-Term Capital
Management (LTCM). LTCM is best noted for its
massive wagers based on arbitrage investing techniques which they believed were spectacular in design.
In 1998, LTCM received a great deal of attention as it
was ultimately bailed out by other financial institutions under the supervision of the Federal Reserve
due to significant investing losses resulting from the
Russian financial crisis. Previous studies have studied
the impact of the near-failure of LTCM on financial
markets (Dowd, 1999; Edwards, 1999; Jorion, 2000;
Kho et al., 2000; Scholes, 2000; Furfine, 2001; Kabir
and Hassan, 2005). To date, no study has analysed
how the bankruptcy filing of Lehman Brothers, a
firm with liabilities in excess of $600 billion, impacted
other financial institutions. Utilizing a similar multivariate regression methodology of Millon-Cornett
and Tehranian (1990) and Kabir and Hassan (2005)
who study how the stock returns of other financial
institutions were affected by LTCMs bailout, the
present study seeks to conduct a parallel investigation
by analysing the major events leading up to the
eventual demise of Lehman Brothers.
It is important to note that Lehman Brothers,
unlike LTCM, received no financial backing (i.e.
bailout) from the Federal Reserve. What makes these
two isolated events similar is that due to their large
size and market exposure, when news began to be
released that both institutions were having financial
difficulties, financial markets responded sharply. The
contribution of this study is to analyse the stock
market reaction of various financial institutions to
news about Lehman Brothers during its final weeks.
By undertaking this study, questions regarding the
wealth effects of shareholders can be answered. Since
Lehman Brothers was implicitly deemed not too big
to fail because it was allowed to fail, the effects of
such a rare event in financial markets history needs to
be analysed so that tangible, concrete ramifications of
such occurrences can be documented.
Results of this study show that when Lehman
Brothers announced its first ever quarterly loss of
$2.8 billion since being spun off by American
Express, the stock returns of banks, savings and
loans, primary dealers and brokerage firms all

M. A. Johnson and A. Mamun

responded similarly by declining approximately 3%
that day. A similar outcome occurred when Lehman
Brothers pre-announced the subsequent quarters
$3.9 billion loss and the stock returns of savings
and loans, primary dealers and brokerage firms all
declined in value with savings and loans posting
returns of 4.10% and brokerage firms posting
returns of 4.40%. Five days after releasing these
dismal results, Lehman Brothers would file for
bankruptcy and the stock returns of primary dealers
suffered the most with a return of 6.00% followed
by banks which had a return of 2.90%. When
taking the size of each respective financial institution
into consideration, results are presented that show
that larger financial institutions were affected more so
by these events than smaller financial institutions.
Results are thus presented that show that the many
types of financial institutions were impacted by
Lehman Brothers difficulties in its final months.

II. Background and Literature Review

Lehman Brothers, established in 1850, was a prominent investment bank which came to become the
largest underwriter of US mortgage bonds (Onaran,
2008). In addition to the investment banking services
that they provided, they also served a critical role in
the buying and selling of US treasuries as a primary
dealer. Before being removed from the list of primary
dealers due to filing for bankruptcy, there were only
19 financial institutions that served the Federal
Reserve Bank of New York (2008) in this capacity.
The massive economic slowdown that has been given
the name, the Great Recession, was the longest
recession that the USA faced since the depression of
the 1930s. According to the National Bureau of
Economic Research (NBER), the most recent recession started in December 2007 and ended in June
2009. The collapse of the US housing market is given
the majority of the credit for causing this particular
recessionary period. The difficulties in the real estate
market carried over to financial institutions and since
25 September 2008, 279 banks have failed (Smith and
Sidel, 2010).
One controversial part of the recent financial crisis
was the bailing out of financial institutions.
Particularly, institutions such as the Federal
National Mortgage Association (Fannie Mae), the
Federal Home Mortgage Corporation (Freddie Mac),
Bear Stearns and American International Group
(AIG) all received financial assistance from the US
Treasury Department and/or the Federal Reserve,
whereas Lehman Brothers did not and was allowed to

The failure of Lehman Brothers

fail. In the weekend before the 15 September 2008
bankruptcy filing for Lehman Brothers, then Federal
Reserve Bank of New York president Timothy
Geithner called a meeting on the evening of Friday,
12 September 2008. In addition to Geithners attendance, the Secretary of the Treasury Department and
Chairman of the Securities and Exchange
Commission (Henry Paulson Jr and Christopher
Cox) met with representatives of other large financial
institutions such as Goldman Sachs, JP Morgan
Chase, Merrill Lynch, the Bank of New York Mellon,
Morgan Stanley, Citigroup and the Royal Bank of
Scotland to discuss the ominous position of Lehman
Brothers (Dash, 2008).
Two of the more promising suitors, Bank of
America and Barclays, eventually decided not to
pursue the acquisition of Lehman Brothers. Bank of
America sought similar arrangements in the possible
Lehman Brothers acquisition from the US government as they made in the Bear Stearns sale. In
particular, Bank of America wanted them to take
financial responsibility for loses of some of Lehman
Brothers real estate assets which the government
declined to provide. As for Barclays, they did not
further pursue acquiring Lehman Brothers partly
because they said that they could not have received
shareholder approval for such a deal before Monday,
15 September 2008 (Sorkin, 2008). The International
Swaps and Derivatives Association, knowing the
extent to which Lehman Brothers counterparties
were involved in transactions with the large investment bank, established a special trading session on
Sunday, 14 September 2008 that allowed for the
closing and offsetting of positions in various derivatives instruments such as credit, equity, rates,
foreign exchange and commodity derivatives
(Thomson Reuters Financial News, 2008). In the
end, the meetings that took place prior to Lehmans
bankruptcy filing have been compared to the meetings that took place prior to the orchestrated bailout
of LTCM which involved hundreds of millions of
dollars of private sector funds from other large
financial institutions such as Chase, Barclays,
Goldman Sachs, Merrill Lynch, Deutsche Bank, JP
Morgan to name a few (Lowenstein, 2000).
Many studies have analysed the recent financial
crisis and in particular, the Federal Reserves
response to the extraordinary events that took
place. Cecchetti (2009) points out that at the beginning of the financial crisis, the Federal Reserves
conventional tools (conducting open market operations, adjusting the discount rate and setting reserve
requirements) did not have the impact needed given
the increasingly quick deterioration of conditions
present in the financial markets. Cecchetti (2009) and

377
Mamun et al. (2010) point out that this resulted in the
Federal Reserve implementing new initiatives such as
the Term Auction Facility, Primary Dealer Credit
Facility and the Term Securities Lending Facility.
These initiatives represented actions by the Federal
Reserve which intended to restore confidence as well
as liquidity to financial markets.
Similar studies investigate how a bank run during
the recent financial crisis impacted the prominent
mortgage lender, Northern Rock, in the UK. Shin
(2009) and Goldsmith-Pinkham and Yorulmazer
(2010) study this event and its impact on financial
institutions in the UK. Shin (2009) points out that
some critical reasons for the difficulties of Northern
Rock were its excessive leverage and overreliance on
short-term funding. Goldsmith-Pinkham and
Yorulmazer (2010) use abnormal returns on bank
stocks to show how this bank run and the subsequent
announcement from the UK government that it
would guarantee all deposits impacted bank stocks.
The notion of financial institutions growing by
sizeable amounts and becoming too big to fail has
been studied extensively in the literature (Kaufman,
1990; OHara and Shaw, 1990; Hetzel, 1991; Shaffer,
1993; Rochet and Tirole, 1996; Freixas et al., 2000;
Kane, 2001; Kaufman, 2002; Ennis and Malek, 2005;
Goodhart and Huang, 2005; Mishkin et al., 2006;
Brewer and Jagtiani, 2007; DeYoung et al., 2009;
Wall, 2010; Wilson and Wu, 2010). The entire
concept of a financial institution becoming too big
to fail is that in terms of size and importance to the
financial system to which it belongs, a failure of this
firm would result in grave consequences such as bank
runs, failures of other financial institutions or credit
markets freezing. But with the failure of Lehman
Brothers, a natural question that tends to arise is,
Why do banks fail?, Wheelock and Wilson (2000)
ask a similar question and find that banks that have
capitalization issues tend to fail at a higher rate.
Additionally, they show that the composition of
banks assets has a role in explaining such failures.
Banks with particularly low-quality loans are at risk
of failure they argue.
With respect to the failure of Lehman Brothers,
Ivashina and Scharfstein (2010) study bank lending
during the financial crisis and how the failure of
Lehman Brothers impacted this market. In addition
to showing that banks were issuing fewer new loans
during the recession, they show that banks that
jointly issued loans with Lehman Brothers (i.e.
syndicated loans) reduced their lending more than
other banks. Additionally, they note the failure of
Lehman Brothers as a critical turning point in credit
markets which resulted in an increased difficulty for
banks to roll over short-term debt.

M. A. Johnson and A. Mamun

378
III. Data
The data used to study the effects of the failure of
Lehman Brothers on other financial institutions are
3 years of daily stock returns from Center for
Research in Security Prices (CRSP) from 3 January
2006 until 31 December 2008. These returns are
compiled into portfolios which are formed based on
the firms Standard Industrial Code (SIC) code. The
following financial firms are included in this study:
banks (SIC 6020, 6021, 6022, 6029), savings and loans
(SIC 6035, 6036) and brokerage firms (SIC 6210,
6211). We also form a portfolio of the publicly traded
financial institutions which had primary dealer status
according to the New York Federal Reserve list on 15
September 2006. We then refer to COMPUSTAT and
gather the variable, asset size, from the balance sheet
of all firms. If a firm does not have the required
balance sheet data for the year 2006, it is excluded
from the sample. This restriction is imposed so that
size-sorted portfolios can be formed for the banks,
savings and loans and brokerage firms industries to
analyse any possible size effects. Table 1 presents the
summary statistics of the firms included in the
sample.
Sample firms in the banks, savings and loans and
brokerage firms portfolios are partitioned into
quintiles based on the book value of their assets at
the end of 2006. For example, small banks that fall
into the 20th percentile are placed in the Size 1
portfolio. As the book value of banks assets increase,
they are placed in the corresponding 40th percentile
(Size 2 portfolio), 60th percentile (Size 3 portfolio),
80th percentile (Size 4 portfolio) and the largest
banks are separated into the final percentile which is
the Size 5 portfolio. The same method of partitioning
financial firms by size is performed for the savings
and loans firms and brokerage firms.

IV. Event Dates

As fears rooted in the financial crisis began to impact
financial institutions, investors and policy makers

focused on the health of these same financial institutions. For example, early in 2008, the Federal Reserve
assisted in the acquisition of Bearn Stearns by JP
Morgan. Similar to the collapse of LTCM, news of
potential financial insolvency of Lehman Brothers
was not identified until they reported their first ever
quarterly loss since being spun off. It was this turning
point when investors began to look more closely at
the bank and see if it would become the next casualty
amidst the bank failures and bailouts.
In addition to studying how the stock returns of
financial firms were impacted around the date that
Lehmans first loss was reported, we also include the
announcement on 2 September 2008 of a possible
capital investment by Korea Development Bank.
Days later, it was announced that these talks ceased,
leaving investors to wonder where alternative sources
of funds would come from given one potential
investor walked away. This event is also studied. In
addition, we study the announcement of their second
consecutive multi-billion dollar loss quarter in addition to Moodys specifying the same day that Lehman
Brothers credit ratings were under review. Finally,
we study the 15 September 2008 date when Lehman
formally announced that it was filing for bankruptcy
following a weekend of failed discussions with
Timothy Geithner, other key policy makers and
members of the financial community. Table 2 lists
the important event dates of this study.

V. Methodology and Hypotheses

Using stock market returns of financial institutions,
we study the key event dates leading up to Lehman
Brothers bankruptcy and how this impacted the
financial services industry. Rose (1985), MillonCornett and Tehranian (1989, 1990), Hendershott
et al. (2002), Kabir and Hassan (2005) and Mamun
et al. (2005, 2010) all use the Seemingly Unrelated
Regressions (SURs) methodology to identify the
markets reaction to key events. This approach is
most appropriate given that events occurring in the
financial services industry around this time period

Table 1. Firm characteristics of financial institutions included in the sample

Asset value (in millions of USD)

N
Mean
Median
Minimum
Maximum

Banks

Brokerage firms

Savings and loan

Primary dealers

493
$14 336.04
$1077.10
$86.45
$1 459 737

32
$123 980.45
$1940.03
$47.34
$1 120 645

200
$4308.56
$742.25
$76.40
$346 288

17
$1 191 065.92
$1 274 923.71
$168 957.00
$1 965 158.671

The failure of Lehman Brothers

379
dates surrounding the failure impacted the portfolios
of financial institutions:

Table 2. Event dates and descriptions

Event
number

Event date

Event description

9 June 2008

2 September
2008

9 September
2008

10 September
2008

Lehman Brothers announced a

second quarter loss of $2.8
billion which was the
investment banks first loss
since being spun off by
American Express.
KDB announced that it was
having discussions with
Lehman Brothers regarding
a possible investment in
their firm.
Discussions regarding a possible investment by KDB into
Lehman Brothers were
discontinued.
Lehman Brothers preannounced their third quarter loss of $3.9 billion along
with their intent to sell off a
majority stake in their
investment-management
business. Lehman Brothers
credit ratings were
announced to be under
review by Moodys.
Lehman Brothers filed for
bankruptcy.

15 September
2008

resulted in returns that are contemporaneously correlated due to the similar industries of the sample
firms (Schwert, 1981). We specifically use the same
multifactor model that Kabir and Hassan (2005)
employ which is the following:
gt ite
ft
eit i it Rm
It it Ex
R

5
X

ik Dk "t

k1

1
eit is the return on portfolio i on day t,
where R
k 1, . . . , 5 representing the number of event dates,
gt representing the returns on the CRSP NYSE/
Rm
AMEX/NASDAQ index on day t, e
It representing
ft reprethe return on the 30-day US T-bill rate, Ex
senting the exchange rate return, Dk representing
dummy variables equal to 1 on the respective event
date specified in Table 1 and 0 otherwise and "t
representing the random disturbance terms.
Kabir and Hassan (2005) find that financial contagion was present within the financial sector during
the failure of LTCM. Given this documented finding
and the similarities between this failure and
Lehmans, we test the following hypotheses from
Kabir and Hassan (2005) to study how the key event

Hypothesis 1: Each event date has the same impact

on the wealth of the shareholders of financial
institutions. More specifically, ik jk 8i, j i 6 j
which would signify that the abnormal returns of all
portfolios are jointly equal across each event date k.
Hypothesis 2: The overall net impact of the indications of trouble at Lehman Brothers during its final
weeks is equal, resulting in no
P clearly identifiable
winners and losers. Formally, i i 0 8k .

VI. Results
Did all types of financial institutions react similarly
to Lehmans failure?
Looking at one of the first signs of trouble for
Lehman Brothers, 9 June 2008 was when they
announced their significant quarterly loss. Table 3
presents evidence that on this date, all four portfolios
had statistically significant negative returns, with the
primary dealer portfolio realizing the largest loss that
day (3.5%) followed by the bank portfolio
(3.4%). Referring to the Wald test results to test
Hypothesis 1, we fail to reject the null hypothesis that
the abnormal returns of all portfolios are equal on
this particular date, implying that the negative impact
on all portfolios was approximately the same. The
results from testing Hypothesis 2 provide evidence
that there were clearly defined losers on this date
because of the fact that we reject the null hypothesis
which stated that the sum of the abnormal returns
equalled zero. This Wald test for the sum of the
effects of all portfolios on this date being zero is
rejected at a 5% level of significance (x2(1) 5.551).
We thus conclude that on 9 June 2008, when Lehman
Brothers announced its first quarterly loss since
going public, the portfolios of banks, savings and
loans, primary dealers and brokerage firms declined
by a statistically significant amount and the net
impact was not equal.
On 2 September 2008, when Korea Development
Bank (KDB) announced that it was having discussions with Lehman Brothers regarding a possible
investment in their firm, only the bank portfolio
increased by 3%. As for the Wald tests for
Hypotheses 1 and 2, neither test statistics are significant indicating a similar reaction by all portfolios
and no clear winners or losers on this particular date.
A few days later, on 9 September 2008, discussions

M. A. Johnson and A. Mamun

380

Table 3. Portfolio abnormal returns and tests of the hypotheses of differential effects on portfolios of financial institutions

Bank
portfolio
Intercept

Primary
dealers
portfolio

Brokerage
portfolio

Wald test
x2(3) statistics

Wald test
x2(1) statistics

0.003**
0.003**
0.002
0.003**
(2.486)
(2.547)
(1.632)
(2.156)
1.412***
1.057***
1.646***
1.777***
(37.256)
(34.897)
(41.383)
(48.211)
0.080**
0.072**
0.062
0.069**
(2.228)
(2.508)
(1.636)
(1.969)
0.713***
0.713***
0.185
0.283**
(5.627)
(7.043)
(1.395)
(2.297)

gt
Rm
e
It
ft
Ex

Event date

Parameter

9 June 2008

1k

2 September 2008

2k

9 September 2008

3k

10 September 2008 4k

15 September 2008 5k
Adjusted R2

Savings
and loan
portfolio

Hypothesis
2:
Hypothesis 1:
P4
ik jk 8i, j i 6 j
i1 ik 0
0.034**
(2.035)
0.030*
(1.804)
0.006
(0.330)
0.024
(1.448)
0.029*
(1.739)
0.652

0.031**
(2.323)
0.005
(0.355)
0.003
(0.204)
0.041***
(3.077)
0.002
(0.133)
0.622

0.035**
(2.019)
0.022
(1.272)
0.004
(0.248)
0.024***
(1.393)
0.060***
(3.416)
0.701

0.030*
0.270
(1.818)
0.013
5.700
(0.769)
0.018
1.923
(1.079)
0.044*** 3.186
(2.703)
0.006
34.461***
(0.397)
0.757

5.551**
1.596
0.298
5.869**
3.102*

Notes: Utilizing the methodology of Kabir and Hassan (2005), the following system of equations using SURs is presented:
P
gt ite
ft 5 ik Dk "t , where R
eit i it Rm
eit is the daily return on portfolio i on day t, Rm
gt the returns of the
It it Ex
R
k1
e
f
market using the CRSP NYSE/AMEX/NASDAQ index, It the daily 1-month T-bill rate, Ext represents the exchange rate and
the daily change in the trade-weighted exchange index of major currencies, Dk the dummy variables equal to one for event day
k and zero otherwise and "t the random disturbance terms. The coefficients of each dummy variable (ik) indicate abnormal
returns for the corresponding financial institution portfolio on that particular event date. The SUR system is estimated using
daily data from 3 January 2006 to 31 December 2008.
t-statistics are listed in parentheses.
*, ** and *** indicate significance at the 10, 5 and 1% levels, respectively.

regarding a possible investment by KDB

into Lehman Brothers were discontinued. None of
the financial institution portfolios realized statistically significant returns and the null hypotheses
for Hypotheses 1 and 2 were not rejected, thus
showing a similar reaction as when it was first
announced that KDB was considering investing in
the troubled giant.
The final two events that we investigate occur near
the final days for Lehman Brothers. The first of the
final two event dates being 10 September 2008, which
is when Lehman Brothers pre-announced their third
quarter loss of $3.9 billion along with their intent to
sell off a majority stake in their investment-management business. Additionally, on this event date,
Moodys announced that Lehman Brothers credit
ratings were under review. Referring again to Table 3,
we observe losses by the savings and loan (4.10%),
primary dealers (2.40%) and brokerage (4.40%)
portfolios. When we test if the sum of the wealth

effect from this news announcement is significantly

different than zero, we confirm this at a 5% level of
significance (x2(1) 5.869).
On the last event date, 15 September 2008, Lehman
Brothers filed for bankruptcy. At the end of the
trading session this date, the Dow Jones Industrial
Average (DJIA) declined 504 points (4.42%) and
this was recorded as one of the largest single-day
declines within the past 20 years (Fig. 1). According
to Table 3, we observe losses by the bank (2.90%)
and primary dealers (6.00%) portfolios. Looking at
the results of Hypothesis 1, we reject the null
hypothesis that this event had the same impact on
the wealth of the shareholders of all types of financial
institutions at a 1% level of significance
(x2(3) 34.461). Moreover, when we test Hypothesis
2 to see if the sum of the wealth effect across
portfolios is significantly different than zero on this
date, we do find evidence that the overall net wealth
effect does not equal zero, leading us to believe that

The failure of Lehman Brothers

381

Fig. 1. Time-series plot of the S&P 500 and DJIA 2 years after Lehman Brothers filed for bankruptcy
Source: S&P Composite Index Level data and DJIA data was obtained from the Federal Reserve Bank of St. Louis (FRED)

Table 4. Portfolio abnormal returns and tests of the hypotheses of differential effects on size-sorted bank portfolios
Size-sorted bank portfolios

Intercept
gt
Rm
e
It
ft
Ex

Event date

Parameter

9 June 2008

1k

2 September 2008

2k

9 September 2008

3k

10 September 2008 4k

15 September 2008 5k
Adjusted R2

Size 1
(Smallest)

Size 2

0.002***
(3.709)
0.099***
(7.787)
0.038***
(3.176)
0.177***
(4.182)

0.001
0.002***
0.004***
0.003**
(1.390)
(3.491)
(3.559)
(2.378)
0.189***
0.697***
1.169***
1.440***
(15.089)
(36.415)
(36.916)
(36.648)
0.015
0.058*** 0.098*** 0.079**
(1.288)
(3.181)
(3.263)
(2.132)
0.110***
0.321***
0.807***
0.719***
(2.627)
(5.021)
(7.624)
(5.475)

Size 3

Size 4

Size 5
(Largest)

Wald
test x2(4)
statistics

Wald
test x2(1)
statistics

Hypothesis 2
Hypothesis 1
P
5
ik jk 8i, j i 6 j
i1 ik 0
0.009
(1.531)
0.000
(0.087)
0.001
(0.166)
0.007
(1.312)
0.020***
(3.510)
0.120

0.004
(0.775)
0.004
(0.813)
0.000
(0.076)
0.003
(0.592)
0.004
(0.730)
0.242

0.014*
(1.647)
0.010
(1.160)
0.013
(1.535)
0.005
(0.581)
0.000
(0.035)
0.637

0.020
(1.421)
0.020
(1.400)
0.020
(1.409)
0.000
(0.007)
0.013
(0.932)
0.646

0.035**
(2.019)
0.031*
(1.788)
0.007
(0.378)
0.026
(1.470)
0.031*
(1.790)

3.576

4.994**

3.212

3.201*

3.831

0.565

7.197

0.884

15.391***

1.283

0.645

Notes: Utilizing the methodology P

of Kabir and Hassan (2005), the following system of equations using SURs is presented:
gt ite
ft 5 ik Dk "t , where R
eit is the daily return on portfolio i on day t, Rm
gt the returns of the
eit i it Rm
It it Ex
R
k1
ft represents the exchange rate and the
market using the CRSP NYSE/AMEX/NASDAQ index, e
It the daily 1-month T-bill rate, Ex
daily change in the trade-weighted exchange index of major currencies, Dk the dummy variables equal to one for event day k and zero
otherwise and "t the random disturbance terms. Bank portfolios are formed based on the book value of their assets at the beginning
of 2006 and are partitioned into quintiles. The coefficients of each dummy variable (ik) indicate abnormal returns for the
corresponding bank portfolio on that particular event date. The SUR system is estimated using daily data from 3 January 2006 to
31 December 2008.
t-statistics are listed in parentheses.
*, ** and *** indicate significance at the 10, 5 and 1% levels, respectively.

M. A. Johnson and A. Mamun

382

Table 5. Portfolio abnormal returns and tests of the hypotheses of differential effects on size-sorted savings and loan portfolios
Size-sorted savings and loan portfolios

Intercept
gt
Rm
e
It
ft
Ex

Event date

Parameter

9 June 2008

1k

2 September 2008

2k

9 September 2008

3k

10 September 2008 4k

15 September 2008 5k
Adjusted R2

Size 1
(Smallest)

Size 2

0.001
(1.499)
0.099***
(7.099)
0.012
(0.887)
0.046
(0.988)

0.001**
0.001*
0.003***
0.003**
(2.041)
(1.714)
(3.926)
(2.377)
0.148***
0.356***
0.751***
1.116***
(11.019)
(26.407)
(41.868)
(33.154)
0.018
0.019
0.056*** 0.076**
(1.419)
(1.449)
(3.280)
(2.371)
0.123***
0.115**
0.468***
0.773***
(2.733)
(2.545)
(7.808)
(6.876)

Size 3

Size 4

Size 5
(Largest)

Wald
test x2(4)
statistics

Wald
test x2(1)
statistics

Hypothesis
2
Hypothesis 1
P5
ik jk 8i, j i 6 j
i1 ik 0
0.000
(0.066)
0.006
(0.957)
0.001
(0.215)
0.005
(0.768)
0.002
(0.268)
0.059

0.006
(0.986)
0.000
(0.014)
0.002
(0.354)
0.000
(0.032)
0.001
(0.117)
0.147

0.007
(1.159)
0.002
(0.401)
0.003
(0.491)
0.004
(0.686)
0.003
(0.570)
0.480

0.011
(1.359)
0.004
(0.526)
0.008
(0.954)
0.002
(0.245)
0.005
(0.584)
0.700

0.035**
4.664
(2.333)
0.004
1.210
(0.290)
0.003
1.431
(0.201)
0.047*** 12.979**
(3.189)
0.003
1.557
(0.185)
0.598

5.110**
0.038
0.067
5.060**
0.022

Notes: Utilizing the methodology P

of Kabir and Hassan (2005), the following system of equations using SURs is presented:
gt ite
ft 5 ik Dk "t , where R
eit is the daily return on portfolio i on day t, Rm
gt the returns of the
eit i it Rm
It it Ex
R
k1
ft represents the exchange rate and the
market using the CRSP NYSE/AMEX/NASDAQ index, e
It the daily 1-month T-bill rate, Ex
daily change in the trade-weighted exchange index of major currencies, Dk the dummy variables equal to one for event day k and zero
otherwise and "t are random disturbance terms. Savings and loan portfolios are formed based on the book value of their assets at the
beginning of 2006 and are partitioned into quintiles. The coefficients of each dummy variable (ik) indicate abnormal returns for the
corresponding savings and loan portfolio on that particular event date. The SUR system is estimated using daily data from 3 January
2006 to 31 December 2008.
t-statistics are listed in parentheses.
*, ** and *** indicate significance at the 10, 5 and 1% levels, respectively.

there were statistically significant portfolios who were

losers this date (x2(1) 3.102).
Did the size of the financial institutions matter?
After documenting the types of financial institutions
affected by the collapse of Lehman Brothers, we
investigate whether or not financial institutions of all
sizes were impacted the same. By separating the
sample firms in the bank, savings and loan and
brokerage firms portfolios into size-quintiles, we are
able to re-apply Equation 1 and study the event dates
impact on these portfolios created based on size and
institution type. Tables 46 present these results.
Table 4 presents the results of the impact of the
Lehman Brothers event dates on size-sorted bank
portfolios. Looking at the two Wald tests performed
to test Hypotheses 1 and 2, we find that the 9 June

2008, 2 September 2008 and 15 September 2008 event

dates provide statistically significant evidence regarding wealth effects affecting size-sorted bank portfolios. According to Table 4, on 9 June 2008, we find
evidence that the sum of the wealth effect from the
news announcement on this date is significantly
different than zero at a 5% level of significance
(x2(1) 4.994). The Size 3 and Size 5 bank portfolios
displayed negative statistically significant returns on
this date (1.40% and 3.50%, respectively). For the
2 September 2008 event date, similar to the 9 June
2008 Wald test results, we reject the null hypothesis
that the sum of the wealth effects was zero with the
Size 5 bank portfolio (3.10%) displaying statistically
significant results (x2(1) 3.201). On the date that
Lehman Brothers filed for bankruptcy, we provide
evidence that not all size-sorted bank portfolios were
impacted the same. We are able to reject Hypothesis 1

The failure of Lehman Brothers

383

Table 6. Portfolio abnormal returns and tests of the hypotheses of differential effects on size-sorted brokerage firm portfolios
Size-sorted brokerage firm portfolios
Size 1
(Smallest)
Intercept

Size 3

Size 4

0.004***
0.003**
0.004***
0.003**
(2.639)
(2.043)
(3.441)
(2.467)
1.568***
1.496***
1.336***
1.531***
(39.958)
(41.303)
(39.905)
(43.086)
0.072*
0.051
0.075** 0.060*
(1.949)
(1.482)
(2.366)
(1.788)
0.604***
0.586***
0.707***
0.749***
(4.604)
(4.837)
(6.319)
(6.310)

gt
Rm
e
It
ft
Ex

Event date

Parameter

9 June 2008

1k

2 September 2008

2k

9 September 2008

3k

10 September 2008 4k

15 September 2008 5k
Adjusted R2

Size 2

Size 5
(Largest)

Wald
test x2(4)
statistics

Wald
test x2(1)
statistics

0.003
(1.585)
1.905***
(40.505)
0.071
(1.588)
0.021
(0.133)
Hypothesis
2
Hypothesis 1
P5
ik jk 8i, j i 6 j
i1 ik 0

0.015
(0.886)
0.016
(0.951)
0.000
(0.021)
0.004
(0.257)
0.015
(0.861)
0.680

0.018
(1.148)
0.005
(0.323)
0.030*
(1.854)
0.048***
(2.977)
0.029*
(1.822)
0.698

0.018
(1.234)
0.029**
(1.992)
0.009
(0.596)
0.005
(0.371)
0.008
(0.559)
0.680

0.016
(1.013)
0.014
(0.896)
0.020
(1.253)
0.011
(0.728)
0.013
(0.818)
0.712

0.033
0.688
(1.598)
0.013
2.348
(0.638)
0.016*** 3.123
(0.786)
0.054*** 13.653***
(2.613)
0.012
8.562*
(0.598)
0.689

3.166*
1.906
1.701
4.708**
0.388

Notes: Utilizing the methodology P

of Kabir and Hassan (2005), the following system of equations using SURs is presented:
gt ite
ft 5 ik Dk "t , where R
eit the daily return on portfolio i on day t, Rm
gt the returns of the market
eit i it Rm
It it Ex
R
k1
ft represents the exchange rate and the daily
using the CRSP NYSE/AMEX/NASDAQ index, e
It the daily 1-month T-bill rate, Ex
change in the trade-weighted exchange index of major currencies, Dk the dummy variables equal to one for event day k and zero
otherwise and "t are random disturbance terms. Brokerage firm portfolios are formed based on the book value of their assets at the
beginning of 2006 and are partitioned into quintiles. The coefficients of each dummy variable (ik) indicate abnormal returns for
the corresponding savings and loan portfolio on that particular event date. The SUR system is estimated using daily data from
3 January 2006 to 31 December 2008.
t-statistics are listed in parentheses.
*, ** and *** indicate significance at the 10, 5 and 1% levels, respectively.

at a 1% level of significance (x2(4) 15.391) and

present results that show the Size 1 and Size 5 bank
portfolios performed the worst on this date which
implies that the largest and smallest bank stocks
suffered the most on this date as a result of the
bankruptcy filing.
When investigating how the savings and loan size
portfolios reacted to the event dates, Table 5 provides
evidence that the savings and loan portfolios were not
affected as much due to the events of Lehman
Brothers. The two dates that particularly affected
the savings and loan portfolios were 9 June 2008 and
10 September 2008. On 9 June 2008, we observe only
the Size 5 savings and loan portfolio declined by a
statistically significant 3.50% and the results of the
Wald test for Hypothesis 2 provides support that
these large savings and loan stocks were losers on this
date. As for 10 September 2008, the Size 5 savings

and loan portfolio declined again by a statistically

significant 4.70%. Both Hypotheses 1 and 2 were
rejected on this date leading us to conclude that when
Lehman pre-announced their third quarter loss and
had their credit rating under review, differential
wealth effects were present with large savings and
loan stocks being punished again.
Finally, we investigate the size effects on the sizesorted brokerage firm portfolios. Table 6 presents
these results. The key event dates that affected the
brokerage firms were 9 June 2008, 10 September 2008
and 15 September 2008. The date in particular with
the strongest results was 10 September 2008. On this
date, we reject Hypothesis 1 at a 1% level of
significance
(x2(4) 13.653)
and
we
reject
Hypothesis 2 at a 5% level of significance
(x2(1) 4.708). The Size 2 and Size 5 portfolios
declined the most on this date (4.80% and 5.40%,

384
respectively) providing some evidence of smaller and
large brokerage stocks being adversely affected this
date. For the other event dates presented in Table 6, a
clear picture is not present as to whether or not small
versus large brokerage firm stocks were consistently
punished through the market turmoil present surrounding Lehmans final weeks.

VII. Concluding Remarks

The epic failure of one of Wall Streets oldest firms,
Lehman Brothers, has not been studied much. The
recent financial crisis that was primarily rooted in the
collapse of US housing market had many casualties.
Financial institution consolidations and failures were
all too common between 2006 and 2008. Countrywide
Home Loans, Bear Stearns, Washington Mutual,
Wachovia, AIG and Merrill Lynch are just a few
financial institutions that experienced significant
difficulties and restructuring in the past few years.
But it was the failure of Lehman Brothers that proved
to be decisive during the US Great Recession that
lasted from December 2007 until June 2009. Ivashina
and Scharfstein (2010) identify Lehmans failure as a
critical turning point within the financial markets.
We present and study key event dates surrounding
the collapse of the Wall Street giant Lehman
Brothers. On 9 June 2008 when Lehman Brothers
announced a second quarter loss of $2.8 billion,
significant negative effects were experienced by
banks, savings and loans, primary dealers and brokerage firms. Months later as the recession persisted
and it became known that KDB was contemplating
investing in Lehman, bank stocks rose on this bit of
optimism. But when this investment never came to
fruition and Lehman Brothers pre-announced their
third quarter loss of $3.9 billion, more negative
wealth effects were observed. And on that crucial 15
September 2008 date when Lehman would file for
Chapter 11 bankruptcy protection, markets panicked
and a significant stock market sell-off took place.

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