Lehman's Rise and Fall (Sinclair Stewart, Paul Waldie)

Long before it became the largest bankruptcy in U.S. history, Lehman Brothers dove into the nascent market for high-risk home loans aimed at a vulnerable part of U.S. society. In the second part of a special investigation, Report on Business examines how Lehman's ties to the 'unethical' business spelled disaster for the company and helped ignite the deepest economic crisis in decades

December 22, 2008

NEW YORK/TORONTO - Eric Hibbert felt uneasy when he toured First Alliance's head office in Irvine, Calif., in July, 1995.{xtypo_quote_right} In 1995, when Lehman began dipping its toe in the water, total CDO issuance was about 2.5-billion. Within four years, it would reach 120-billion. The subprime market moved in near perfect lockstep. In 1994, there was 35-billion in subprime mortgages in the United States, about 5 per cent of the market. But by 1999, that figure would swell to 160-billion, or roughly 13 per cent of all home loans. {/xtypo_quote_right}

Mr. Hibbert was a vice-president at Lehman Brothers and he'd been sent to meet First Alliance founder Brian Chisick to see if Lehman could form some kind of relationship with the mortgage lender.

“This is a weird place,” he wrote later in an internal memo. While he noted the company's “efficient use of their tools to create their own niche,” he also pointed out that “there is something really unethical about the type of business in which [First Alliance] is engaged.”

Mr. Chisick had become one of the biggest players in subprime loans. First Alliance's annual revenue had doubled in four years to nearly $60-million (U.S.) and its profit had increased threefold to $30-million.

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