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How Lehman Bros. rescued L.A.
It's ironic that, as the mortgage crisis pushed Lehman Bros. Holdings Inc. into bankruptcy and probable demise, the storied finance house couldn't find a savior in its hour of need. Had Lehman turned a similar cold shoulder to Los Angeles more than 125 years ago, the contours of California's evolution likely would have been much different.
In 1875, when Farmers and Merchants Bank was on the edge of financial collapse, threatening to undermine Los Angeles' fledgling economy, Isaias Hellman, the bank's co-founder and the city's most astute financier, turned for help to a venerable East Coast institution: Lehman Bros.
The request for money to help a bank hit hard by a run did not faze Mayer Lehman, who joined his brothers in 1850 in the company that started out selling cotton -- and who happened to be Hellman's brother-in-law. Lehman handed over $20,000, and the funds helped Los Angeles weather its first full-scale financial crisis. Farmers and Merchants Bank rose to become the city's dominant financial institution and a catalyst in helping the region grow.
Fifteen years later, in 1890, Lehman Bros. helped the California economy again. This time Nevada Bank of San Francisco was teetering. Its cashier -- who ran the bank in those days -- had tried unsuccessfully to corner the country's wheat market, leaving the bank's coffers almost empty. The owners of Nevada Bank offered to sell it to Hellman, who, in turn, looked to Lehman Bros. for help in the acquisition. Once again Hellman wasn't disappointed. The New York firm bought $150,000 in stock. The next highest investor was Levi Strauss & Co., at $120,000. Within two years, Nevada Bank was earning a profit.
For much of California's history, the well-being of the state's economy has been dependent on an influx of capital from the East. And through the early 20th century, Lehman Bros. played an important part in stabilizing the state's uncertain markets and investing funds in major industries. Lehman served as a correspondent bank for a number of California financial institutions that did business on the East Coast. When the 1906 earthquake and fire devastated San Francisco, Lehman was one of the first East Coast firms to offer aid.
One reason that Lehman Bros. played such a crucial role in California came from the close association between Lehman and Hellman, which began after they married sisters. Hellman became the West's most powerful banker, heading up Wells Fargo Nevada National Bank and controlling more than $100 million in capital.
The period after the Civil War was one of tremendous U.S. economic growth, and the two men took advantage of the opportunities, investing in banks and railroads together. The relationship continued: Hellman's great-grandson, Warren Hellman, took over the presidency of Lehman in 1973.
The close association between Hellman and Lehman Bros. broke down as the country's financial markets evolved and grew more complex. Today, personal relationships play only a minor role in huge transactions. In a small bit of irony, Hellman's Farmers and Merchants Bank was eventually gobbled up by Bank of America Corp., the bank that agreed this week to acquire Merrill Lynch & Co. but that turned its back on Lehman Bros.
So now the company that evolved from a cotton exchange business in Montgomery, Ala., to a commodities company in New York to America's fourth-largest Wall Street firm may soon be just a memory. But it's worth a moment of reflection to acknowledge how it once helped Los Angeles.
Frances Dinkelspiel, author of the forthcoming book, "Towers of Gold: How One Jewish Immigrant Named Isaias Hellman Created California," is Hellman's great-great granddaughter.