Lehman Bankruptcy Gets Ugly

Posted by: Matthew Goldstein on October 02, 2008

The Lehman Brothers bankruptcy is quickly becoming one giant mess.

Scores of hedge funds that had hundreds of millions in cash and other securities parked with Lehman’s prime brokerage operation in London have had their accounts frozen. A number of these hedge funds have filed formal objections with the bankruptcy court and at least one fund, New York-based Bay Harbour Management, is mounting a legal challenge to the court’s hastily-approved sale of Lehman’s brokerage arm to Barclays Capital.

Now a new and even more troubling scenario is arising: legal disputes stemming from the estimated $1 trillion in derivatives transactions that Lehman had entered into on behalf of itself and some of its customers. Already, at least three lawsuits have been filed, alleging that nearly $600 million in collateral posted by some of Lehman’s trading partners in derivatives transactions hasn’t been returned and is in jeopardy of disappearing as the bankruptcy process unfolds.

To date, the most aggrieved of Lehman’s trading partners is Bank of America, which at onetime was considering buying Lehman as the investment firm was lurching towards bankruptcy. The Charlotte, NC based lender is seeking to recover nearly $500 million the bank “posted as collateral to “support derivative transactions between BofA and the respective Lehman Entities,’’ according to a lawsuit filed in New York State Supreme Court.

The lawsuit alleges the accounts at Lehman that held the collateral were “frozen,’’ when the investment house filed for bankruptcy on Sept. 15. The complaint describes numerous attempts by BofA to persuade Lehman officials to unfreeze the funds, but each time the bank was rebuffed. In one email exchange, a Lehman employee says: “All activity has been suspended until further notice. Since everything is frozen, we cannot return the remaining collateral at this time.’’

BofA contends that Lehman “has wrongfully refused’’ to return the collateral and is violation of its agreement as a trading partner. The dispute could be the first of many since it’s not uncommon for derivative transaction to be part of tangled web, in which on trading partner is on the hook to make payments to other trading partners. A derivative is a sophisticated contractual agreement that is dependent on the performance of an underlying security, such as a bond, a stock or a commodity.

The dispute between BofA and Lehman appears to stem from the fateful decision by Lehman officials in New York to transfer $8 billion in cash from the firm’s London offices on the eve of the bankruptcy filing. The $8 billion cash and securities sweep left Lehman’s London offices with no money to pay employees or to provide cash to hedge funds that made use of the firm’s overseas prime brokerage operations.

The list of hedge funds entangled in the Lehman bankruptcy keeps growing by the day. Besides Bay Harbour, the list of hedge funds caught-up in the great $8 billion cash transfer include, GLG Partners, Newport Global Opportunities Fund, Amber Capital and Harbinger Capital Partners.

Texas-based Newport Global, a nearly $700 million fund with close ties to private equity giant Providence Equity Partners, got squeezed when Lehman officials apparently failed to comply with the funds’ request to move all its assets to Credit Suisse. Newport, which used Lehman as a prime broker, notified Lehman on Sept. 10 to “transfer assets held by “Lehman’s London affiliate to Credit Suisse. Newport executives had believed the transfer was completed and were shocked to learn that the assets were never moved before Lehman filed for bankruptcy.

Now Newport’s assets are frozen in the wake of the $8 billion transfer. In court papers, Newport says, “if these assets are not located and recovered immediately, there is the very real specter of serious and irreparable harm to not only the funds, but also to their respective investors.’’

The trouble is there are now a lot of questions about what happened to that $8 billion. It does not appear that $8 billion in cash and securities was ever part of the deal that enabled Barclays to buy Lehman’s New York operation. Trading partners like BofA and hedge funds like Newport that had money parked with Lehman, are now worrying they may never get their assets back. There’s growing concern that some hedge funds may be forced to shut-down if they can’t get their funds unfrozen soon.

It’s looking like Lehman, contrary to the conventional wisdom, may have been too big to fail after all. And the fallout from the bankruptcy may further undermine investors’ confidence in the financial system.

with David Henry

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Reader Comments

For the PEOPLE

October 2, 2008 12:52 PM

Hello EVERYONE...

If the government was able to bailout $700 billion, it would be better to give $1 million to every individual living legally in the United States.

There are only 300 plus million US population. If they provide $1 million for everyone in the US legally, half of it goes to taxes and the other half people get to spend. There will be less unemployment, people will be more inclined to spend cash,pay-off debt, less claim on unemployment, help troubled homeowners, less borrowing etc...This will ultimately boost the economy.

Forward this to everyone on your email list.

Dan

October 2, 2008 01:21 PM

Except that if they gave everyone $1 million, inflation would instantly skyrocket. Driving the price of EVERYTHING through the roof.

You think $4 gas is bad? Give everyone a million, you'll see $20/gallon gas!

JP

October 2, 2008 01:27 PM

wow, thats probably the dumbest thing i've heard in awhile. if everyone had million dollars, then do you think the value of million dollars will be the same as before the distribution? go get an education please.

Jeff

October 2, 2008 01:28 PM

For The PEOPLE, do the math yourself before you post nonsense like this.

Giving 300 million people $1M each is:

$300,000,000,000,000

Three hundred trillion dollars, or 428 times the $700B bailout.

Some Guy

October 2, 2008 01:28 PM

For the People
I'm not even going to be PC about this. Those days are over.

You are an idiot.

Your post has all the hallmarks of those moronic, ill thought out chain emails that people of low IQ seem to spew out all over the web.

Before you send this to anyone else on your email list you need to find out what the connection is between the Money Supply and Inflation. Oh and make sure you google Hyperinflation as well.

Hartley Lord

October 2, 2008 01:29 PM

Just the tip of the "Iceberg" of dust that Paulson and the establishment is trying to sweep under the rug with the "Pork Barrel Special".

Ralph W.

October 2, 2008 01:36 PM

These bailouts occured about two weeks after the close of the GOP convention. Who cashed out in the two weeks after the convention???

AJ

October 2, 2008 01:47 PM

Since when did the United States adopt communism? Capitalism on the way up and communism on the way down? Is that how it works? Seems like the perfect equation for the rich to get richer. Let the government bail out failed institutions. If this plan is "SO VITAL" to stimulate the economy then why aren't they giving the money directly to small businesses and the American people. Giving these huge corporations this money and bailing them out IN NO WAY guarantees they are going to lend my business or your business any money. Who is to say this won't happen again after we bail them out? Oh, because over the "oversight committees" and "regulation boards"? You must be kidding me. Their golfing buddies are the ones on these boards. The rich get richer and the poor get poorer. PERIOD.

Reply to For the people

October 2, 2008 01:48 PM

Hi For the People, How bad are you in math

700 billion / 300 million comes to 2300$ we cant do anything with 2300

J.L.

October 2, 2008 01:48 PM

duhh
???
That is definitively the most unsmart solution I've ever heard. Eventually it will lead to a bigger problem, honestly, Do you believe that people is going to spend that money properly?

SAM

October 2, 2008 02:03 PM

So now we see the elite at each other's throats. Good. The bailout won't work, and we will see it before the election.

Travis

October 2, 2008 02:11 PM

Any bailout is bad. It's socialism no matter how you dress it up. Besides, Dan has it right with every citizen having mass sums of money given to them.

Any instant liquidation into the market would cause two things to happen. First it will subsidize all the bad spending behavior we've had over the past couple of decades, and give incentive to keep spending recklessly. Second, it would cause prices to instantly go up in all sectors. Money would instantly lose value with that kind of liquidation. This is monetary theory straight out of the Austrian school.

Please read anything by Murray Rothbard for detailed analysis.

MM

October 2, 2008 02:17 PM

The bailout is wrong! Don't care how you look at it. It rewards greed plain and simpe. The old rule - If it looks to good to be true, it is! Seems like maybe they should teach that at MBA school.

Will times be hard without the rescue?Hell yes they will but they have been that way before. This is not the United States of Socialism Republic relocated.(Then again maybe it is!)

Put on your big boy drawers folks because it is going to be rough for quite awhile bailout or no bailout. It would just be rereshing to see the government look to someone besides the tax payers to bail their incompetent butts out.

william

October 2, 2008 02:27 PM

I've been preparing for a bank holiday by buying $100 worth of $1's now and then.

Wim

October 2, 2008 02:32 PM

8 billion missing? That sounds like fraud. I don't believe any bailout can help when people aren't honest. The only likely end is Enron.

Henry

October 2, 2008 02:34 PM

There are a lot of dead corporations still walking around these days looking for a meal. It reminds me of the movie "Night of the Living Dead." Vast taxpayer guaranteed transfusions of blood money will not make any diffrence in the long run. Let them suffer the fate they brought on themselves. Bury them.

Wou Houl

October 2, 2008 02:36 PM

The people are retards.

Francisco

October 2, 2008 02:39 PM

Wow,
i have heard news from several governments complaining about that topic,because they have some reserves in Lehman.
Some people have made their opinion about the problems with the derivatives, because they were innovative financial instruments causing this Crisis...
so, what the FED respond in this case of Lehman or even the SEC?

joaquin

October 2, 2008 02:42 PM

maybe congress needs to cut work visa`s and insist on giving the jobs of running our finace companies to u.s.born citizens so we keep our funds here instead of over seas to the homeland of those congress has made finacial ties with.thier pockets are well lined and ours are empty

Gary

October 2, 2008 02:44 PM

Why is everyone making such a fuss?! After the bailout bill passes, banks financial troubles will, as if by magic, just disappear. Believe in the bailout!!! It will solve everything!

Eric

October 2, 2008 02:56 PM

$700 Billion / 300 Million people = $2,333.33 per person, not $1 Million.

$1 Million a person would cost 300 Trillion not Billion, which is approximately 22 times the size of the entire US economy (2007 US GDP=$13.5T).

Karl

October 2, 2008 03:11 PM

Hey BofA, I know where some of your money will be in November through March!!! It'll be in West Palm Beach, Florida!!!! Simply read what a Harvard Business Professor said to his class that included some EXECUTIVES back in late 2004 that proves this!! 'Google' this- RIP OFF REPORT FUEL FREEDOM INTERNATIONAL MPG CAPS, and go to the 2001 Toyota Tacoma Ripoff Report, and then to the 'Update' entitled- "Blame it on a Lawyer". The ANSWERS are all in there!!!!!!!!!!!!!! Good luck. I hope you get your money that they have hidden from YOU & the rest of the WORLD!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Steve

October 2, 2008 03:12 PM

It should be run like a baseball game.

Stike 1:

You can't afford your loans in the first place.

Ball 1:

The government buys up all the troubled mortgages from the banks. Thus getting the banks out of hock.

Ball 2:

The government renegotiates the mortgage rates. Making people pay what they can afford. 6% interest rates, are not 2%. Take what we can get.

Strike 2:

You failed to pay these new negotiated rates.

Strike 3:

Governement siezes house. Forecloses. Auctions it off.

That is a compromise that gives people oppotunities to get out of this mess. However it also makes people be responsible for the own lives. If you can't pay even the new rates, you didn't deserve the house. Get out!

Sam

October 2, 2008 03:12 PM

So money is worth more when most of it is concentrated with the few?

Commie Stooge

October 2, 2008 03:18 PM

Lenin once said that give capitalism enough rope; and it will hang itself.
Maybe with the credit crisis that day has arrived.
AIG was saved just to prevent the sort of chaos that Lehman is now causing.
It will be interesting to see just how this unravels.

MF

October 2, 2008 03:23 PM

Risk is unregulated, despite what the Central Banks think.And they think very slowly.

At least Equities/Quoted funds Are regulated (usually).

Come on folks, remember the Nigerian scams.

The prime culprits :??????
(IMHO) are the inter-dealer brokers

BlackSox

October 2, 2008 04:09 PM

Message to Steve...it sounds like your baseball is fixed in favor of the banks! Why let them off the hook by making the stupid loans to Mr. and Ms. Youcantaffordyourloansinthefirstplace?

jon

October 2, 2008 05:17 PM

If everyone was responsible enough with the million dollars to actually do the right thing with it America wouldn't be in this horrible financial position to begin with.
90% of people who win the lottery are broke within five years.
90% people!

Heh from finlan

October 2, 2008 07:06 PM

Are you really sure that 1mil/ppl wont work?
The idea ofcource is that government lends the money from soehwhere to ppl. Who then pays their mortages and car loans, and aftes that starts to pay it back in a form of taxes.
That money does not come from out of nothing. hehe.
For example, id u only want half, u get tax relieve etc.
100k/ppl. who has loan and are willing to pay some extra taxes would work better than 700bn to bankers.
Anyway, u have been fooled to think that a loan and a job in a hamburger bar is better than a salary from a factory.

George McBay

October 3, 2008 06:29 AM

Watch and learn, FOR THE PEOPLE, watch and learn...

http://www.youtube.com/watch?v=t_LWQQrpSc4

terrymac

October 3, 2008 09:40 AM

the $1000,000 per American proposal probably was based on the mistaken notion that $700 billion would be British billions, which are 1000x larger than American billions. The actual cost of a $700 billion bailout would be approximately $2000 per American, give or take a few.

Now, if every American were issued $1,000,000, the consequences are obvious: rampant inflation. If every one were issued $2000, the consequences are just as incontrovertible: inflation, only less so. If the same $2000 per American is issued to financial institutions, the consequence is the same: inflation which will drive up the costs of goods and services to everyone.

Alternatively, the funds could be drawn by taxation, to balance the books, inflation-wise. Draw $700 billion in taxes, and you can expect a reduction in spending on other goods and services. This is the hidden cost of the bailout plan.

Texan99

October 3, 2008 07:09 PM

I've receive three separate emails trying to make this argument, all with the same problem of moving the decimal point three places over to the right. People keep forwarding me this nonsense without seeming to be able to do the long division and check it first.

Our schools are hopeless.

kamaki

October 6, 2008 12:03 AM

Hedgehogs and Day Traitors forgot:
"Pigs get fed and Hogs get slaughtered!"

Financially illiterate

October 6, 2008 04:30 AM

This from Canadian Capitalist and I think it's worth repeating.

In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.

A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.

Albert N.

October 6, 2008 07:01 AM

I still can't guess the reason why both Paulson and Bernanke were so adamantly opposed to any alternative bailout approach, including one that would involve lending money to troubled financial companies.

Why this insistence on unloading "toxic" assets off the backs of gamblers and speculators?

Lending them money instead would give keep them edgy and on a short leash, and would at the same time allow them to resume (hopefully) legitimate, much less risky activity.

Ethically and for solid economic and financial reasons, they should retain the now-illiquid assets till they could sell them at acceptable losses, or even at some gains.

Lawrence Griffiths

October 11, 2008 12:35 AM

Why criticise a suggestion to give money to the bottom of the pyramid instead of the top. Of course it is inflationary. Inflation is the answer because the dollar is going to be worth half its current value soon one way or the other and the US will have half the financial power it had. If you double the value of all assets like real estate, gold and oil, which is the same as halving the value of the dollar, the sub prime mortgage problem will go away.

Jaysonrex

October 11, 2008 04:20 PM


So much for American style capitalism. Just like socialism and communism, it proved to be a complete flop.

This time around there is no remedy in sight except, maybe, using the same unbeatable technique that made the Spanish Inquisition famous.

This means putting every Wall Street "player" and most people connected with the financial world (except the cleaning staff and the receptionists) through the "inquiry" conducted by a special tribunal similar to the one Torquemada so successfully organized.

After confessing their sins, and they will confess, a fair choice should be given to one and all: (a) surrender to the Fed every single dollar they and their families own, or, (b) have their entire fortune confiscated and then be sentenced to life in prison without parole.

Since we must be filled with compassion even during such difficult times, we should not insist that the "players", the bankers and their associates be burned alive at the stake. I hope that they will truly appreciate that merciful alternative.

These steps ought to put the house in order without much delay and thus avoid a complete melt-down of the financial structure we are all so dependant upon. Or am I wrong?

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Businessweek’s Emily Thornton, Amy Feldman, Ben Levisohn, and Ben Steverman focus on matters great and small for investors, from the views of a hot fund manager to an explanation of the latest products devised by Wall Street’s rocket scientists. Exploring trends in any area, from bonds and stocks to closed-end funds and futures, always with an eye towards giving investors a better understanding of the sometimes confusing and often chaotic world of finance. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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