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Posted by: Matthew Goldstein on February 27
It sounds like one of those bad credit card deals. But believe it or not, Lehman Brothers is charging some of its former trading partners 16% interest for failing to settle up on outstanding derivatives contracts.
The bankrupt firm has been imposing that stiff penalty ever since Bankrupty Judge James Peck ruled that Lehman can move to collect from trading parties that still owe it money on outstanding derivatives trades. The judge’s Dec. 16 ruling also gave corporate restructuring veteran Bryan Marsal, now serving as Lehman’s CEO, the authority to sell some of those so-called “in the money” trades to third parties.
But it’s the hefty 16% interest rate penalty that’s emerging as the big hammer for Marsal and his team at Alvarez & Marsal. People close to Lehman say the penalty has prompted counterparties that owe Lehman money on trades to come to the table to settle-up.
“We are invoicing terminated parties for past due amounts and the
“running interest” is proving an important motivator for parties to pay what they owe,” says a Lehman spokeswoman. “The (judge’s ruling)is proving an important catalyst for assignments and settlements of open trades.”
Marsal’s team won’t say exactly how they derived at the 16% figure. In fact, no such figure appears in the judge’s order. But a person close to Marsal says the interest rate is based on a calculation of what would be Lehman’s borrowing costs as a bankrupt company.
In time, Marsal & Co. expect the judge’s ruling, coupled with the 16% penalty, to bring in several billion dollars for the bankrupt investment firm’s creditors. In all, there are about 30,000 open derivatives contracts, in which thousands of Lehman trading partners owe money to the failed investment firm.
But the 16% penalty will do nothing to resolve the far bigger total of 900,000 terminated derivatives transactions—many of which have resulted in billions of dollars in claims against Lehman. Those disputes, many of them with giant banks like JPMorgan Chase and Bank of America, could take months, if not years to resolve.
Marsal and his team don’t plan on moving to tackle those more difficult derivatives contracts until sometime this spring. Stay tuned. The Lehman derivatives battles are just heating up.
BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.