Bloomberg News

Lehman Gets Goldman, Paulson Consent on Liquidation Plan

June 30, 2011

(Updates with signed agreements in fifth paragraph.)

June 30 (Bloomberg) -- Lehman Brothers Holdings Inc., resolving a dispute that threatened to delay its exit from bankruptcy, won consent for a $65 billion liquidation plan from derivatives creditors including Goldman Sachs Group Inc. and bondholders led by hedge fund Paulson & Co.

The new plan gives more money to holders of guaranteed claims against the defunct firm’s derivatives and treasury units, including Goldman Sachs, Morgan Stanley and hedge fund Silver Point Capital LP, Lehman said yesterday. The Paulson group, which includes the California Public Employees’ Retirement System, or Calpers, would get less than previously proposed.

Once the world’s fourth-biggest investment bank, Lehman fought the Paulson group and the rival group of derivatives creditors for months over control of its liquidation plan. Lehman, which entered bankruptcy almost three years ago, has twice amended its proposals to pay claims in response to creditor challenges.

“Substantially all” of the proponents of the competing plans are backing the latest proposal after “intense negotiations” this month, Lehman said in filings yesterday in U.S. Bankruptcy Court in Manhattan.

The Goldman Sachs-Silver Point group signed its consent to Lehman’s plan yesterday, according to a creditor who declined to be identified because the proceedings are confidential. The Paulson group and Lehman’s official creditors committee also signed their support, the person said.

Litigation Threat

Lehman Chief Executive Officer Bryan Marsal declined to comment, as did Goldman Sachs spokeswoman Andrea Raphael. Gerard Uzzi, a lawyer for the Paulson group, and Dennis Dunne, a lawyer for the creditors committee, didn’t immediately return calls seeking comment.

The compromise reached by Marsal, who has been selling assets to pay creditors, ends the threat of “protracted litigation” over the plan, the firm said.

The Goldman Sachs-Silver Point group said in April that Lehman’s earlier proposal was “highly unlikely” to succeed and contained “gifts” to bondholders that other creditors hadn’t approved.

Calpers, which disclosed that it paid more than 100 cents on the dollar for some of its Lehman bonds, responded that the Goldman Sachs group’s plan treated retirees “unfairly.” Harvey Miller, Lehman’s lead bankruptcy lawyer, said in a filing the Paulson-Calpers plan “presents the parochial interests” of the group. Referring to the Goldman Sachs group, he said “the Big Banks assert extraordinarily large unresolved claims.”

Paulson Purchases

The hedge fund headed by John Paulson, who earned an estimated $4.9 billion in 2010, paid as little as 9 cents on the dollar for some of its Lehman bonds, according to court papers.

Lehman said it will seek approval of the disclosure statement explaining the plan at an Aug. 30 hearing, allowing it to be sent to creditors for a vote. Objections to the disclosure statement are due by Aug. 11 and ballots must be in hand by Nov. 4.

Marsal told CNBC on June 16 that he expects to begin making distributions in the first quarter of next year. Lehman so far has raised $25 billion to $27 billion in cash, Marsal said in the CNBC interview.

Under the new plan, Lehman’s derivatives unit will distribute $14.2 billion to creditors while the allowed treasury claim is $34.5 billion. Derivatives claims would be paid 27.9 cents to 32 cents on the dollar, while commercial paper claims would get 48.4 cents to 55.7 cents, court papers show.

Guaranteed Claims

A guaranteed claim against Lehman’s special financing unit would get 27.9 cents on the dollar, plus more than 11 cents from a guarantee by the Lehman parent, or a total of about 39 cents. That is an increase from Lehman’s earlier plan, though less than the more than 40 cents proposed by the Goldman Sachs group.

Lehman senior bondholders would recover 21.1 cents on the dollar under the new plan, compared with 21.4 cents under the firm’s previous proposal. The Paulson-Calpers group filed its own liquidation plan in April that would have paid bondholders 25.4 cents on the dollar, up from 24.5 cents under a plan filed in December. Senior bondholders were offered 16 cents in the Goldman Sachs-Morgan Stanley proposal.

General unsecured claims would receive 19.9 cents on the dollar under the new plan. Claims tied to so-called Racers would be capped at $9 billion, Lehman said. Racers, or Restructured Assets with Enhanced Returns, were securities devised by Lehman using repurchase agreements and guarantees, according to a regulatory filing.

‘Consensual Resolution’

The plan agreement is “in principle” and Lehman still seeks “consensual resolution” of structured securities claims totaling $55 billion, according to yesterday’s filings. A hearing is scheduled for July 20 on valuing creditor claims.

Lehman bonds rose to the highest since June 7 after the agreement was announced. Lehman’s $4 billion of 5.625 percent bonds due in January 2013 rose 0.5 cent to 26.1 cents on the dollar at 2:12 p.m. yesterday in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Lehman last month proposed a framework to settle claims from Goldman Sachs, JPMorgan Chase & Co. and 11 other banks that were its largest derivatives counterparties. Lehman sought to avoid court fights with the banks and help resolve the bankruptcy case so it can pay creditors, according to a summary of the proposal made public on May 31.

About 30 financial institutions filed about $22 billion of derivatives claims, which Lehman estimated would be reduced to about $11 billion, the firm said then.

Bondholder Recoveries

Under Lehman’s amended plan, part of the bondholders’ recoveries would come from 20 percent of guarantees owed to other creditors, according to yesterday’s filings.

Lehman filed for bankruptcy on Sept. 15, 2008, with assets of $639 billion. The firm has paid about $1.3 billion in fees to managers and advisers since then, according to court papers.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from David McLaughlin, Bill Rochelle and Tim Catts in New York and Sophia Pearson in Philadelphia. Editors: Stephen Farr, John Pickering.

To contact the reporter on this story: Linda Sandler in New York at

To contact the editor responsible for this story: John Pickering at

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