Financial Crisis

‘Chaotic’ Lehman Bankruptcy Cost up to $75B in Value

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An internal analysis concludes that Lehman Brothers lost up to $75 billion in value because of the hurried nature of its bankruptcy filing.

The “unplanned and chaotic” filing led to cancellation of 900,000 separate derivatives contracts under provisions that called for contract terminations under an “event of default,” the Wall Street Journal reports (sub. req.). The canceled contracts included those in which Lehman was owed money, the story says.

The report by Alvarez & Marsal says the quick filing destroyed $50 billion to $75 billion in Lehman value. Delaying the bankruptcy filing by a few weeks would have allowed Lehman to transfer or unwind its derivatives trades and preserve more cash for creditors, the report concluded. A delay also would have allowed Lehman to sell assets before the bankruptcy depressed their prices, Alvarez & Marsal co-chief executive Bryan Marsal told the Wall Street Journal.

Marsal told the newspaper that the bankruptcy filing “was pretty much dictated to the board of directors at Lehman.”

A companion story in the Wall Street Journal tells of bankruptcy lawyer Harvey Miller’s efforts to oversee bankruptcy planning during a chaotic time. Miller, of Weil, Gotshal & Manges, began secretly developing a bankruptcy plan for Lehman at the same time its chief executive Richard Fuld was trying to reach his counterpart at Bank of America in a bid to get the bank to buy Lehman. A possible buyout with Barclays was also being pursued.

Weil Gotshal lawyers were hard-pressed to get needed information since Lehman officials were tied up in talks with the Federal Reserve and potential buyer Barclays.

“We were a distraction to the Lehman people,” Lori Fife, a Weil partner, told the Wall Street Journal. “It felt like it was just a fire drill.”

But Fuld was unable to get Bank of America chairman Kenneth Lewis to answer his phone calls, and the deal with Barclays unraveled after the U.S. and U.K. governments declined to back Lehman’s trading balances. Fuld was running out of options.

Miller told officials at the Fed discussing Lehman’s fate that he needed more time to prepare a bankruptcy filing. Derivatives contracts needed to be unwound in an orderly way, he reportedly said during the Sept. 14 meeting. A quick filing “will cause financial Armageddon,” he said, according to the story.

Later that day, Lehman’s board heard from the chairman of the Securities and Exchange Commission, Christopher Cox, who told board members they had a “grave matter” to address, according to the Wall Street Journal account. Asked if he was directing them to file for bankruptcy, Cox reportedly said, “You have a grave responsibility, and you need to act accordingly.”

Lehman filed for bankruptcy four hours after the board meeting ended. “Rather than soothing markets, Lehman’s bankruptcy filing roiled them—slamming trading partners that had direct exposure to the firm and sowing fears that Wall Street’s remaining giants weren’t safe from failure,” the story says.

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