Comments on: Hedge Fund Customer Assets Stuck for "Months" at Lehman http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for.html Sun, 22 Nov 2009 07:56:24 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: bidrec http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for.html#comment-16678 bidrec Tue, 23 Sep 2008 13:24:00 +0000 http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for-months-at-lehman/#comment-16678 Bay Harbor is both a client of the London subsidiary and US based. I guess SIPC does not not have jurisdiction overseas. Bay Harbor is both a client of the London subsidiary and US based. I guess SIPC does not not have jurisdiction overseas.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for.html#comment-16594 Anonymous Tue, 23 Sep 2008 00:00:00 +0000 http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for-months-at-lehman/#comment-16594 This article refers to clients of the London Subsidiary of Lehman. The US based clients seemed to have had an entirely different experience: http://sipc.org/media/release20Sept08.cfm This article refers to clients of the London Subsidiary of Lehman. The US based clients seemed to have had an entirely different experience: http://sipc.org/media/release20Sept08.cfm

]]> By: Anonymous http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for.html#comment-16567 Anonymous Mon, 22 Sep 2008 21:09:00 +0000 http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for-months-at-lehman/#comment-16567 From Jubak's Friday column:<br/><br/><i>And maybe the Fed and Treasury hadn't remembered that Congress amended the bankruptcy code in 2005 to carve out special rules that applied to swaps, repurchase agreements and the other derivatives that have proved so toxic to Lehman.<br/><br/>In most bankruptcy proceedings, all of a debtor's assets are frozen. The bankrupt company can't even pay a bill without permission of the bankruptcy court once the bankruptcy petition is filed. The point of this rule is to create an orderly distribution of the company's assets to the company's creditors. The creditors, ranging from the company's employees to its coffee service to its landlord to the big investors who own its bonds, all get in line by seniority. The bankruptcy court then doles out the liquidated assets of the bankrupt company until there are no more.<br/><br/>The 2005 exception threw that process out the window for the derivatives that Lehman owns. The counterparties in those deals are free to sell those deals on the market, if anyone wants them. They're free to take the collateral they'd given to Lehman as part of one of these derivative deals. Lehman took out hedges in the derivatives market to protect against a deal going bad or the value of a security (or another derivative) falling. The financial companies that were the counterparties to those hedges can now just rip them up, taking away critical protection for the company's portfolio just when creditors need it most.<br/><br/>And because the derivative market is so lightly regulated, it's likely that no one will even know if an asset walks out the door at Lehman in this way before it could be liquidated and distributed to creditors. In essence, the companies that were parties to derivative deals with Lehman are free to strike the best deals they can without having to clear them with the bankruptcy court or inform other creditors. Creditors' claims against Lehman come to $613 billion, according to bankruptcy court filings.</i><br/><br/>Does intermingling invalidate Jubak's point on the possibility of preferential settlements outside bankruptcy proceedings? From Jubak’s Friday column:

And maybe the Fed and Treasury hadn’t remembered that Congress amended the bankruptcy code in 2005 to carve out special rules that applied to swaps, repurchase agreements and the other derivatives that have proved so toxic to Lehman.

In most bankruptcy proceedings, all of a debtor’s assets are frozen. The bankrupt company can’t even pay a bill without permission of the bankruptcy court once the bankruptcy petition is filed. The point of this rule is to create an orderly distribution of the company’s assets to the company’s creditors. The creditors, ranging from the company’s employees to its coffee service to its landlord to the big investors who own its bonds, all get in line by seniority. The bankruptcy court then doles out the liquidated assets of the bankrupt company until there are no more.

The 2005 exception threw that process out the window for the derivatives that Lehman owns. The counterparties in those deals are free to sell those deals on the market, if anyone wants them. They’re free to take the collateral they’d given to Lehman as part of one of these derivative deals. Lehman took out hedges in the derivatives market to protect against a deal going bad or the value of a security (or another derivative) falling. The financial companies that were the counterparties to those hedges can now just rip them up, taking away critical protection for the company’s portfolio just when creditors need it most.

And because the derivative market is so lightly regulated, it’s likely that no one will even know if an asset walks out the door at Lehman in this way before it could be liquidated and distributed to creditors. In essence, the companies that were parties to derivative deals with Lehman are free to strike the best deals they can without having to clear them with the bankruptcy court or inform other creditors. Creditors’ claims against Lehman come to $613 billion, according to bankruptcy court filings.

Does intermingling invalidate Jubak’s point on the possibility of preferential settlements outside bankruptcy proceedings?

]]> By: bidrec http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for.html#comment-16560 bidrec Mon, 22 Sep 2008 20:32:00 +0000 http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for-months-at-lehman/#comment-16560 Something like this happened recently in Australia where retail customers of Opes Prime borrowed money against their stock. They thought they had signed standard margin agreements but instead had signed Securities Lending agreements. They lent their stock to Opes who onlent it to ANZ Bank and Merrill who lent it to short sellers. In exchange they got cash that they used to buy more of the same stock. Many of these customers were company directors and used the money borrowed against the stock to exercise stock options. Under the securities lending agreement absolute title to the securities passes to the borrower who can pass title to another borrower. When Opes collapsed ANZ and Merrill seized the "onlent" stock and sold it. The clients were, for the most part, wiped out.<br/><br/>Securities Lending agreements are the commercial contracts between hedge funds and prime brokers that underly the borrowing and shorting of securities.<br/><br/>The judge, Ray Finkelstein, ruled against the clients. His decision is online here: http://www.austlii.edu.au/au/cases/cth/FCA/2008/594.html Something like this happened recently in Australia where retail customers of Opes Prime borrowed money against their stock. They thought they had signed standard margin agreements but instead had signed Securities Lending agreements. They lent their stock to Opes who onlent it to ANZ Bank and Merrill who lent it to short sellers. In exchange they got cash that they used to buy more of the same stock. Many of these customers were company directors and used the money borrowed against the stock to exercise stock options. Under the securities lending agreement absolute title to the securities passes to the borrower who can pass title to another borrower. When Opes collapsed ANZ and Merrill seized the “onlent” stock and sold it. The clients were, for the most part, wiped out.

Securities Lending agreements are the commercial contracts between hedge funds and prime brokers that underly the borrowing and shorting of securities.

The judge, Ray Finkelstein, ruled against the clients. His decision is online here: http://www.austlii.edu.au/au/cases/cth/FCA/2008/594.html

]]> By: bg http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for.html#comment-16556 bg Mon, 22 Sep 2008 20:08:00 +0000 http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for-months-at-lehman/#comment-16556 Posters are trying to be securities lawyers online. It is complex as hell. These last minute moves could just as easily be considered legal as illegal. For example, the courts could state that the last minute actions were not intended to favor one creditor, but rather were intended to protect the correct claimants prior to the filing. <br/><br/>At a minimum, this $8B currently is not cash, and is at risk. <br/><br/>Poor hedge funds. Poor Wall Street. Posters are trying to be securities lawyers online. It is complex as hell. These last minute moves could just as easily be considered legal as illegal. For example, the courts could state that the last minute actions were not intended to favor one creditor, but rather were intended to protect the correct claimants prior to the filing.

At a minimum, this $8B currently is not cash, and is at risk.

Poor hedge funds. Poor Wall Street.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for.html#comment-16554 Anonymous Mon, 22 Sep 2008 20:06:00 +0000 http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for-months-at-lehman/#comment-16554 These hedge funds probably tried to save money by *not* using lawyers for these transactions. Lawyers make a lot of mistakes all of the time, but encouraging their clients to take on additional risk is rarely one of them. These hedge funds probably tried to save money by *not* using lawyers for these transactions. Lawyers make a lot of mistakes all of the time, but encouraging their clients to take on additional risk is rarely one of them.

]]> By: tz http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for.html#comment-16547 tz Mon, 22 Sep 2008 19:41:00 +0000 http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for-months-at-lehman/#comment-16547 Oops, cut off part II<br/><br/>Such a preference is prohibited by law, and the favored creditor must pay the money to the bankruptcy Trustee. However, the bankruptcy court may give secured creditors (with a judgment, lien, deed of trust, mortgage or collateralized loan) a Legal preference over "general" creditors in distributing available funds or assets.See also: bankruptcy. Oops, cut off part II

Such a preference is prohibited by law, and the favored creditor must pay the money to the bankruptcy Trustee. However, the bankruptcy court may give secured creditors (with a judgment, lien, deed of trust, mortgage or collateralized loan) a Legal preference over “general” creditors in distributing available funds or assets.See also: bankruptcy.

]]> By: tz http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for.html#comment-16545 tz Mon, 22 Sep 2008 19:37:00 +0000 http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for-months-at-lehman/#comment-16545 YOU CANNOT PULL THESE THINGS BEFORE DECLARING BANKRUPTCY.<br/><br/>They may try but the courts are likely to undo any transaction in the last few hours if it looks preferental.<br/><br/>http://www.legalhelpmate.com/legal-dictionary-term.aspx?legal=preference<br/><br/> PREFERENCE<br/><br/>n. in bankruptcy, the payment of a debt to one creditor rather than dividing the assets equally among all those to whom he/she/it owes money, often by making a payment to a favored creditor just before filing a petition to be declared bankrupt. YOU CANNOT PULL THESE THINGS BEFORE DECLARING BANKRUPTCY.

They may try but the courts are likely to undo any transaction in the last few hours if it looks preferental.

http://www.legalhelpmate.com/legal-dictionary-term.aspx?legal=preference

PREFERENCE

n. in bankruptcy, the payment of a debt to one creditor rather than dividing the assets equally among all those to whom he/she/it owes money, often by making a payment to a favored creditor just before filing a petition to be declared bankrupt.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for.html#comment-16539 Anonymous Mon, 22 Sep 2008 19:25:00 +0000 http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for-months-at-lehman/#comment-16539 LEH hastily seizes $8 billion of overseas client funds right before it files for BK?<br/><br/>And it's short sellers who are undermining confidence in the American financial system? LEH hastily seizes $8 billion of overseas client funds right before it files for BK?

And it’s short sellers who are undermining confidence in the American financial system?

]]> By: Anonymous http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for.html#comment-16537 Anonymous Mon, 22 Sep 2008 19:14:00 +0000 http://www.nakedcapitalism.com/2008/09/hedge-fund-customer-assets-stuck-for-months-at-lehman/#comment-16537 Matthew,<br/><br/>You actually think the legal counsel at hedge funds were hired to think? They were window-dressing. They might as well have walked around with the words "legal compliance" scrawled on their foreheads. They are mid-level law firm associates who thought they were worth something. Now they are all going to be teaching 6th Grade English if they are lucky. Matthew,

You actually think the legal counsel at hedge funds were hired to think? They were window-dressing. They might as well have walked around with the words “legal compliance” scrawled on their foreheads. They are mid-level law firm associates who thought they were worth something. Now they are all going to be teaching 6th Grade English if they are lucky.

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