One of my buddies who must go unnamed because he is involved in the Lehman bankruptcy told me many months ago that the unwinding was going to cost over $2 billion. A new story at Bloomberg suggests that his prediction is on track. The costs of various advisors to the Lehman estate in now in excess of $1.6 billion, and it ain’t over.
But perhaps more important, my mole, who has oodles of experience on big messy international bankruptcies, was incensed at the way various advisors, in particularly Alvarez & Marsal, which is running what is left of Lehman and is the major domo, and the lead law firm, Weil Gotschal, were feeding at the trough. Bloomberg also tells us that the fees paid to A&M are now over $500 million. This of course is the sort of thing that is inherently difficult to discern from the outside, since there aren’t that many people with the experience base and the vantage to discern that. And the people who do see it are either direct beneficiaries (as in they are working for Lehman) or are representing clients who are trying to improve their recovery. The advisors to creditors are in many respects part of a criminogenic environment, since the fees and costs incurred by the Lehman advisors legitimate their charges. And if someone was high-minded enough to object, waging a quixotic war over self-serving practices is not likely to help their client or their career.
Now some of the expense of the BK is due to people who have something to hide trying to reduce liability. We’ve pointed several times to one factoid supplied by A&M, that Lehman’s
“disorderly bankruptcy” cost as much as $75 billion (we’ve had fun since 2008 trying to explain the size of the Lehman black hole, and the figures offered don’t even begin to add up). But why did A&M even bother making this report and going on a PR push? As we noted in 2009:
We now have the interesting question, :”If the board was told as much as $75 billion was due to the chaos, pray tell where did the other $55 billion go?” And the assertion that Chapter 11 would have produced a vastly better outcome is questionable. As we pointed out then:
Here is where readers are encouraged to correct me if I have something wrong or a bit askew. I was under the very strong impression that securities firms do not decay in an orderly fashion, but instead collapse rapidly once certain triggers are breached, making it well-nigh impossible to contain the unwind. In fact, you’d need pretty substantial changes in both bankruptcy law and the way that trading counterparties deal with each other to have the sort of managed process that the A&M reports argues should have taken place.
So if the logic above is correct, the A&M report looks like a costly ass-covering exercise to protect the board from lawsuits. And the Journal did the board a favor by giving it reasonably prominent placement.
Oh, by the way, our last sizing of the Lehman black hole put it at $140 to $245 billion (total losses of $216 to $319 billion less giving full credit for A&M’s as much as $75 billion attributable to the disorderly unwind. If you take out $50 billion for Repo 105, you still have $90 billion to $195 billion of losses that have not been adequately explained. But Bryan Marsal has maintained that Lehman had a liquidity, not a solvency problem! That’s certainly the line the board that hired him would want him to take.
And we have footprints of more Alvarez & Marsal featherbedding. For instance, in an older post, we took issue with A&M trying to act as a global bankruptcy administrator, which is quite a reach given that bankruptcies are always national affairs. But this seemed to be a no lose proposition from a fee perspective: either administrators hired in other jurisdictions would play ball, giving A&M more work by pretending to babysit them, or they’d fight, and the scrapping would still produce more billed time.
Or how about this?
In the video, Marsal mentions that his firm hired some 400 ex Lehman staffers to help unwind the trades, and threw out a $500,000 salary and a $500,000 bonus if recovery targets were met as a representative figure.
The world happens to be awash in unemployed structured credit types these days, I would bet at least 300 of those 400 jobs could have been filled at much lower cost. But Alvarez & Marsal has no incentive to do that. Paying more makes it easier to hire people, and also makes their fees look more reasonable. And say “derivatives” and a BK judge will buy in, even if the skills required may not be all that high level. In the LTCM bankruptcy, Myron Scholes worked for a mere $250,000 a year, which in today’s dollars is about $330,000. Am I to believe in that there is good reason to pay more than the equivalent of $500,000 all in for a successful job in winding down a company that you helped destroy? Well, sadly yes, pay escalated with perilous little justification, since most of the money supposedly made turned out to be smoke and mirrors, and those high water marks are still holding.
What is distressing isn’t that this sort of looting is happening, it’s that pretty much no one is bothered that it is happening, and that for every Lehman, there are hundreds of smaller scams disguised as Serious Professionalism underway. The airy assumption among the elites that they are entitled to their cut, no matter what, seems to be beyond question these days. The executive classes in the old days were kept somewhat in line by the need to maintain appearances and stay within certain bounds in order to preserve their authority. But now the top operates in a self-referential realm, where the contempt of the lower orders does not penetrate. They’ve made their fate independent of most of the rest of us, until some calamity, say a pandemic, or an infrastructure failure (think of what would happen if the US got no chips for 18 months) or a loss of control of the police makes them realize that the costs they imposed on broader society will come to haunt them.