Even if you don’t get a thrill from looking at spectacular car wrecks, one reason to take interest in the Lehman bankruptcy is that it may get at issues that regulators seem remarkable loath to address, namely, how did a company that reported positive net worth and not a single big firm equity analyst ever dreamed was insolvent wind up showing $130 billion of losses? The US administrator, which aspires to coordinate the entire international BK, has blamed the size of the black hole (on a $640 billlionish balance sheet) on the disorderly bankruptcy.
I’m sorry, losses of that magnitude are simply not plausible, particularly when you have to add back the $20 plus billion of book equity prior to the collapse. Yes, much of it may indeed have been the result of a sudden implosion, but the fact set strongly suggests accounting fraud was also a factor (for instance, Lehman had some notoriously aggressive marks on some high profile Inland Empire white elephants, namely Archstone and SunCal. If they had to put valuations like that on deals that were certain to raise eyebrows, what must one assume about positions that would be impenetrable?
But the bankruptcy jousting does have its perverse charms. The move by Alvarez & Marsal to expand its role in an unprecedented fashion by coming up with a “global plan” seems more than a bit peculiar, given the fact that bankruptcies are subject to governing law in the relevant jurisdictions, and is not well suited to coordination. In fact, one hat to wonder whether this move is simply an attempt to co-opt counsel in other countries.
The UK liquidator, PriceWaterhouseCoopers, took a dim view of this notion from the outset, perhaps in part because it was clear that the UK units would be seeking redress from the US operation. Lehman raided the UK brokerage operation of $8 billion in its waning days, something that would be impermissible under US regulations.
The latest update comes via the Times Online:
Administrators of the London arm of Lehman Brothers…are preparing a $100 billion (£61.5 billion) claim against its former parent company in America…. It will mark an acrimonious new stage in the international battles by creditors to recover billions still tied up in the largest corporate collapse in history….
John Suckow, president of Lehman Brothers Holdings — the remains of the US parent company — and a managing director at liquidator Alvarez & Marsal, is braced for a deluge of claims. The one from the London arm, which was the largest operation outside America, is likely to be the biggest.
Tony Lomas, one of the partners at PWC leading the case, said he will file on behalf of “more than 100” Lehman units that fall under the London umbrella. “On the face of it guaranteed most of the obligations of other subsidiaries so we’re going to be filing claims in the many tens of billions. It will be close to $100 billion,” he said.
The London claim will add to tensions between American and British administrators. Earlier this month, Alvarez & Marsal brokered an agreement with 13 other Lehman liquidators around the world.
The deal sets a protocol to share information on claims and assets with the hope of speeding up the reconciliation process and avoiding litigation. PWC declined to participate.
“Why you’d enter into an agreement with a bunch of other parties that you’ll probably end up litigating against is beyond conception,” said Steve Pearson, another PWC partner working on the case.
“We’re talking about billions of dollars. To sit in a room and say, ‘we’re all going to be nice to each other’, is almost certainly the wrong thing to do.”…
As the ultimate guarantor of the deals they did, including billions on inter-company loans and share trades, the former Lehman businesses will argue that the US parent should pay.
At the time of its collapse, Lehman had $639 billion in assets on its books. These included everything from real estate to office equipment. The most tangled element is the more than 1.7m “hung trades” to which Lehman was a party — transactions in shares or instruments such as derivatives that were frozen when the company collapsed.