Advisors Feast on the Lehman Carcass: Bankruptcy on its Way to $2 Billion in Fees

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.

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  1. YankeeFrank

    Aww come on, Yves all those unemployed Lehman traders need an income support program too! I mean, the lower classes get $300 per week, but they don’t NEED more. Those wealthy traders — they NEED $10k per week. How else can they maintain their cocaine habits and whore Fridays, and their brats in private schools?

  2. Dennis

    the problem, on the lawyer side, is that Bankruptcy used to be pretty crap work until 2007, Weil almost shut down their whole practice because the partners from, ironically, the Structured Credit and Private Equity groups were complaining that the bankruptcy guys werent carrying their weight. So, at least from the perspective of the 15-20 lawyers that are actually working on Lehman they are doing a hell-of-a lot of work.

    But of course that is the structure of all of these big law firms. Thousands of ‘big law’ associates unemployed but why hire more/pay each associate less when you can jack up the fees and then waive your arms around about your lawyers working 20 hour days non stop [which is what the Lehman guys were doing in October and around every filing deadline]

  3. Middle Seaman

    My experience is not with finance, but with being an expert in complex litigations. When a big client is involved, you see the millions flowing with little friction. It is not corruption, I feel that it is mainly incompentence.

    For example: in one case after about a month of work I handed the principle a two page report that would have buried the other side. It was ignored. Instead, they wrote a 300 page report that took two months to prepare. We lost the case we could have easy won. The client could have won and also saved tons of money. It was mainly incompetence. Even I made way more than the case should have paid.

  4. Nonanonymous

    We’re at a crossroad of human civilization. Never has so much information been available to so many people. The last time it happened was the invention of the printing press, which brought about the protestant reformation. It remains to be seen what the Internet will bring about, but clearly, the elites don’t know what to do about it. Imagine, free will playing out on a global scale. It’s enlightening to the masses, and frightening to the elite.

    OWS, or something similar will play out this Spring as Greece implodes and food scarcity puts pressure on central governments once again. DHS will be ready. Thus, all the talk about “social media”. They didn’t need PIPA, they’ve got NDAA. Would they like to shut down forums like this, you bet. But with NDAA they can go after individuals. Just not as effective as shutting down whole sites.

    There is some reassurance to recognize this is a global conspiracy and one not constrained by man made events. This implies a super natural phenomenon. There is a conspiracy, and a chief conspirator, the Devil. Those who know and believe God’s Word know how this is going to play. This also means that we don’t have some gestapo government conspiring against us. For sure, corporate fascism is alive and well, but they’re still bound by laws and that’s where the focus is needed. This Spring, protests should rise to the level of anti war protests in the 60’s, and continue rising until the White House and Congress get the message.

    What are we protesting for? How about jobs? My sign will read something like this,


    Or, we could just hang’em. The message is the same.

    Be prepared and be vigilant.

    1. EH

      My sign will read something like this,

      way too long.

      This Spring, protests should rise to the level of […]

      Hope is a form of prayer.

    2. Observer

      “Look, the people you are after are the people you depend on. We cook your meals, we haul your trash, we connect your calls, we drive your ambulances. We guard you while you sleep. Do not fuck with us.” – Tyler Durden, Fight Club

  5. Norman

    Revolution or Military Coup! It will go down to the wire. Consider that the election may not come off. The scare tactics wont change what is coming, though the elite[s] will give it a run for the money – (yours) – so those who prepare, will survive, those who sit on their collective asses, well, they always have Wally World if they have the $$$.

  6. Pearl

    Does anyone know where former Lehman CEO, Dick Fuld, is these days?

    I read somewhere that he is currently employed by an old Lehman subsidiary, Aurora Loan Services. Does anyone know if this is true?

    The following is an old (but excellent) Village Voice article from 2008 that describes the Lehman-Aurora Loan Services connection. The article makes me even more curious as to whether or not Fuld ended up at Aurora Loan Services.

    Here is a juicy snippit from the article:

    Also, Tammie Lou Kapusta, former paralegal for Florida foreclosure mill king, David Stern, mentions Aurora quite a bit in her deposition. She even refers to Aurora as David Stern’s “baby.” (Just filter through deposition for “Aurora.”)

    Anyway–just really wondering how much of Lehman ended up being ditched into the Aurora Loan Services subsidiary. And if ole Dick is there, too.

  7. Pearl

    Sorry, don’t know how, but my post did not include the “juicy snippit” from the 2008 Village Voice article. Here is that snippit for those who do not want to link to the article itself.

    “Like most streetwise dealers, Lehman took a cut of just about every piece of the transaction all the way down the line. It (and other Wall Street firms) ended up pushing its loan companies to stretch even their flimsy standards and issue weak loans.

    “Lehman was involved at all ends of this dirty business, so deeply involved that it set up shop at every single money-making stage,” Ackelsberg says. “Basically, it was just a gold rush: a huge wealth transfer from middle-class families to Wall Street.”

    And it was a sweet proposition while it lasted. But like any racket, the subprime business had its seamier side. And for that, Lehman kept its squeaky-clean image by turning to a less holy subsidiary.

    Call her Aurora.

    When the mortgage market collapsed and the huge investment bank failed last month, it dragged other financial markets down with it. Lehman’s executives walked away with buckets of cash.

    But buried beneath the bank, way down at the bottom of the pile, are people like Brooklyn lawyer Philip Grant and Bart Christofferson, an excavator in Utah. They live 2,000 miles apart, but they have one thing in common: They were both worked over by a Lehman Brothers subsidiary called Aurora Loan Services.

  8. Deb

    YankeeFrank, your remark is not facetious. My ex-husband worked at Bear Stearns and I can attest that those big salaries went for lots of cocaine, Johnny Walker Blue and three-at-a-time hookers. There is no reason to pay anyone that much money EVER, certainly not the egomaniacal, incredibly irresponsible types who work on Wall Street.

    1. Procopius

      A few years ago I remember seeing a quote from some (fogotten) super-star bond salesman or fund operator or some other kind of Wall Street Celebrity, either going into or coming out of rehab after losing his fortune, “Cocaine is God’s way of telling you you’re making too much money.”

  9. S. D. Jeffries

    Is there any reason why we should care what’s happening with the Lehman’s bankruptcy? Is any taxpayer money involved, or are these predators just eating each other and each other’s wallets? It sounds to me like the moral of this story is if you can’t afford to lose all your money to sharks, don’t get into the pool.

  10. Stuart

    Fees in bankruptcy are limited to the gross assets of the bankrupt estate. The more gross assets, the more vultures and vulturous activity it will attact. I started doing bankruptcy work close to 30 years ago, and I’ve never seen it any different. (It was never a big part of my practice, it was always the most disgusting.) Though I’ve never heard this expressed explicitly, from the perspective of those involved, every penny that goes to creditors is a penny lost. Every dollar that creditors spend to stop this mindset costs another 2 dollars in fees on the estate to defend against the claims. Creditors can almost never win. And the vultures can never lose.

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