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Lehman Sept 7
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Court showdown over Lehman’s £7bn legacy
Sep 6, 2015 | Sunday Times
By Danny Fortson
A COURTROOM showdown is looming over a £7bn jackpot tucked inside the remains of Lehman Brothers’ European operations. -
Lehman’s £7bn legacy
Sep 6, 2015 | Sunday Times
By Danny Fortson
ALISTAIR DARLING was at home in Edinburgh on the Sunday afternoon when the final call came. It was September 14, 2008, the climax of the banking crisis that tipped the West into deep recession. Lehman Brothers, the giant Wall Street investment bank, was on the brink. Hank Paulson, the US Treasury secretary, was ringing in desperation. Would the British government back a rescue bid for Lehman led by Barclays?
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Court showdown over Lehman’s £7bn legacy
Sep 6, 2015 | Sunday Times
By Danny Fortson
A COURTROOM showdown is looming over a £7bn jackpot tucked inside the remains of Lehman Brothers’ European operations.
The battle will see Goldman Sachs, a pack of hedge funds and the world’s largest food company fight it out.
Lehman Brothers, one of Wall Street’s biggest investment banks, collapsed seven years ago, plunging the financial markets into chaos.
The meltdown also tipped its European arm, based in Canary Wharf, east London, into administration, leaving thousands of creditors clamouring for assets worth tens of billions of dollars. PwC, administrator to the estate, repaid all of them in full last year.
The business was so well-capitalised before it went under, however, that there is £7bn left over. PwC has stopped making payments amid a fierce legal fight that is about to reach a denouement in a London hearing, set to be held next month or November.
Two sets of opposing creditors are battling it out, with the argument revolving around the level of interest accrued while they waited to be repaid. One is Wentworth, a Luxembourg vehicle set up by hedge funds Elliott Advisors and King Street Capital, along with Lehman’s US parent. The other is the Senior Creditor Group, comprised of CarVal Investors, a distressed debt specialist owned by the world’s largest food company Cargill, and American hedge funds Davidson Kempner and Baupost. Goldman Sachs recently joined the fight on their side.
Wentworth owns £1.2bn of debt that sits near the bottom of the repayment pecking order. It opposes the Senior Creditor Group, which has argued that it is entitled to interest rates far beyond the statutory 8% set out under the Insolvency Act 1986. The higher the rate for senior creditors, the less money will be left over for Elliott and its partners.
Regardless of the outcome, Lehman Europe will go down as one of the most lucrative corporate collapses: some creditors are in line for returns of up to 140% of their principal.
http://www.thesundaytimes.co.uk/sto/business/Finance/article1603001.ece
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Sep 6, 2015 | Sunday Times
By Danny Fortson
ALISTAIR DARLING was at home in Edinburgh on the Sunday afternoon when the final call came. It was September 14, 2008, the climax of the banking crisis that tipped the West into deep recession.
Lehman Brothers, the giant Wall Street investment bank, was on the brink. Hank Paulson, the US Treasury secretary, was ringing in desperation. Would the British government back a rescue bid for Lehman led by Barclays?
The chancellor was cautious. If the Americans were not prepared to back the ailing bank, why should the British taxpayer? The answer was “no”. Paulson was “exasperated”, Darling recalled in his memoir. His American opposite number reportedly had a more colourful phrase, telling colleagues he had been “grin- f***ed”. In his own book, Paulson wrote: “The British screwed us.”
Despite Darling’s efforts to quarantine Lehman, the collapse crashed on to British shores as well. The Wall Street bank’s sprawling European operation, headquartered at Canary Wharf in east London, filed for administration the same day.
The reverberations are still being felt. Just nine days short of the seventh anniversary of its meltdown, an almighty fight over the pot of gold within the carcass of Lehman’s European operation is about to reach a turning point.
At a London court hearing that could come as soon as next month, Mr Justice Richards will make a key ruling that will determine how £6bn-£7bn left in the estate is divided up.
The arguments, which will revolve around how an arcane clause of the Insolvency Act 1986 applies to interest rates, will be mind-numbingly dull.
The stakes, however, are high. The winner will walk away with a huge share of what has become — bizarrely, given its chaotic beginning — one of the most profitable corporate collapses in history.
Creditors have already been paid back in full. PwC, the administrator of Lehman, has disbursed some £36bn in dividends and returned assets. The unexpected surplus means that some creditors will rake in up to 140% of the principal owed — an unprecedented return.
That compares with an average recovery rate of just 35% for creditors of Lehman’s more heavily indebted American parent.
The battle that has broken out for the bank’s European remains is being fought, broadly, by two sides.
In one corner is Wentworth, a Luxembourg vehicle set up by Elliott Advisors, the aggressive hedge fund infamous for once impounding an Argentine navy vessel. Lined up alongside it are Lehman’s American parent and King Street Capital Management, a fund run by billionaire financiers Brian Higgins and Francis Biondi.
In the other corner is the Senior Creditor Group, three hedge funds that have been recently joined by long-time claimant Goldman Sachs. The trio are: CarVal, an arm of the world’s largest food company Cargill; Davidson Kempner, a New York fund; and Baupost, the firm founded by Seth Klarman, a Wall Street legend whose out-of-print investment guide, Margin of Safety, sells for thousands of dollars on Amazon.
Tony Lomas, head of PwC’s insolvency practice, called the impending court hearing “the summit”. He said: “It’s quite a prize. In the financial world, it is very, very rare that creditors get paid in full.”
SO IF Lehman Europe had so much money, why did it go under? The day after Darling blocked the Barclays bid, the European operation needed $3bn to stay open for business: to make good on trades, return assets to panicked investors, to pay its bills.The problem was that at the end of each day billions of pounds were sucked from the European operation by the American parent. Cash would then be released back to subsidiaries the next morning. Going bust broke the link.
Lehman Europe had $17bn in capital on day one, but could not access it. Lomas said: “This was a particularly well-capitalised subsidiary. It didn’t have a balance sheet problem. It had a liquidity problem.”
So began the arduous process of unwinding thousands of trades, making claims against other collapsed affiliates, and chasing down debtors.
By 2012, PwC had recovered enough money to start paying dividends to creditors. The last big one, about £800m, was in April last year. This made all creditors whole — and still left a huge pile of cash.
The European arm of Lehmans filed for bankruptcy on September 14, 2008 - and employees were out the same day (BEN STANSALL/AFP/Getty) Which is extraordinary not least because the administration team had been so eye- wateringly expensive. PwC and the legions of lawyers charged with the epic dismantling have collected £1.2bn in fees since 2008. PwC’s top-paid insolvency partners, for example, are racking up an average of £810 an hour.
Professional fees are not the only thing milking the Lehman pot. Of the £7bn or so surplus, £5bn is invested in ultra- low-risk — and low-return — government bonds. Thanks to inflation, Lehman’s cash is losing value. This is why, Lomas argues, it would make sense for the rival groups to lay down their weapons and agree a settlement.
No deal will happen, however, before the judge rules on a key aspect of the case: how much interest is due to each creditor.
It is not a trivial matter. More than £5bn of the £7bn pot is expected to be paid out in interest. Under the Insolvency Act, a creditor is entitled to what is called the judgment rate, which is 8% a year over the period that creditors have been without their money.
This is generous against today’s rock-bottom rates, but reflects the prevailing condition when the level was determined decades ago.
A wrinkle in that rule means some creditors could be eligible for even higher rates if they are written into the terms of underlying contracts, such as those governing derivatives deals.
Wentworth, the Elliott vehicle, wants as little interest to be paid as possible. That is because the hedge fund, along with Lehman’s bankrupt parent and King Street, own £1.2bn of subordinated debt.
It has argued that the loans should rank ahead of other creditors but has lost that argument twice in court. Hence its opposition to the Senior Creditor Group, which argues that the derivatives contracts entitle it to interest that could exceed 10%.
Whatever the outcome of the trial, Elliott, Goldman and the rest will not have done badly.
Most of the hedgies who are fighting over Lehman’s cadaver began buying into the debt in the months immediately after the bank’s collapse. Lomas said: “The earliest transactions we are aware of were in the early twenties [pence in the pound]. It’s a very good return. People were selling blind.”
Such returns have left some mystified, and others embittered, by the death of Lehman. “In a world where everything was worth nothing, you had forced bankruptcies,” one of the bank’s former executives said. “It has clearly been proven since then that these were very valuable assets.”
THE welter of new rules unleashed by regulators since the financial crisis has been crafted with one overarching goal in mind: to prevent another Lehman Brothers. Never again should the collapse of one “too big to fail” institution be capable of bringing the global financial system shuddering to a halt.
The reality has fallen short. JP Morgan, for example, today has $2.5 trillion (£1.6 trillion) of assets on its books. That is two-thirds more than it had in 2007. Deutsche Bank has $1.7 trillion in assets, just 15% less than the year before the crash.
A source close to the rescue of AIG, the insurance giant that was bailed out by the American government the day after Lehman’s demise, said: “We haven’t got rid of this concept of ‘too big to fail’. If JP Morgan fell over tomorrow, it would be catastrophic for the world.”
Other weaknesses have emerged. Universal regulations such as Basel III, which sets the minimum levels of cash that banks must keep in reserve, have homogenised the way the global finance industry operates.
The source close to the AIG rescue said: “The concept of competitive regulation has been lost. We are, in effect, building a single financial system, so any failure will be, by its very nature, systemic.”
http://www.thesundaytimes.co.uk/sto/business/Finance/article1602822.ece
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