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Lehman 3/11
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FirstBank Lays Claim To $62M From Lehman Deal In 2nd Circ.
Mar 10, 2016 | Law360
By Max Stendahl
A lawyer for FirstBank Puerto Rico urged the Second Circuit on Thursday to allow it to recover $62 million from a swaps deal with Lehman Brothers, saying the securities had been improperly transferred to Barclays at the height of the 2008 financial crisis. -
A New Tool for Avoiding Big-Bank Failures: ‘Chapter 14’
Mar 10, 2016 | The Wall Street Journal
By Emily C. Kapur and John B. Taylor
...An examination by one of us (Emily Kapur) of previously unexplored discovery and court documents from Lehman Brothers’ September 2008 bankruptcy shows that chapter 14 would have worked especially well for that firm, without adverse effects on the financial system.
Client Attorney Privileged/Attorney Work Product/At Request of Counsel
FirstBank Puerto Rico
Chapter 14 Bankruptcy
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FirstBank Lays Claim To $62M From Lehman Deal In 2nd Circ.
Mar 10, 2016 | Law360
By Max Stendahl
A lawyer for FirstBank Puerto Rico urged the Second Circuit on Thursday to allow it to recover $62 million from a swaps deal with Lehman Brothers, saying the securities had been improperly transferred to Barclays at the height of the 2008 financial crisis.
During a hearing in Manhattan court, Jeffrey Mitchell, an attorney for FirstBank, urged a three-judge panel to overturn a district court’s December 2014 finding that the bank had no right to reclaim the securities from Barclays Capital Inc.
FirstBank gave the securities to a Lehman entity called Lehman Brothers Special Financing, or LBSF, as collateral in the swaps transaction. LBSF then sold the securities to Lehman Brothers Inc., or LBI, the company’s brokerage business. According to court filings, LBI used the securities to fund its business in the months before the investment banking giant went bankrupt in September 2008, then sold them to Barclays.
In its suit, FirstBank has argued that the securities were improperly included in the Barclays sale order and then confirmed in a clarification letter that was never presented to or approved by the bankruptcy court. Mitchell told the panel on Thursday that the letter constituted a material change to the Barclays deal, calling it a “side agreement.”
“The parties needed to come back to court and get the bankruptcy court to bless it,” Mitchell said. “That’s the important issue in this case.”
Mitchell added that if the appeals court ruled against FirstBank, “You open the door for bankruptcy courts to approve all sorts of things and the parties go off and do whatever they want.”...For full story: http://www.law360.com/articles/769964/firstbank-lays-claim-to-62m-from-lehman-deal-in-2nd-circ-
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A New Tool for Avoiding Big-Bank Failures: ‘Chapter 14’
Mar 10, 2016 | The Wall Street Journal
By Emily C. Kapur and John B. Taylor
...The solution is not to break up the banks or turn them into public utilities. Instead, we should do what Dodd-Frank failed to do: Make big-bank failures feasible without tanking the economy by writing a process to do so into the bankruptcy code through a new amendment—a “chapter 14.”
Chapter 14 would impose losses on shareholders and creditors while preventing the collapse of one firm from spreading to others. It could be initiated by the lead regulatory agency and would begin with an over-the-weekend bankruptcy hearing before a pre-selected U.S. district judge. After the hearing, the court would convert the bank’s eligible long-term debt into equity, reorganizing the bankrupt bank’s balance sheet without restructuring its operations...
An examination by one of us (Emily Kapur) of previously unexplored discovery and court documents from Lehman Brothers’ September 2008 bankruptcy shows that chapter 14 would have worked especially well for that firm, without adverse effects on the financial system.
Here is how Lehman under chapter 14 would have played out. The process would start with a single, brief hearing for the parent company to facilitate the creation of a new recapitalized company—a hearing in which the judge would have minimal discretion. By contrast, Lehman’s actual bankruptcy involved dozens of complex proceedings in the U.S. and abroad, creating huge uncertainty and making it impossible for even part of the firm to remain in business.
When Lehman went under it had $20 billion of book equity and $96 billion of long-term debt, while its perceived losses were around $54 billion. If the costs of a chapter 14 proceeding amounted to an additional (and conservative) $10 billion, then the new company would be well capitalized with around $52 billion of equity.
The new parent company would take over Lehman’s subsidiaries, all of which would continue in business, outside of bankruptcy. And the new company would honor all obligations to short-term creditors, such as repurchase agreement and commercial paper lenders.
The result: Short-term creditors would have no reason to run on the bank before the bankruptcy proceeding, knowing they would be protected. And they would have no reason to run afterward, because the new firm would be solvent.
Without a run, Lehman would have $30 billion more liquidity after resolution than it had in 2008, easing subsequent operational challenges. In the broader marketplace, money-market funds would have no reason to curtail lending to corporations, hedge funds would not flee so readily from prime brokers, and investment banks would be less likely to turn to the government for financing.
Eventually, the new company would make a public stock offering to value the bankruptcy estate’s ownership interest, and the estate would distribute its assets according to statutory priority rules. If the valuation came in at $52 billion, Lehman shareholders would be wiped out, as they were in 2008. Long-term debtholders, with $96 billion in claims, would recover 54 cents on the dollar, more than the 37 cents they did receive. All other creditors—the large majority—would be paid in full at maturity.
Other reforms, such as higher capital requirements, may yet be needed to reduce risk and lessen the chance of financial failure. But that is no reason to wait on bankruptcy reform. A bill along the lines of the chapter 14 that we advocate passed the House Judiciary Committee on Feb. 11. Two versions await action in the Senate. Let’s end too big to fail, once and for all.
For full story: http://www.wsj.com/articles/a-new-tool-for-avoiding-big-bank-failures-chapter-14-1457654027
Client Attorney Privileged/Attorney Work Product/At Request of Counsel
FirstBank Puerto Rico
Chapter 14 Bankruptcy
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