WSJ: Lehman's Chaotic Bankruptcy Filing Destroyed Billions in Value
As much as $75 billion of Lehman Brothers Holdings Inc. value was destroyed by the unplanned and chaotic form of the firm's bankruptcy filing in September, according to an internal analysis by the company's restructuring advisers.
A less-hurried Chapter 11 bankruptcy filing likely would have preserved tens of billions of dollars of value, according to a three-month study by the advisory firm, Alvarez & Marsal. An orderly filing would have enabled Lehman to sell some assets outside of federal bankruptcy-court protection, and would have given it time to try to unwind its derivatives portfolio in a way that might have preserved value, the study says.
It is too early to say how much Lehman creditors will recover in the bankruptcy process. Unsecured creditors have asserted in court filings that they are owed about $200 billion. The bond market is projecting a recovery of about $20 billion, or about 10 cents on the dollar, for these creditors.
Lehman's large unsecured creditors include the federal government's pension-insurance arm, the Pension Benefit Guaranty Corp. The group also includes the Bank of New York, as trustee for the bondholders, and the German government's depositor-insurance arm. The problem for creditors is that this also terminated contracts in which Lehman was owed money. Mr. Marsal said a few extra weeks would have allowed Lehman to transfer or unwind most of its 1.1 million derivatives trades, preserving more cash for creditors.
Overall, the losses from derivatives trades and related claims cost Lehman's unsecured creditors at least $50 billion, according to the analysis. The findings, yet to be made public, eventually will be presented to the U.S. Bankruptcy Court and to Lehman's creditors.
"This filing, which was pretty much dictated to the board of directors at Lehman that weekend, occurred with no planning," said Mr. Marsal, whose New York firm was hired by Lehman's board around 10:30 p.m. Sept. 14. That was just hours before Lehman filed for the largest bankruptcy in U.S. history, after the U.S. government declined to offer its backing.
That decision has been widely debated since mid-September, as it touched off a stock-market panic and credit crisis from which markets have yet to recover.
"Had fundamental rules of crisis management been followed, much of the value that was lost by the unsecured creditors would have been prevented. This loss in value was a big hit to the public holders and could have been mitigated," Mr. Marsal said. Mr. Marsal also criticized the way Lehman sold off assets. The unplanned bankruptcy pushed down prices for Lehman assets in an already depressed market. An example is Lehman's trading and investment-banking businesses, which before the filing made about $4 billion in annual profits and were sold for less than $500 million. Experts say such businesses -- once separated from Lehman's realestate portfolio -- could have garnered a higher price in a more orderly wind-down.
About 150 Alvarez & Marsal employees are on site at Lehman offices in New York, London and Hong Kong, combing through creditor claims and managing operations. They are piecing together what happened at the moment of Lehman's collapse.
An additional 300 Lehman employees are still working at the firm, helping in a wind-down process that could take as many as three years.
Among those working with Mr. Marsal are Lehman Chairman and CEO Richard Fuld Jr., who will be leaving at the end of this year, and Dave Goldfarb, the former Lehman chief financial officer who is now chief strategy officer. Mr. Marsal will succeed Mr. Fuld as CEO.
While bondholders will lose as much as 90% of their investment, one entity got all of its money back -- the Federal Reserve. At one time it was owed about $63 billion by Lehman, according to Mr. Marsal. But a postbankruptcy sale of some Lehman assets to Barclays PLC meant that all of the debt to the government was repaid.
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