The Deconstruction of Lehman Brothers

By Davidson, Adam | International Herald Tribune, September 15, 2012 | Go to article overview

The Deconstruction of Lehman Brothers


Davidson, Adam, International Herald Tribune


In the enormously complex unwinding of the bank that helped start the financial crisis, it becomes clear that the most significant blow to the international market was the destruction of confidence.

Lehman Brothers is having a great year. The bank, which almost destroyed the global economy four years ago this week, recently emerged from bankruptcy, resolved a third of its debts and executed the largest U.S. real estate deal of the year. Today, the company appears an awful lot like a normal investment bank. Its trading floor -- on one of the two floors Lehman occupies in the Time & Life Building in New York -- is filled with dozens of young people who stare at financial graphs on Bloomberg terminals and talk in the hallways about the deals they are working on.

Except that Lehman's sole objective is to sell everything it owns so it can repay its lenders and disappear. The reason it has taken so long (and will take many more years) is that selling off the pieces of a big investment bank is almost ineffably complicated. Banks have few physical assets, and they go fast. (Lehman sold its headquarters the day after its bankruptcy.) A bank's main value is really just a huge pile of promises. Banks borrow money (often from other banks) and promise to pay it back; then they lend that money (again, often to other banks) also on the promise that it will be returned. Every bank could collapse if more than a small percentage of people ask for their money at once.

The system works because lenders have confidence that if there is ever a run on a bank, governments and central banks will step in and limit the damage. Of all the financial calamity that Lehman inflicted on international markets, perhaps the most significant was that it came close to destroying that confidence. And one reason this sluggish economy persists is that investors still have not got it back.

Much of the continued distress, as measured in bond rates and fewer loans issued, comes down to a lingering fear that another bank (or, for that matter, a country) could collapse. Lehman's long unwinding has only worsened these fears. Like all big banks, Lehman was more like a loose agglomeration of hundreds of individual companies. Its bankruptcy affected thousands of subsidiary entities and triggered filings in 80 jurisdictions around the world. This led, immediately, to several conflicts. The firm's now-separate divisions in the United States and Switzerland, for instance, are still negotiating exactly how much they owe each other.

The Lehman Brothers office in Midtown makes up about a third of the original company, in terms of assets, and is responsible for paying back $360 billion in more than 60,000 claims. It has already distributed about $22 billion and has estimated that it will pay back another $40 billion -- giving investors an average of 18 percent of that $360 billion -- by the time it closes its doors completely, some time after 2017. The company's entire business objective is to fulfill the terms of a 791-page legal document listing all of its unfulfilled financial promises.

The task is even more overwhelming than it first appears. Each creditor is owed a different percentage, based on the type of loan it gave and which division the creditor gave it to. Investors who lent money to Lehman's commercial-paper subsidiary get a return of 56 cents on the dollar; those who bought a bond from the parent company are getting a little more than 20 cents. And each of those creditors can pursue a challenge and demand more money. One of the new Lehman's busiest departments, not surprisingly, is legal.

Why would anyone lend money to any institution if there was a chance, once trouble hit, of having to wait years to get 20 cents on the dollar? U.S. officials have tried to stanch the loss of confidence by claiming that they have solved the problems of Lehman. The core solution -- as stated in Title II of the Dodd-Frank overhauls -- is predicated on the notion that the problem was not Lehman's overinvestment in sketchy real estate deals but rather that the U. …

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