Posted on 12/29/2008 7:39:56 PM PST by CutePuppy
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.
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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.
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Mr. Marsal estimates that the total value destruction at Lehman will reach between $50 billion and $75 billion, once losses from derivatives trades and asset impairment are combined.
Much of the destruction of value came from the bankruptcy filing of the parent guarantor, Lehman Holdings. The filing triggered a cascade of defaults at subsidiaries that held trading contracts. That created what is known as an "event of default" for Lehman's derivatives. This resulted in a termination of more than 80% of the transactions with counterparties -- typically major European and U.S. banks such as J.P. Morgan Chase & Co., said Mr. Marsal. In all, the bankruptcy canceled 900,000 separate derivatives contracts.
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.
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(Excerpt) Read more at online.wsj.com ...
or there were outsized incentives to run it into the ground.
ping
Well, I certainly got a good reminder that the “value” of something is not what some godlike higher authority dictates but only what other people are willing to pay for it.
It’s been an expensive lesson.
So that’s what President Bush meant when he said that they did not want a chaotic bankruptcy for the Big Three.
That was not the option for Lehman or any other financial institution, their problems are not competitiveness, just being the part of the financial system where liquidity and "run on the bank" and dependence on Fed for such liquidity is a fact of life, by design.
Lehman aside, the good thing is that no body knows, law or no law, what the Treasury, or Bush is or is not going to do, that may or may not be done in the future by an Obama administration.
Other than that, it’s clear sailing.
Bush tried to spend $15 Billion that Congress had already appropriated for auto industry, so called "green" funds, for development of "green" cars. It was a good solution, "strategery" wise, since this "green" money will be wasted in the future, but Congress didn't go along with the plan because Democrats couldn't get enough Republicans to vote for it to provide cover for them. As it is, they took it from "pot of gold" already in TARP. GM already plans to ask for more in January.
... on the good ship Titanic. ;-)
Good observation. There were at least two sides to this, and at least one of the sides was interested in running Lehman (and/or) other US financial institutions into the ground, and not necessarily just for financial reasons.
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.
The problem with the “orderly bankruptcy” is that it would have required the US Government to put a significant amount of money on the table to keep Lehman solvent in the interim. Hindsight may tell us that we could have gotten our money back, but, at the time, we were tired of being called to cover the tracks of a company which had been spectacularly mismanaged. The sums, as I understand it, would have been greater than what we laid out for Bear,Stearns.
The true fault lies with Wall Street which, instead of creating exchanges for derivatives, they wanted to keep all the profit to themselves. There was just one problem: the success of their derivatives book depended on the assumption that they could never fail which, given the Bear, Stearns and Lehman fiascoes, was a woefully wrong supposition.
The Lehman bankruptcy was a classic case of somebody had to be made an example out of.
For example.....We’ve all been guilty of speeding. We complain when the cop pulls us over and say “But golly gee willikers everyone was going 80. Why did you pull me over?”
Answer: you broke the law and someone has to pay.
It’s weak. But somebody had to serve as the poster child to tell American businesses that you can’t lose billions, make stupid business decisions and expect taxpayers to bail you out.
Think next time. Or this could be you.
It's my opinion that taxpayer money would have been needed for the DIP financing. But even that would have been far preferable to just giving the money away.
suppose you owned life insurance on those bonds. suppose there were a total of a billion in bonds outstanding, and you owned many billions in insurance on them...
Absolutely, agreement for DIP financing in case of bankruptcy reorg would be much better than what has been done.
Very good question. And since we are talking abound CDS (?) or similar “insurance” derivatives, here is a wider one:
Suppose there was about $11T-$14T in total mortgage market - that’s subprime (less than $1.5T) plus Alt-A plus prime, all. Some put the total securitized market (MBS / CDO) at $7T-$8T. Suppose there was about $60+T of “insurance” (CDS) on it. That starts to look like a “house” that has been a “wee bit” overinsured.
For comparison, the total loss in recent “stock market” value was about 40% or $8T.
abound = about
Lehman was spectacularly well managed. They often used 30-1 leverage. Richard Fuld took out $400 million in the last 6 years
Lehman paid out billions in bonuses and that's all that counts to those that got them
The true fault lies with Wall Street which, instead of creating exchanges for derivatives, they wanted to keep all the profit to themselves. There was just one problem: the success of their derivatives book depended on the assumption that they could never fail which, given the Bear, Stearns and Lehman fiascoes, was a woefully wrong supposition.
These guys aren't retards. They knew these alleged "assumptions" were cheesy but billions in bonuses got paid out based on them. So which "assumption" would you go with if you know it impacts on your yearly bonus?
Lehman was playing rough. Can’t remember the exact details, but something along the lines of soliciting bidders, then using the bids to drive up to cost of a bailout, then using the new government offer to drive up the bids etc.
Per my brokers, Lehman got left out in the cold because they tried to squeeze all rescuers too hard.
Couple that circumstance with FASB 157, 20 years of “moral hazard”, and the likes of Barney Frank, Chris Dodd and friends, and you have a perfect storm.
A complementary article to the one above :
The Weekend That Wall Street Died
Coincidentally, abuse on the CME is one mechanism that makes it possible. Chicago. Where corruption apparently knows no bounds.
I commented and posted several articles on the predatory shortselling and its destructive potential. Also here and here
Unfortunately, instead of paying attention to the destructive potential of the tactic and what to do about it, the discussion often goes off track into topics like "banning" or "CEO greed and mismanagement" and "deserving it" etc. This was just one of the issues that I felt Chris Cox at SEC should have been paying much closer attention to and more involved with, but he handled it abysmally. IMO, he was ineffective and seemed out of his depth in that position, and Bush's economic team from the beginning was not impressive.
Granted, to foresee an attack on the entire industry (or the system), especially vulnerable due to necessary (by its business structure) leverage and lack of liquidity to survive "run on the bank" redemptions may not have been easy, but that extraordinary massive "overinsurance" should have been a tip-off that consequences may be more than ordinary.
re above: “CME” should read “CBOE” and “CHX.”
I agree, Byrne runs at the mouth a bit and for that reason I haven't followed his particular plight too closely; however, I did read that entire paper and none of main premises are easily refutable.
And then there's this angle...
Thanks, I understood what it meant. Incidentally, maybe you know that Patrick Byrne recently had at least one “victory” in this war of attrition :
December 11, 2008 - Overstock.com Comments on Report of Liquidation of Copper River Partners [David Rocker, Marc Cohodes]
http://news.prnewswire.com/ViewContent.aspx?ACCT=109&STORY=/www/story/12-11-2008/0004940448&EDATE=
I trust Rocker and Co. have exit strategies in place.
I am sure of it.
I also don’t get too much into discussions about it, because it’s unnecessarily aggravating if people don’t argue the facts. I make some exceptions in cases where I think I might have a chance of shedding some light or explaining the real dangers and consequences of capital destruction - with those who might have an open mind to the arguments or those who don’t know or understand but might read the thread for information. I have no illusions and don’t expect to convince SIG.
That’s also why I occasionally bother to post few articles here on the issue, if they are from reputable publications / sources and are armed with facts. Also good to have these for future references for people who may be on the fence or are genuinely interested in the issue and looking for serious factual information and explanation of the issue, not just dismissive arguments.
You’re doing the argument a real service, in that case. I admire your effort.
Thank you, and may the Year of the Ox be kind to you and yours!
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