Lehman's Chaotic Bankruptcy Filing Destroyed Billions in Value

Wall Street Journal (subscription) ^ | December 29, 2008 | Jeffrey McCracken

[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.

.....

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.

.....

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.

.....

[jeffers]

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.

[the invisib1e hand]

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.

[CutePuppy]

... and you have a perfect storm ... which, amazingly, has been handled and managed well enough so as to almost avoid larger debacle for some time, just before additional coordinated and targeted anthropogenic efforts finally achieved their larger goals, and storm came ashore with full strength ... not coincidentally, just in time before elections.

A complementary article to the one above :
The Weekend That Wall Street Died

[the invisib1e hand]

Are you following this at all (predatory naked short selling)?

Coincidentally, abuse on the CME is one mechanism that makes it possible. Chicago. Where corruption apparently knows no bounds.

[CutePuppy]

I have not been aware of specifically "this" document or the name, but I have followed the story of Overstock and Patrick Byrne trying to bring attention to the issue for years, and saw numerous companies either destroyed or severely crippled by the deliberate strategy. His communication style and tangential issues make it easier for his detractors to brand him a "kook".

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.

[the invisib1e hand]

re above: “CME” should read “CBOE” and “CHX.”

[the invisib1e hand]

I pretty much stayed away from this discussion on FR because here, and pretty much everywhere else it was brought up, it was polarized by people who either a) didn't understand shorting or b) may have been shilling for predatory shorts.

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...

[CutePuppy]

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=

[the invisib1e hand]

I trust Rocker and Co. have exit strategies in place.

[CutePuppy]

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.

[the invisib1e hand]

You’re doing the argument a real service, in that case. I admire your effort.

[CutePuppy]

Thank you, and may the Year of the Ox be kind to you and yours!