Lehman Brothers

Lehman enters final bankruptcy phase as judge approves plan

Lehman Brothers Holdings Inc. won a federal judge's approval to begin the final phase of the biggest bankruptcy in U.S. history, as the defunct securities firm said it would begin to distribute some of its $23 billion in available cash.

The bankruptcy may have reached its halfway point, as Lehman's plan calls for liquidation of its remaining assets over the next three years to raise a total of $65 billion. Lehman, once the fourth-largest investment bank, collapsed in September 2008 with assets of $639 billion.

U.S. Bankruptcy Judge James Peck approved the plan after the objection of one final creditor was overcome. The plan is backed by creditors holding about $450 billion in claims, which is a "huge achievement," Peck said yesterday. The case was the "most impossibly challenging" bankruptcy ever, he said.

Lehman, which was run by Chief Executive Officer Richard Fuld when its collapse helped bring on the worst economic slump since the Great Depression, settled a fight with creditors in a June payment plan that allotted more money to derivatives claimants including Goldman Sachs and less to bondholders such as Paulson & Co. Both groups had proposed rival plans to pay Lehman's debts.

Problems overcome

Lehman overcame "almost insurmountable" problems in resolving competing liquidation plans, lawyer Harvey Miller said in court yesterday. The liquidation plan has the support of 95 percent of Lehman creditors, Miller said. The firm's advisers did a "good job" guiding it toward confirmation, he said.

Lehman's $4 billion of 5.625 percent notes due in January 2013 fell 1 cent to 25.875 cents on the dollar as of 11:37 a.m. in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The notes have climbed from 23 cents on Oct. 4.

Lehman CEO Bryan Marsal has said he aims to raise $65 billion from the firm's assets in the next few years, giving some money to creditors in the first quarter. Lehman and its affiliates had more than $23 billion of cash available on Oct. 31 after spending almost $1.5 billion in fees for managers and advisers, according to a filing.

The company will distribute some of the $23 billion to creditors in the first quarter, Lehman has said.

'Common sense'

"This case has required compromise and common sense, diligence and determination, and the reconciliation of complex positions that at times seemed irreconcilable," said Marsal, co-founder of Alvarez & Marsal, the professional services firm that has been managing Lehman's operations during bankruptcy, in an e-mailed statement. "Confirmation of this plan is a testament to the enormous efforts of the many stakeholders who recognized the value of an economic compromise plan and did yeoman's work to achieve it."

Marsal has estimated that the final claims will total $370 billion, giving the average creditor less than 18 cents on the dollar. Lehman's senior bondholders would recover 21.1 cents on the dollar under the new plan, compared with 21.4 cents under the firm's previous proposal.

The bondholder group including Paulson and the California Public Employees' Retirement System, or Calpers, filed its own liquidation plan in April that would have paid bondholders 25.4 cents on the dollar. Senior bondholders were offered 16 cents in a rival proposal by holders of claims on Lehman affiliates, including Goldman Sachs and Morgan Stanley.

Claims on Lehman's derivatives unit would be paid 27.9 cents to 32 cents, while commercial paper claims would get 48.4 cents to 55.7 cents, all based on each dollar of their investment, court papers show.

Special financing unit

A guaranteed claim against Lehman's special financing unit would get 27.9 cents on the dollar, plus more than 11 cents from a guarantee by the Lehman parent, or a total of about 39 cents. That is more than Lehman offered in an earlier plan, though less than the more than 40 cents proposed by the Goldman Sachs group.

Calpers paid more than 100 cents on the dollar for some of its claims, while Paulson paid 9 cents or less for some of its Lehman holdings.

Lehman quickened its effort to get out of bankruptcy in June, after being mired in disputes as it neared three years in Chapter 11 proceedings.

Separately, a group of Lehman Brothers' underwriters agreed to pay $417 million to settle a class-action lawsuit by investors who claimed they were in the dark about Lehman's exposure to mortgage-backed securities in 2008, according to a Dec. 2 filing in federal court in Manhattan.

Fuld and other former Lehman executives in August had agreed to settle the investors' claims for $90 million to be paid by Lehman's insurers.

Goldman subpoenaed

Lehman this month subpoenaed Goldman Sachs for documents relating to derivatives claims. Many banks are fighting Lehman over its handling of derivatives contracts, including Deutsche Bank AG. More than 20 "formal" objections to the overall plan were withdrawn before yesterday's hearing, Miller said.

Lehman has winnowed down claims from 67,000 filed originally demanding about $1.2 trillion from what was once the fourth-largest investment bank. Through Oct. 31, it raised $13.8 billion from derivatives. Real estate sales fetched $3.9 billion through June 30. Marsal has said property sales will continue through 2014.

Lehman failed because of too much debt and risky real estate investments, according to a bankruptcy examiner's report. The firm filed for bankruptcy with $613 billion in debt.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

The shareholders lawsuit is In re Lehman Brothers Equity/Debt Securities Litigation, 09-MD-02017, U.S. District Court, Southern District of New York (Manhattan).

(Published by Bloomberg - December 7, 2011)

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