Lehman Brothers

June 2, 2011

Pennsylvania Chapter 11 Bankruptcies Fall

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The good news is that the number of Chapter 11 business bankruptcy filings in Pennsylvania fell close to pre-recession numbers in the first quarter since dramatic rises between late 2008 through the middle of last year.  But the bad news is that a second wave of filings could come if interest rates rise without being accompanied by significant economic improvement.
Business Chapter 11 filings in New Jersey and the Eastern District of Pennsylvania have been relatively steady despite the economic downturn because most major companies choose to file in Wilmington or New York.  The recession-related increase in filings in 2009 and 2010 in the 3rd Circuit, which includes eastern Pennsylvania, New Jersey and Delaware, came largely from Wilmington.  These are the regions where many companies choose to be incorporated because of the business-friendly court structure there.
The number of Chapter 11 business filings in the 3rd Circuit combined were only 114 in second-quarter 2008.  But after Lehman Brothers went under in September that year, followed by the stock market collapse, filings went up to 408 in the third quarter, 626 in the fourth quarter and 621 in first-quarter 2009.  They remained high for the rest of 2009 and the early portion of 2010 before dropping significantly to just 213 in first-quarter 2011.
Some industry players believe that borrowers were aided by loan agreements with few financial covenants, particularly commercial real estate loans.  That means that borrowers can struggle but without defaulting.
But many filings that occurred in the most recent wave were pre-packaged arrangements with lenders that allow borrowers to reorganize.  Fewer midsize and small companies are using bankruptcy protection, choosing instead to either restructure their debt or sell the company.  The reason for that is that smaller companies cannot afford the fixed costs associated with bankruptcy, unlike larger companies.
While the decline in business filings is viewed as a good sign for the economy, many pundits are predicting there will be another spike in filings when and if interest rates rise.  Many struggling businesses have been saved by “unrealistically low” interest rates that allow them to maintain reasonable levels of cash flow despite the prolonged economic slump.
But Interest rates could affect the liquidity of many companies that could yet go bankrupt unless they find favor with their lenders.  The Federal Reserve is trying desperately to keep interest rates low but it may not be possible in the long term.

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    Filed under Chapter 7 (Tampa) by dmishesq on Jun 2nd, 2011. Comment. #

    January 27, 2011

    Lehman Brothers Plan to Exit Bankruptcy with Revised Plan

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    Defunct investment bank, Lehman Brothers recently submitted a revised plan to exit bankruptcy after several creditors declined to support their initial plan.  Under the revised plan, there will be more money offered to bondholders.
    The bank intends to raise some $60 billion for creditors by selling their assets over the next few years and reducing allowable claims by $322 billion.  With this move, the average creditor will receive 18.6 cents for every dollar claimed.  This is more than the 14.7 cents under the initial plan which was shown in March and April 2010 when values for Lehman assets were not as high as presently.
    Senior bondholders would be paid 21.4 cents on the dollar compared to 17.4 cents under the original plan.  Unsecured creditors would receive a return of 19.8%.  Derivative creditors would get 22.3 cents, down from an earlier estimate of 24.1 cents.  Some of the derivative creditors that filed claims against Lehman Brothers Special Financing include Morgan Stanley, Deutsche Bank, Credit Suisse Group AG, Goldman Sachs Group Inc. and Bank of America.  When it filed for bankruptcy, Lehman Brothers was involved in about 1.2 million derivative transactions with about 6,500 counterparts.  As at the end of last year, Lehman had settled about 45.6% of those contracts.
    Last December, another competing plan was offered up by hedge fund Paulson & Co. and other creditors with large claims against Lehman.  Under this plan, the group including Paulson allocated 24.5 cents to bondholders and cut derivatives creditors’ payout to 25.7 cents, from what the group calculated as 38.8 cents under Lehman’s first plan, which gave them a right to get paid twice in a so-called “double dip.”  The group comprises of 10 members that include the California Public Employees’ Retirement System (America’s largest public pension fund), Pacific Investment Management Co. (the world’s largest bond fund) and Canyon Partners LLC which is a $19 billion hedge fund.  Paulson & Co. themselves manage about $33 billion in hedge funds.
    Lehman urged creditors not to support Paulson’s plan which, according to them, would “would engender significant opposition and litigation, and would result in increased expenses and delay” in the case.
    With its new plan, Lehman hopes to have a court hearing by the end of June and within 60-90 days thereafter, obtain the approval of bankruptcy Judge James Peck.  Creditors must first vote on the revised proposal.
    If you are finding it hard to overcome your debts, consider filing for bankruptcy protection.  Call us at (813) 200 4133 for a free consultation.


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    Filed under Chapter 7 (Tampa) by dmishesq on Jan 27th, 2011. Comment. #

    August 7, 2010

    Lehman Sues J.P. Morgan in Bankruptcy

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    Bankrupt investment bank Lehman Brothers has sued JPMorgan Chase & Co. alleging that J.P. Morgan illegally obtained billions of dollars from it in the days prior to their bankruptcy filing. J.P. Morgan was Lehman’s one time ‘clearing bank’ or middleman between Lehman and its investors and creditors. This, according to Lehman, allowed J.P. Morgan to be privy to the financial condition of Lehman, especially when it continued to weaken. Lehman further alleged that J.P. Morgan’s Chief Executive James Dimon and other top executives took advantage of this insider information to get Lehman to turn over $8.6 billion in collateral in September 2008, an act that significantly contributed to its lack of liquidity and its subsequent downfall.

    Lehman’s lawsuit goes on to allege that J.P. Morgan siphoned billions of dollars out of Lehman by demanding more collateral to cover its risks. This in turn ensured that J.P. Morgan would have the advantage over all other Lehman creditors, not just for its clearance exposure, but for all possible exposure that would have resulted from Lehman’s bankruptcy.

    On its part, Lehman felt the need to give in to J.P. Morgan’s demands, fearing that should J.P. Morgan stop its clearing activities, it might have precipitated Lehman’s immediate collapse.

    Although the lawsuit did not come as a surprise to industry players, J.P. Morgan spokesman Joe Evangelisti described it as ‘ill conceived and meritless’ and said the company will vigorously challenge it.

    In a recent report, a bankruptcy court examiner found that Lehman could pursue a legal claim against J.P. Morgan for making excessive collateral requests albeit not a very strong claim. In his report, the court examiner said that Lehman could recoup $6.9 billion of the $8.6 billion pledged to J.P. Morgan. At the same time, the court examiner chided Lehman for using certain accounting techniques to hide its leverage and deceive the market before it ultimately fell into bankruptcy. All the while, J.P. Morgan was among the only institutions to continue lending to Lehman before and after its bankruptcy.

    Evangelisti used the bankruptcy court examiner’s report to refute Lehman’s allegations and claimed that it was due to Lehman’s own poor decisions in taking on leverage and exposing itself to subprime mortgages that led to its eventual downfall and not any inappropriate use of confidential information on the part of any J.P. Morgan employee.

    As it turned out, when Lehman could no longer get itself out of its downward spiral, the government declined to rescue it, forcing Lehman to file the largest bankruptcy in US history.

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    Filed under Chapter 7 (Tampa) by dmishesq on Aug 7th, 2010. Comment. #

    July 13, 2010

    Stern Call to Prevent Major Bankruptcies

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    The nation’s top three finance officers lobbied before the House Financial Services Committee for more stringent regulatory measures over financial markets to prevent any more major bankruptcies like Lehman Brothers. Treasury Secretary Tim Geithner, Federal Reserve chairman Ben Bernanke and Securities and Exchange Commission (SEC) chairwoman Mary Schapiro who have come under sharp criticism lately for their institutions’ failure to prevent Lehman from going bankrupt, appealed for an overhaul of the financial systems.

    At the opening of a hearing to discuss policy matters on financial markets, the case of Lehman’s bankruptcy was brought up highlighting the fact that the nation’s financial regulatory bodies did not pick up on Lehman’s exposure to risky derivatives and their highly questionable accounting practices to hide these activities in the years prior to their collapse.

    Financial reform has been in the forefront of many people’s minds not least because the SEC last week charged another Wall Street giant, Goldman Sachs with fraud. At the hearing, legislators began their debate on the tough measures needed to be taken for the government to better regulate derivatives and the appropriate capital requirements for Wall Street firms.

    One of the matters brought up in the debate was how Lehman surreptitiously used an accounting trick known as ‘Repo 105’ to mask its massive losses and remove some $50 billion of assets from its balance sheet instead of selling them off at a loss.

    At the discussions, lawmakers from both sides of the political divide decried Lehman’s gross mismanagement and expressed disappointment at the feeble regulatory system that did not detect their wrongdoing and under-capitalization until it was too late.

    This led to a call for the need to enforce the Wall Street Reform bill that was proposed by the Democrats and passed by the Senate Banking Committee last month. But this proposal was quickly shot down by the GOP representatives, branding such a move as trying to reinforce a broken system. The Republicans are generally against giving the Fed Reserve and SEC more regulatory authority.

    The committee questioned Shapiro on how the SEC could have overlooked Lehman’s condition and did not take action on the investment bank earlier. In reply, Shapiro stated that the SEC did not have “the staff, the resources or…the mindset” to effectively regulate the operations of the world’s largest financial institutions. At the time of Lehman’s bankruptcy, the SEC had only 24 employees overseeing five of the largest investment banks in the world.

    Shapiro was quick to add that the SEC had learned from its mistakes and has adopted more stringent methods of cracking down on the types of transactions that led to Lehman’s downfall. The SEC has sent letters to all major financial institutions requesting detailed descriptions of accounting practices including possible Repo 105 type transactions and will make its findings public after reviewing them.

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    Filed under Chapter 7 (Tampa) by dmishesq on Jul 13th, 2010. Comment. #

    July 9, 2010

    St Pete sues Wachovia as Bankruptcy spreads

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    The city of St. Petersburg has taken up a lawsuit against its financial advisor, Wachovia Bank. The suit was filed in US District Court in Tampa, Florida and stems from Wachovia’s failure to warn the city of the impending collapse of Lehman Brothers Holdings Inc. At the time of the collapse, St. Petersburg was holding $15 million worth of Lehman bonds. Needless to say, after Lehman filed what turned out to be the largest bankruptcy filing in US history, the bonds were practically worthless. The city contends that Wachovia bank should have sounded the alarm bells to it when credit rating agencies drastically downgraded Lehman’s ratings during the spring and summer of 2008. Having lost $15 million, the city attributes it to Wachovia’s inaction over Lehman’s impending collapse.

    In court papers, St. Petersburg stated that because Wachovia remained silent during the crucial period when Lehman’s ratings were sliding down, it deprived the city of the opportunity to sell off the bonds before it was too late. Court papers go on to show that Wachovia only alerted city officials on September 16, 2008, one day after Lehman filed for bankruptcy by which time, the bonds were not even liquid anymore. Unfortunately for the city, it used the bonds to participate in some sophisticated and risky lending programs administered by Wachovia. The bonds were in turn loaned to others and when they became worthless, the city had to pay $15 million in cash to compensate the borrowers.

    In its lawsuit, the city seeks an unspecified amount in punitive damages and compensation. On its part, Wachovia denies all allegations in the suit. Under its new owner, Wells Fargo & Co., the bank intends to fight the case. In its defense, the bank puts forth its contention that at the time St. Petersburg purchased the bonds, they were rightly valued.

    Admittedly, the whole episode served as a rude wake-up call to the city officials. But St. Petersburg is not alone in its financial turmoil. Many other cities in various counties are similarly plagued with fiscal problems of their own. The Lehman bankruptcy in particular, hit dozens of other communities in counties across 20 states in the country. One example is Sarasota County that owned $40 million in Lehman bonds. No prizes for guessing who Sarasota County’s financial advisor was. Altogether, Florida communities lost in excess of $456 million.

    Somewhat fortunately for Sarasota County, it did not sell its Lehman bonds, instead it recorded them as unrealized losses in its books for 2008. Since then, the value of the bonds have risen as the bonds continued to mature and allowed the county to record them as unrealized gains in their books in 2009.

    On the other hand, St. Petersburg had to write down their losses from the Lehman bonds in their books in 2008.

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    Filed under Chapter 7 (Tampa) by dmishesq on Jul 9th, 2010. Comment. #

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