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Financial instruments of destruction12/28/2023 An apparently thriving business of over 5,000 staff and investments worth billions of dollars was broke. Without cash, the business would not be able to meet its financial obligations on Monday morning, 15 September. The Friday sweep on 12 September 2008 had taken $8bn out of the London-based company. Like so many global corporations, Lehman Brothers in New York swept the cash from its regional operations back to New York, and released funds the next day. Lehman Brothers International (Europe) based in London also suffered from the nightly sweep. Many clients and counterparties found themselves exposed to multiple Lehman Brothers entities in various legal jurisdictions, with different bankruptcy and insolvency laws and contractual protections and remedies. These included mortgage banks for whole residential mortgage loans other banks/dealers for market making, firm finance, OTC derivatives hedge funds for prime brokerage, custody, trade finance, OTC derivatives, secondary trading and MBSs and CMBSs sovereign and municipal debt issuers for credit and interest rate derivatives and the primary dealer money market funds for commercial paper insurance companies for debt and equity securities, commercial paper, OTC derivatives and MBSs and CMBSs and finally corporate issuers for debt, equity and OTC derivatives. Its collapse resulted in over 75 separate and distinct bankruptcy proceedings immediately, and affected thousands of financial market participants through its wide range of contracts. Lehman had over 7,000 legal entities in over 40 countries, of which 209 were registered subsidiaries, in twenty-one countries. International derivative contracts were not the only problem. That's a $150bn of value out of pension funds and savings’. ‘That is what the Fed and Treasury did not understand – the worldwide implications of the derivative book.’ In an interview he gave in July 2013, he said that ‘in the Lehman matter, the creditors lost $150bn. Lehman had 1.2 million derivative contracts, with a notional value of $39 trillion. In December 2008, he estimated that the total value destruction would be between $50 and $75bn, once losses from derivatives trades and asset impairment were combined. He arrived at 8.30 am the following morning and saw everyone leaving with boxes. A study carried out by the advisory firm Alvarez & Marsal argued that ‘an orderly filing would have enabled Lehman to sell some of its assets outside the federal court bankruptcy protections and would have given it time to unwind its derivatives portfolio in a way that might have preserved value.’ 1Īlvarez & Marsal's co-founder and co-CEO, Bryan Marsal, was appointed CEO of Lehman Brothers, overseeing the largest bankruptcy in America history, at about 10.30 pm on Sunday 14 September 2008, just hours before Lehman actually filed for bankruptcy. Under its dramatic headline, ‘Lehman's chaotic bankruptcy filing destroyed billions in value’, the Wall Street Journal proclaimed that a ‘less hurried Chapter 11 bankruptcy filing would have preserved tens of billions of dollars of value’. The Destruction of Value The process of bankruptcy destroyed value In the aftermath of the financial crisis, regulators turned theirĪttention to capital, liquidity and supervision, in order to prevent theįailures of what then became known as 'systemically important financial International Swaps and Derivatives Association (ISDA) and to consider whatĬontribution the Master Agreements were able to make to sorting out theĮnormous number and the wide range of derivatives, running into trillions ofĭollars. It is important to focus on the procedures set out by Thousands of financial market participants through its wide range ofĬontracts. Separate and distinct bankruptcy proceedings immediately, and affected International derivativeĬontracts were not the only problem. That a 'less hurried Chapter 11 bankruptcy filing would have preserved Under its dramatic headline, 'Mayer Lehman's chaotic bankruptcyįiling destroyed billions in value', the Wall Street Journal proclaimed
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