Lehman Brothers was the catalyst to the financial crisis – and the period when the phrase “too big to fail” came into common parlance.
But Lehman did fail, and somewhere in the region of 100,000 creditors were left being owed money, reckoned at one point to exceed $1.2 trillion. Five years on and billions of dollars in legal, accountancy, and administration fees later, not to mention the ongoing employment of hundreds of Lehman employees seeking to recover lost funds, and we are getting close to the final chapters of this sorry saga.
It is not well known in the US, but Lehman’s European operations, known as Lehman Brothers International Europe (LBIE), was the largest and most complex part of the Lehman Group. Although it was put into receivership of its US parent post-2008 collapse, the business was well funded with $15 billion of capital – much better indeed than the US operations – and only failed because of liquidity when credit lines froze.
So is payback imminent?
An FT article this week reports that the receivers expect to fully repay claims to the 5,350 unsecured creditors in Lehman’s London-based unit this year, contrasting with the much lower recovery from the equivalent Chapter 11 process in the US.
The estate of Lehman Brothers Holdings Inc. is expected to return only about 26 cents on the dollar to its 70,000 creditors, according to US court filings. Indeed, so successful has the process been that the receivers expect to pay interest at 8 percent on the sums due and then be left with up to £5 billion ($8 billion) of surplus cash at the end of the process.
It is easy to be smart after the event, so we will refrain from drawing any conclusions, but it does at least beg the question: would the UK authorities not have been better off supporting LBIE and keeping it as a going concern?
Maybe its dealings were too intricately entwined with the US operation for that to happen, but it is unusual for an entity to go into receivership and, at the end of the unwinding, all creditors to be paid in full and still have a cash surplus.
How bad was this company at the time it was wound up? In hindsight, possibly not that bad that an (admittedly large) injection of liquidity would not have seen it through.