Dick S. Fuld (photo: World Resources via flickr)

The bankruptcy case of Lehman Brothers grinds along.

1. Last April, Lehman proposed a plan of liquidation. It estimates that at some point years from now most creditors will receive varying amounts, ranging from 15 cents to 44 cents on the dollar, with a lucky few getting 100% but no interest.

Lehman claimed to have a net worth of $27.3 billion a few days before the filing. And that was after net write-downs on its assets of $5.6 billion. The financial statements filed with the Disclosure Statement show a negative net worth of $80.1 billion for Lehman and its controlled entities at June 30, 2009. Hmmmm.

2. Lehman sued JPMorgan Chase for billions arising from the steps JPMorgan took in the weeks before bankruptcy to get its hooks into the cash and marketable assets of Lehman. JPMorgan filed a Motion to Dismiss, which claims it took enormous risks in facilitating the trades of Lehman, and is outraged by the whole idea that one bankster might screw another one into the ground. This will give a flavor:

Plaintiffs’ breach of contract claims simply recycle the allegations that JPMorgan improperly requested and withheld collateral from LBHI. The Complaint, however, does not identify any contractual provision that regulates the amount of collateral that JPMorgan was entitled to request, nor does it identify any provision that entitled LBHI to the immediate release of its collateral from JPMorgan. Likewise, plaintiffs’ claims for breach of the implied covenant of good faith and fair dealing cite no relevant contractual provision with which JPMorgan’s requests for collateral purportedly interfered. Moreover, plaintiffs’ claims for “billions of dollars in damages” are barred by LBHI’s contractual waiver of consequential damages.

Let me translate that from legal to English:

You know how those credit card agreements screw customers? Check out our documents with our fellow banksters.

3. One group of people screwed over by Lehman is over thirty thousand Hong Kong residents who purchased something called mini-bonds. These were actually investments in a synthetic collateralized debt obligation structured by a Lehman subsidiary. Hong Kong banks sold mini-bonds to customers looking for higher returns than savings accounts. According to a class action suit, the investors are mostly retired people. The sellers gave them swag for buying the bonds, ranging from “free parking at a mall” to TVs.

The allegations of the complaint and press stories are confusing. As best I can tell, the deal was part of a series called the Dante Transactions. The investor money was used to buy a portfolio of securities to be held in a trust by Pacific Finance, an entity set up and controlled by HSBC, a giant bank, as Trustee.

The portfolio of securities was the collateral to secure payment if the synthetic CDO had to pay. Synthetic CDOs write protection credit default swaps. In this case, a Lehman sub was the protection buyer. When Lehman filed bankruptcy, it quit paying premiums on the CDSs, and there was no money to pay investors. This should be a termination event, and the portfolio should have been liquidated and paid to the investors.

However, Pacific Finance didn’t enforce the rights of termination or demand the collateral. Eventually, the government of Hong Kong brokered a partial settlement under which the banks that sold this crap will pay at least 60-70%, and more if the banks collect the collateral.

And eventually, investors filed a class action suit. HSBC and Pacific Finance defended, saying that under English law, beneficiaries of trust agreements can’t sue. The Bankruptcy Court agreed and dismissed the case. On appeal, the District Court reversed, holding that there were special circumstances that would allow the investors to proceed with a derivative action.

It isn’t clear whether that will do any good if these are in fact Dante Transactions. The Lehman bankruptcy court held in a separate proceeding that provisions of the Dante transactions that would permit the investors to reach the collateral violate the Bankruptcy Code. This conflicts with the holding of English courts on the issue. Maybe the investors will get lucky, and English law will govern, or maybe the US decision will be reversed on appeal.

Of course, there is no accountability. No one, except three low level female Hong Kong bank employees, has faced criminal charges.

As an editorial aside, mini-bonds were not sold in the US, because of regulatory restrictions. The US is full of geniuses who tell us they know better than anyone how to invest their money. I bet a whole lot of them would have bought mini-bonds if they could have.