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.





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Would that be the same as nailed to the floor?
What exactly is Lehman’s position on the sales of minibonds? Do they not own up?
This is an interesting suggestion (might be tried here, again):
Lehman raised the issue of the “ipso facto” clause as a defense to a claim of another Trustee that the Trustee should distribute the collateral to the investors.
If this sticks, they keep the collateral and screw the people who dealt with them. I couldn’t care less if AFLAC and a bunch of other speculators get screwed, but cheating retail investors is just disgusting. Of course, the responsibility for the cheating is on the management of the companies involved, but you really have to ask yourself what the Court thinks about cheating a bunch of retired Chinese out of their life savings.
But no one will be held accountable.
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.
Now,like, my law school wasn’t hardly top flight, but the way I read that is judge sayin’ like, “You gotta be fuckin’ kidding me man. You Lehman bros knew damn well you didn’t have no contract claim so yer tryin’ t’pull a implied contact right out yer ass. And the zillions of dollars a damages? You already pissed away on yer own, guys.”
Mini bonds weren’t sold in the US because of regulatory restrictions? Nanny state! Nanny state!
So, did Lehman not have lawyers who understood contracts?
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.
Right after Lehman collapsed, the Bush administration started the massive bailouts. Anybody want to guess how many other Wall St firms are STILL really insolvent?
Maybe I wasn’t clear: that is from JPMorgan’s brief. I’ve read the complaint, and this isn’t as clear as the brief suggests.
this is actually clinton’s fault, he got through deregulation of commodities that allowed these synthetic instruments, instruments based on nothing which then made it easier to make loans backed by nothing which made the instrument seem like it was worth something, which it was not and the people creating the instrument knew it was not but since it was not a crime to create these worthless instruments they figured, (and rightfully so), *hell, if they want to buy this crap I’m going to write it*
commodities used to be used by manufacturers who wanted to hedge bets against the cost of their supplies rising, basically buying their supplies at a set price through the commodity exchange
through deregulation banks were allowed to manufacture these instruments however they saw fit, for instance bank loans were chopped up and put on the commodity exchange, so long as people were buying these loan commodities banks were happy to make loans to anyone and everyone who even thought they wanted to borrow money, the bank had no risk since they simply put the loan on the commodity exchange
all
clinton’s
fault
sorry
All
His signature is on the dotted line, but it was a bipartisan effort.
I do agree with the rest of your comment.
Wrt to derivatives it was largely a situation where new products were conceived to fit into unregulated areas, and attempts to regulate these new products and trading practices were continually thwarted.
Step 1: Gramm Leach Bliley- which did away with the combining of ‘investment banking’ and retail banking.
Step final: defeat the proposals by Brooksley Born to have the CFTC regulate derivatives and their markets- particularly swaps.
The one name never to be left out of this discussion is Phil Gramm Senator (Republican) Texas. He did get his start as a Democrat, but there was an interesting series of events beginning with his support of the Reagan budget proposals in 1982.
Oh, don’t misunderstand me, I wasn’t taking a shot at Bush (although there are many there to take), Obama continued the exact same bailouts with the exact same people (except for Paulson).
I will point out that as much as you can blame Clinton for passing the 1999 Financial Modernization act, that did not “legitimize” OTC derivatives. By then, Brooksely Born had already tried to regulate that market as head of the CFTC and been shot down by Greenspan, Rubin and Summers:
http://www.pbs.org/wgbh/pages/frontline/warning/view/
The 1999 Financial Modernization Act (Gramm–Leach–Bliley Act) was what tossed out Glass-Steagall which allowed Main St banking to merge with investment banking. Clinton has since publicly stated that signing that into law was a mistake.
But my initial point is that despite the fact that we have bailed out Wall St with unGodly sums of taxpayer money, in all probability most of the TBTF banks are insolvent especially if using mark to market accounting and we look for Repo 105 type accounting tricks.
ha. i got that idae about the complaint. wonder how much the firm made for drafting it.
Thanks, next we’re going to hear the “banks are over regulated, and it’s all that socialists Obama’s fault”!
And really, it just reaches the point where I don’t know how to respond. I am, like many others mad as hell about what’s been done to the American citizens, and even admire the Tea Party for being so proactive about getting us out of the status quo.
BUT, if they think blind de-regulation and cutting taxes solves all problems, then they haven’t been paying attention – that’s what we’ve BEEN DOING for the last thirty years, and look where we are.
If de-regulation and no taxes are the most effective way to go then how come Somalia or some other place with little to no government restrictions isn’t a world beating Wall St powerhouse with the cheapest dang healthcare market in the world?
Because it takes a lot of REGULATION to make a fair market, and a functional government to enforce contracts. For a LONG time one of Wall St’s greatest strengths was the REGULATION that made it a safe place for foreigners to invest money.
I’m not saying government is the end all, be all. We need both a functional government and a fair market – right now we have neither, and both political parties in DC are in on the crony capitalism.
And sorry jo6pac if I tee’d off on you in response to perris. I too think most of the TBTF banks are still insolvent, and for some reason, you and I have to pay for that.
I was stunned to see Fareed Zakaria on teevee this morning using the Lehman example to illustrate how the Wall Street Panic of 2008, and the TARP rescue, was an example of how our government SHOULD operate in time of distress.
It’s a lot worse than that. The courts have been rigged against investors. The costs of litigation are enormous, and the delays are disgusting, and that assumes you can get past an arbitration clause, where your chances are even worse. The public has been trained to accept the myths of the Chicago School of Economics, so they mindlessly accept the arguments put out by oligarchs and big businesses, including the bizarre idea that there are actual competitive markets.
The people we elect to Congress are ignorant but their egos get in the way of admitting this obvious fact. And that’s when they themselves are not corupt. Their staffers are young and don’t really see what’s happening in front of them.
It isn’t clear this mess can be cleaned up, or that there is even a significant group that wants to clean it up.
Not good at all. Well, if the US courts are un-responsive, can we expect two things:
Legal actions in other countries – is there any pending cases in Hong Kong to go after Lehman?
The further killing of the golden goose – Wall St has pretty much bled the middle class dry, gotten massive taxpayer infusions and still seems to be running pretty much the same as before. Will foreign investors take their money and go somewhere else? Wall St had three big things going for it:
1) the American manufacturing economy to invest in,
2) a fair and well regulated market,
3) and the American dollar.
They’ve managed to mangle up 1 pretty good, 2) little guy American investors are fleeing the market, can the rest of the world be far behind?
And Bernanke’s getting ready to ride the dollar hard, and put it away wet with QE2 coming in November (or so I heard). But, lucky for us (or maybe not) it looks like the Euro will get all the immediate attention:
http://www.zerohedge.com/article/ecb-stepped-rescue-ireland
The ECB had to bail out Ireland over the weekend, and there’s been rumblings that the London gold market was under attack. (Big buyers are taking physical delivery to try and break the market – this from guys that have been watching the central banks and the BIS swap around gold reserves.)
So anybody that thinks we’re out of this, or that TARP was a “success”, is smoking some good shit.
I’d add that once upon a time we had GAAP, which was clunky but everyone more or less followed it, and CPAs did a reasonable job of enforcing it. No one trusts financial statements any more, at least no one who expects to make money investing on fundamentals. The accounting profession at the highest levels is about as trustworthy as CEOs, lawyers and courts.
There is little left uncorrupted.
Added on edit: I want to point out that there are plenty of honest lawyers and accountants and judges. They don’t work for big monied interests.
It was a very dark day when my Senator and my banker refused to address electronic identity/data theft. It was then that I knew that I only needed my mattress …
- from Keiser Report, Sept. 7, 2010 (~ timepoint 7:35)
Let’s make that “the
AmericanInternational economy today”:“The Great Global Macro Experiment, BoomBust Cycles, and the Refusal to See the Truth: Bubble Economics in the Mainstream Media,” Sept. 1, 2010
“The Elusive Canadian Housing Bubble: Summer 2010 Edition – Canary In A Coal Mine,” Aug. 25, 2010
‘Observations On China’s Bubble, Or The “Lose-Lose” Reality Of A Financial Cocaine Addiction,’ Aug. 8, 2010 (also “Chinese Banking Stress Test Assumptions Imply Chinese Real Estate May Be Overvalued By As Much As 60%,” Aug. 8, 2010)
Postscript: For grins, here’s HSBC’s current “investment in communities” list