Tag Archives: lehman

Prime brokerage clients stand to lose assets in Lehman bust

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This is why everyone needs to be extremely careful about their brokerage, banking, counterparty and business relationships. What would a bankruptcy of any of these entities do to your finances? From Bloomberg:

Lehman Won’t Return Prime-Broker Assets for `Months’ (Update2)

By Tom Cahil

Sept. 22 (Bloomberg) — Lehman Brothers Holdings Inc. will take “considerable time” before it returns assets stranded by the world’s largest bankruptcy to hundreds of hedge fund clients, according to PricewaterhouseCoopers.

“Our current view is that this process could take several months to conclude,” PwC, Lehman’s bankruptcy administrator in London, said in a statement today.

GLG Partners Inc., a $24 billion hedge fund, and CQS U.K. LLP. are among those that used Lehman as a prime broker for borrowing stock and clearing trades. They may now join a line of creditors trying to recover money after Lehman filed Chapter 11 bankruptcy on Sept. 15 listing $639 billion of assets.

“There’s a short queue to recover assets and a long one,” said Jerome Lussan, founder of Laven Partners LLP, a hedge fund consultant and investor in London. “If your hedge fund assets have been included with Lehman’s, you’re in the back of a queue that’s quite long.”

Lehman had the right to lend prime-brokerage clients’ securities as collateral in the stock-loan and repurchasing markets, PwC said. Securities used for these purposes were mingled with Lehman’s, PwC said.

“The assets, once `used,’ were no longer held for the client on a segregated basis, and as a result the client may cease to have any proprietary interest in them,” PwC said in the statement.

Margin account holders at any institution should beware. Read about SIPC and assess your risk. Is margin really worth it?

Questionable Value

Hedge funds with assets tied up with Lehman probably will have to write down the value of those assets when they report net asset values to investors or restrict redemptions, Lussan said.

“What’s the market value of, say, $100 million that’s owed to you by Lehman?” he asked. “I’d say it’s not that great, and it’s going to have to be written down.”

Any hedge fund managers who allowed Lehman to lend out their securities were asking for a world of hurt, and in my opinion, were not qualified to handle other people’s money.

Lehman reportedly to declare bankruptcy. US futures down 3% Sunday night.

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According to The New York Times Dealbook blog, the word is that nobody wanted the entirety of this gangrenous carcass without a complete Federal Reserve guarantee a la Bear Stearns, so the healthy parts are being carved off, while the Fed graciously trades some of its remaining assets for the fetid pieces:

Lehman Brothers will file for bankruptcy protection on Sunday night, in the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago.

Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government. …

How many billions of its remaining $400 billion in Treasuries is the Fed going to lose in this deal?

Lehman’s broker-deal subsidiaries would not be a part of the bankruptcy filing. Those entities must file under Chapter 7 rules, which are the procedures for liquidation, under the assumption that it is the best way to protect customers. The Securities Investor Protection Corporation would handle the liquidation of such brokerages, and bankruptcy lawyers say that customers are likely to receive their holdings back.

Boy, if I were a Lehman brokerage client, I would hate to have to wait for the bureaucrats at SIPC to get me my securities back. And what about clients with margin accounts? Will they be wiped out?

… Moreover, changes to the bankruptcy code mean that counterparties to Lehman’s credit-default swaps can seize their collateral at any time, posing an enormous potential risk to the entire financial markets. Investment banks, hedge funds and other financial players labored throughout Sunday to offset their exposure to Lehman, moving their contracts to other firms.

As of 7:30 PM in New York, traders are anticipating a nasty open Monday morning. With a Fed meeting Tuesday and options expiration Friday, this should make for an interesting week.

 

 

 

 

 

Wanna bet the Fed bails out Lehman’s creditors?

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There is no way any rational buyer will take over Lehman without someone else taking the risks of holding their bad assets. With a market cap of just $2.6 billion, Lehman’s share price is not the issue. An honest valuation of Lehman’s assets would surely result in a massively negative equity figure.

The company is clearly insolvent, since it showed over $40 billion in Level III assets, $200 billion in Level II assets and $640 billion in total assets, levered on top of just $26 billion in equity. Merill’s recent sale of mortgage assets to Lonestar at 5.5 cents on the dollar gives you an idea for the true value of some huge portion of this stuff. Even writedowns of just 11% on the Level II and III assets would wipe out Lehman, without even considering the true value of the rest of its assets in this lousy environment.

Look for a Bear Stearns style giveaway of the core brokerage, advisory and money management operations to some big bank, while the Fed covers the losses on the riskiest assets. Since JP Morgan already got a handout, maybe Goldman or Bank of America is at the front of the line for these scraps.

Greenspan, Poole and Paulson have all chimed in saying that the Fed shouldn’t finance any sale of Lehman, but that is a smokescrean, because the sale itself isn’t the issue. Any Fed assistance will be to back up Lehman’s debt so that someone is willing to buy the stock ‘with their own money.’

Since there is a lot of resentment out there from the BS and GSE bailouts, our hustlers-in-chief may use some kind of obscure arrangement whereby the taxpayer’s obligation isn’t readily apparent, but is burried in the footnotes. This would allow them to redeem themselves as champions of the free market with the help of compliant editors and producers in the propaganda outlets.

SEC planning re-education camps for short-sellers

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Also, LEH is has agreed to sell all of its level III assets to the Tooth Fairy, but is providing 90% non-recourse financing:

If Tinkerbell defaults, Lehman’s successor entity will stick its hand down the crocodile’s throat and attempt to get it to regurgitate. The firm’s historical value-at-risk analysis shows that sticking your hand down a crocodile’s throat is completely safe.

Treasury Secretary Hank Paulson issued a statement: “I am delighted that SWFs (Sovereign Wealth Fairies) continue to express confidence in the terrific values represented by American financial institutions. As I have been saying since August of 2007, this shows that the crisis is now over.”

Get the rest of the story here.