Why The Big Hedge Funds Bought Lehman Brothers Trading ClaimsVW Staff
Lehman Brothers’ Chapter 11 filing in September 2008 was the largest bankruptcy filing in history. The news of the financial firm’s collapse sent thousands of panicked investors around the globe into a flurry. These investors, ranging from the most sophisticated hedge funds, towns and councils, and companies to individuals and pension funds, lost access to cash, assets and trades, and were wary of the recovery of their investments. The bankruptcy case was complicated, involving thousands of documents and depositions, around 30 law firms and other professionals billing almost $ 2 billion, and numerous investigations and lawsuits. Despite this complicated process, trading of claims filed against Lehman Brothers Holdings Inc. (PINK:LEHMQ) was active from day one.
Since the financial firm filed for bankruptcy in 2008, claims that were traded totaled more than $90 billion. In October alone, more than $2 billion of claims were traded in Lehman’s case. Based on Lehman’s bankruptcy case dockets, big buyers of claims are Goldman Sachs Group, Inc. (NYSE:GS), Centerbridge Special Credit Partners, L.P., Bank of America Corp (NYSE:BAC), and The Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS), and hedge funds, including Elliott Management Corp., King Street Capital Management and Paulson & Co.
Prior to Lehman’s collapse in 2008, it had more than $600 billion in assets. Lehman sold its biggest asset to Barclays PLC (LON:BARC) (NYSE:BCS) and liquidated, and continues to liquidate, its remaining assets. Lehman’s plan outlining the payment scheme and recovery percentage for creditors became effective in the first quarter of this year, just less than a year after that liquidation plan was filed. The plan contemplated distribution of more than $65 billion to creditors.
Under the plan, it was agreed that creditors will receive 21 to 28 cents on the dollar. In April, Lehman’s initial distribution to creditors totaled $22.5 billion, which paid more than 12,000 individual third-party creditors and other Lehman units. There was $4.4 billion of cash held in reserve for disputed claims and about $6 billion reserved for operating and non-operating expenses. In September, a second distribution totaling $10.2 billion was made.
Claims trading is an ordinary course proceeding in any bankruptcy case. Usually, creditors sell their claims to third-party investors at a discount, which means the claim for money is sold in an amount less than the amount asserted in the claim. The volume of claims traded in Lehman’s case will eventually decrease but claims trading will go on as investors remain positive on the recovery of creditors from the bankrupt estate as the Lehman restructuring team continues to settle claims and generate additional money for the estates to be paid to creditors. Although the bankruptcy case has officially ended and court approval is no longer needed for transaction Lehman enters into, Lehman’s case will remain in court as numerous lawsuits are still pending and are nowhere near resolution. These lawsuits, including those against JPMorgan Chase & Co. (NYSE:JPM) and Nomura Holdings, Inc. (NYSE:NMR) (TYO:8604), may potentially bring back money to pay creditors. Lehman also continues to sell off its remaining assets, which include real estate properties, such as the Archstone apartment real estate company.