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Lehman seeks to expose ‘silly’ claims

Web posted at: 1/12/2010 0:19:53

http://www.thepeninsulaqatar.com/Display_news.asp?section=Business_News&subsection=market+news&month=January2010&file=Business_News2010011201953.xml

By Anousha Sakoui

The collapse of Lehman Brothers is proving a big test for the derivatives market and is being closely watched for the precedents that unravelling these claims will set. When Lehman filed for bankruptcy, it allowed large banks that were counterparties with Lehman to terminate their trades and use provisions under the International Swaps and Derivatives Association contract for calculation of damages.

More than 6,000 derivatives claims were filed against the US arm of the investment bank before a deadline last September. Back in November, when updating the US courts on the state of the estate, Bryan Marsal, chief executive of Lehman Brothers Holdings Inc, told Judge James Peck, the judge in charge of the bankruptcy proceedings, that some of the claims were “just flat out silly”, adding that there was “no downside” for making them.

Now the representatives of the US bank want to have large banks persisting with their claims to explain them in court. “There are some banks whose claims are outrageously unreasonable but, if we have to, we plan to bring these claimants in front of the judge to argue why this claim is not warranted and by doing so persuade the other claimants to be more reasonable,” said Marsal.


settling claims

“We want to make an example of the banks that have made the most outrageous claims.” His comments highlight the challenge posed in settling claims around these complex derivative agreements and shed light on their workings.

“Lehman’s bankruptcy cost the banks dearly in terms of the impact on the capital markets but what they had learnt from Bear Stearns was how to make a profit on the derivatives part of their exposure and cover those losses, and to position themselves so that if Lehman did file they could make at least some of the bad into a good,” says Marsal.

In the week before Lehman filed for bankruptcy it was owed $2.3bn by the counterparties to derivatives trades, three weeks later the banks claimed Lehman owed them $25bn plus guaranteed claims of $25bn. “How does that make sense?” said Daniel Ehrmann, co-head of derivatives at LBHI and a Managing Director of Alvarez & Marsal.

The ISDA contract sets out different methods for valuing losses linked to unwinding derivatives. One method, known as the Close Out provision, recognises that at a time of turmoil it may be difficult to get market quotes and allows counterparties additional flexibility to use other sources of information. David Geen, general counsel at the ISDA, said: “ISDA continues to observe the effects of the financial crisis and the performance of its documentation framework in these circumstances.”

While the representatives of Lehman are not rejecting legitimate claims and do not believe banks contravene the letter of the contract, they instead believe some used the ISDA contract to support theoretical losses as opposed to actual losses.

financial times