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Replies to post #110564 on Lehman Brothers Financial SA (LEHNQ)
04/01/24 3:47 PM
Total Value Destruction in Lehman’s Chapter 11 Bankruptcy
Our estimate of the value destruction from the Lehman bankruptcy is substantial, although some losses were likely due to economic distress, or represented value transfers to other parties. In particular, we estimate value destruction to be on the order of $46 billion to $63 billion, or 👉️between 15 percent and 21 percent of Lehman’s pre-bankruptcy consolidated assets. These estimates exclude fees and expenses from the SIPA proceedings, which are an additional $1.4 billion, and the costs of resolving Lehman’s subsidiaries outside of U.S. legal jurisdictions.
Recovery Rates for Different Creditors
The recovery rates of Lehman’s various affiliates also improved over time, although there was substantial variation. Creditors of most of Lehman’s derivative entities (Lehman Brothers Commodity Services (LBCC) and Lehman Brothers OTC Derivatives (LOTC) in chart below) recovered 100 percent of their claims, as 👉️most of these affiliates had positive net worth at the time of bankruptcy. One exception is Lehman’s largest derivatives entity Lehman Brothers Special Financing (LBSF). Its creditors received just 40 percent of their claims because in part, under Lehman’s liquidation plan, their claims were reduced in favor of unsecured counterparties of the holding company LBHI. In contrast, general unsecured creditors of LBHI benefited from the liquidation plan, as their recovery rate improved from just 6 percent initially to 45 percent after the sixteenth distribution.
To facilitate comparisons with other bankruptcies, we express Lehman’s Chapter 11 expenses as a share of the book value of assets (equal to👉️ $298 billion) held by Lehman and its affiliates, as of the bankruptcy filing date of each entity. For the SIPA resolution, we use the total value of customer claims at the start of the resolution process. The table below reports these shares.
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Thus, in comparison with previous Chapter 11 bankruptcies, Lehman’s professional fees were in line with historical norms while its total expenses were toward the lower range of historical values. However, Lehman’s pre-bankruptcy assets were almost👉️ $300 billion while sample firms in the studies had assets of less than $700 million. As most studies show a negative relation between the expense ratio and asset size, we might expect that Lehman’s expense ratio should fall toward, or even below, the lower range of historical values..
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