Replies to post #1653 on Lehman Brothers Financial SA (LEHNQ)

[linda1]

From what I have read SUBORDINATION is a non-issue in Substantive Consolidation. All assets and liabilities of the Debtors are pooled together and the rights of the Creditors are waived.



"In short, substantive consolidation is the merging of assets and liabilities of a debtor into one big pool where creditors look for recovery. In principle, by consolidating units (i.e. disparate corporate entities, divisions, malls, etc) a debtor is essentially simplifying the process of how it will settle with all its creditors. In a substantive consolidation, certain parties are helped and certain parties are hurt. If a better capitalized subsidiary with better assets is consolidated with a worse capitalized subsidiary with more debt, the lenders to the former subsidiary get hurt - the assets they were going to get to get their loans paid off now are in a bigger, more toxic pool."

[linda1]

Here is another excerpt that emphasizes ALL CREDITORS partake in substantive consolidation.


"Second, unlike equitable subordination or other equitable remedies, substantive consolidation

“almost invariably redistributes wealth among [all] creditors;” creditors of a less solvent entity will

gain at the expense of creditors of the more solvent entity and vise versa. By combining ALL the

assets and liabilities of multiple debtors, substantive consolidation fundamentally alters the value

of creditors’ claims.



The Capital Trusts are listed as a liability on the LBHI balance sheet and since all assets and liabilities are combined in substantive consolidation we will be a participant.


I have read in another article that Guarantees are waived in substantive consolidation.


I have also read that a Debtor can choose to consolidate only certain subsidiaries - however I have not read anywhere that the Debtor can pick and choose which Creditors of an entity can participate in the consolidation.