LEHMAN BROTHERS AFTERMATH:THE RAMIFICATIONS of a financial institution the size of Lehman Brothers going bust always seemed so terrible that bankers thought the authorities would never let it happen. Now people's worst fears have arisen.
Banks have gone under before - Bear Stearns made emergency preparations for a Chapter 11 filing before being rescued by JP Morgan in March. But Lehman's demise is in a different league and presents its administrators with unprecedented challenges.
Their priority when any company goes under is to establish the value of its assets and liabilities.
But in Lehman's case, this is a mammoth task. "It is extraordinarily complex," said Tony Lomas, the PricewaterhouseCoopers (PwC) partner leading the process for Lehman's UK entities.
"There are a huge number of transactions. It is going to take some time to unravel all the affairs of this company and, therefore, to assess the financial consequence for creditors and impact on the market."
Lehman's tangible assets include the massive subprime mortgage portfolio that was the origin of its problems. Ironically, that is one of the easier parts of the business to liquidate.
Likewise, Lehman's asset management unit and corporate finance divisions remain attractive to possible buyers, and have not been put into administration.
Bankers say they expect PwC to sell these assets as soon as possible, given their value lies in the staff and client relationships.
Executives at Lehman's $35 billion (€24.6 billion) private equity division, part of asset management, are considering a management buyout.
"The problem, I think, would be market forces, and people just not wanting to hang around," said one restructuring lawyer.
Most immediate, perhaps, is the need to find $75 million in cash by Friday to cover the September payroll bill.
"If we're able to pay employees at the end of the week, we can keep them to the end of the month. That's a critical point when line managers will have developed their plans to realise the value of the various areas," said Mr Lomas.
"At the moment, it is not at all clear what will happen."
PwC has indicated that there are physical assets - from supermarkets to golf courses - that do not need to be sold in a hurry.
But the real difficulty here is Lehman's colossal derivatives book. The bank has hundreds of billions of dollars worth of over-the-counter derivatives contracts with corporate and investment clients, covering everything from oil-price hedging to insurance on corporate debt to bets on the rise in stock indices.
- (Financial Times service)
