Post by Sapphire Capital on Sept 25, 2008 22:04:26 GMT 4
Dodgy documents create more problems for Lehman
24 September 2008
Source: Rachel Evans, IFLR
As the dust settles on the remains of Lehman Brothers, administrators are struggling to pick up the pieces. Rights and obligations regarding assets and trades are not clear; the documents did not anticipate an event of default.
"In all the documentary arrangements with banks, no one really thought about where attention was needed. These documents have not been stress tested through the fires of insolvency," said one lawyer close to the discussions.
Lehman corporate loan documents were structured in the abstract. Now that the event of default has happened, counterparties are worried about how to get their assets back, what happens to custodial accounts, and how trades will be settled. RAB Capital, for example, has already initiated legal action against the adminstrators regarding some of its securities that Lehman had in custody.
This issue of clarity is troubling the administrators on a number of fronts. Last week, PricewaterhouseCoopers asked the US branch of Lehman to return $8 billion that was swept back to New York from the bank's London office.
The UK administrators have admitted that the reason for this sweep remains uncertain and they are investigating the cash movement to ensure that there were no suspicious circumstances.
Many group companies have cash sweeps from subsidiaries back to parent entities. But if companies start to get distressed, cash sweeps are usually re-evaluated to establish whether they continue to be appropriate.
"There are lots of rumours at the moment about what the cash sweep was: whether it was a pure cash sweep, whether it was a pay down of company debt to a parent, or a swap under which illiquid assets were transferred to the subsidiary in return for cash. There are also Machiavellian press rumours that the cash was to sweeten a deal with Barclays," said the lawyer.
If the sweep back to New York was a payment of debt, the European branch's ability to get the money back would depend of whether the company was insolvent at the time the payment was made.
If however receivables were swapped for the cash, questions could be raised about the value of that receivable and investors could argue that they were defrauded.
24 September 2008
Source: Rachel Evans, IFLR
As the dust settles on the remains of Lehman Brothers, administrators are struggling to pick up the pieces. Rights and obligations regarding assets and trades are not clear; the documents did not anticipate an event of default.
"In all the documentary arrangements with banks, no one really thought about where attention was needed. These documents have not been stress tested through the fires of insolvency," said one lawyer close to the discussions.
Lehman corporate loan documents were structured in the abstract. Now that the event of default has happened, counterparties are worried about how to get their assets back, what happens to custodial accounts, and how trades will be settled. RAB Capital, for example, has already initiated legal action against the adminstrators regarding some of its securities that Lehman had in custody.
This issue of clarity is troubling the administrators on a number of fronts. Last week, PricewaterhouseCoopers asked the US branch of Lehman to return $8 billion that was swept back to New York from the bank's London office.
The UK administrators have admitted that the reason for this sweep remains uncertain and they are investigating the cash movement to ensure that there were no suspicious circumstances.
Many group companies have cash sweeps from subsidiaries back to parent entities. But if companies start to get distressed, cash sweeps are usually re-evaluated to establish whether they continue to be appropriate.
"There are lots of rumours at the moment about what the cash sweep was: whether it was a pure cash sweep, whether it was a pay down of company debt to a parent, or a swap under which illiquid assets were transferred to the subsidiary in return for cash. There are also Machiavellian press rumours that the cash was to sweeten a deal with Barclays," said the lawyer.
If the sweep back to New York was a payment of debt, the European branch's ability to get the money back would depend of whether the company was insolvent at the time the payment was made.
If however receivables were swapped for the cash, questions could be raised about the value of that receivable and investors could argue that they were defrauded.