The skeleton of Lehman walks on indefinitely

The sign may be gone, but Lehman lives on.
The sign may be gone, but Lehman lives on.
Image: Reuters/Joshua Lott
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Five years after it filed for bankruptcy on September 15, 2008, Lehman Brothers still employs about 300 people, according to the company. Most of them toil on the 39th and 40th floors of the Time & Life Building in Manhattan, and their job is to wind down the failed bank’s remaining assets, liquidate its portfolio, and litigate ongoing legal disputes. Though the staff has shrunk from some 340 a year ago, the company isn’t likely to shut its doors for several years more.

The legal claims against Lehman are far from over, and it’s not clear exactly how much money the bank’s creditors will ultimately receive. So far, the Lehman estate has doled out three disbursements of cash totaling $47.2 billion, and estimates that it will collect another $33.6 billion by liquidating remaining assets. The next installment—size still to be announced—will go out on October 3.

But many of the legal cases are actually pressed by Lehman against other firms, which it believes have wrongfully hung onto its pre-crisis cash. Just last week it filed a new claim against Tokyo Gas Co, according to court documentsAny cash it gets would help Lehman pay back its remaining creditors, increasing the approximately 18-26 cents they’ll ultimately receive on every dollar they had lent the company.

According to Lehman Brothers Holdings’ cash flow estimates, the bulk of its assets will be sold off by December 31, 2014. However, that does not necessarily include some $16.9 billion from what it calls “non-controlled affiliates,” foreign arms of the company that are being wound down separately under the oversight of foreign regulators. Only $0.5 billion in claims against these affiliates had been recovered as of March 31. Although these claims could be resolved quickly, they might not be, continuing the drawn-out process of dissolving the firm.

The intricacies of Lehman’s continuing financial holdings and legal disputes are one reason why the US government is so adamant that banks write “living wills,” which would offer details on how a firm could be wound down in case of a bankruptcy. It’s in everyone’s best interest, sources close to regulators say, to prevent the kind of legal and financial disarray that has kept Lehman alive.

“The whole point [of living wills] is pre-planning and making the process simpler, easier, and less expensive—and coming up with a process that doesn’t impact financial stability,” explains Margaret Tahyar, a partner in the financial institutions group at Davis Polk, and Wardwell LLP.

In 2011, the Federal Deposit Insurance Corporation, which among other things manages failed banks, went even further (pdf), insisting that had Lehman been wound down faster, creditors could have gotten back as much as 90 cents on the dollar (though one expert we spoke with scoffed, saying that figure was far too high).

“It’s never going to be simple and its never going to be overnight,” admits Tahyar. “But just the fact that there’s been the experience of Lehman should make the next process quicker and easier.”