Lehman Had $1.2 Billion Loss After a Bankruptcy Fire SaleLehman Brothers had over $1.2 billion in losses in the days following its epic bankruptcy, after the nation's largest commodities exchange ordered the sale of Lehman's trading positions to a select group of firms.
It is the first and only time the CME Group [CME 319.47 9.27 (+2.99%) ] has conducted a forced liquidation of a member firm's positions, and left Lehman creditors with little to show for the valuable contracts.
The revelations come in newly unsealed passages of a report filed earlier this year by court-appointed bankruptcy examiner Anton Valukas, seeking to identify potential claims for Lehman's creditors. The CME Group operates the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Mercantile Exchange.
Valukas concluded the CME Group acted properly in ordering the sale in its role as a self-regulatory organization. Nonetheless, the exchange wanted details of the sale kept secret to protect the identities of the bidders. United States Bankruptcy Judge James Peck denied the motion Wednesday, and details of the sale were revealed.
Lehman filed for bankruptcy on September 15, 2008, but the CME began preparation days earlier to force the liquidation of Lehman's $2 billion in proprietary trading positions. Officials decided the size and complexity of Lehman's positions made it imprudent to simply sell them in the open market, Valukas writes.
Click Below to See the Full Examiner's Report:
Instead, the CME hand picked six firms to bid on the positions: Barclays[CME 319.47 9.27 (+2.99%) ] , Goldman Sachs [GS 184.92 5.67 (+3.16%) ] , Citadel L.P., JPMorgan [JPM 47.73 1.86 (+4.05%) ] , DRW Trading and Morgan Stanley [MS 31.14 0.66 (+2.17%) ] , which ultimately dropped out of the bidding. The auction ultimately took place on September 18, 2008, three days after Lehman Brothers Holdings filed for bankruptcy. According to Valukas, the firms did very well.
"The bulk sale process ... resulted in a substantial loss to (Lehman) exceeding $1.2 billion over the close-of-business liabilities associated with the positions," Valukas writes. The CME still holds about $150 million in Lehman margin deposits, the report notes.
While Lehman creditors could try to sue the CME over the fire sale, Valukas concludes they probably would not succeed because the exchange's role as a self-regulatory organization gives it "absolute immunity."
"CME was acting in its regulatory, not private, capacity when it ordered the liquidation," Valukas writes. "Whether the CME's decision was a wise one is irrelevant," he notes, since it is the nature of a self-regulator's acts—not their wisdom or legality—that determines if it is immune from a lawsuit.
Creditors could pursue claims against the individual firms, Valukas notes, but with little precedent on the subject, Valukas offers no conclusion as to whether they would have a case.
The report also said that Lehman Brothers was insolvent well before its September 2008 bankruptcy filing. It said that Lehman had unreasonably little capital to conduct business in June of 2008.
And the report said six Lehman affiliates were insolvent or borderline as early as May 31, 2008. Lehman's commercial paper arm was insolvent as early as February 2008 and that Lehman used Repo 105 transactions to hide over leverage, the report goes on to say.
Pages of the report were unsealed in bankruptcy court Wednesday after a US judge said the court-appointed examiner of Lehman Brothers
At a hearing in U.S. bankruptcy court in Manhattan, Judge James Peck overruled an objection from CME Group
4. ISEE close at 78 yesterday is almost a guarantee for a stronger market the next day as we returned to a real ( yesterday was insane) value today with 166 the highest reading in months.
|Date Published||Percent Bullish||Percent Bearish|