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Financial Crisis Update
Gary F. Eisenberg
Stephen B. Selbst
Patrick D. Sweeney
TAGLaw Fall Conference
October 19-21, 2008
New York, New York
Lehman Brothers Holding, Inc. Chapter 11
• Biggest chapter 11 case ever filed: $639 billion in assets and $613 billion in liabilities
• 2001 Enron case: $49.8 billion in assets and $31.2 billion of liabilities
• Lehman succumbed to a liquidity squeeze– In the week before chapter 11 filing, JP Morgan Chase
demanded $10 billion in collateral – Lehman scrambled for a buyer/investor, but there was no
interest without a US government guarantee– When the US government refused to provide financial
support for a sale/investment, Lehman forced to file for chapter 11
Sale of Lehman’s Businesses
• Lehman is going to be the largest garage sale in history
• Some Lehman businesses have been sold quickly:
– Barclays bought most of the US Lehman investment banking and trading business for $1.35 billion, including a midtown office building valued at $960 million
– Neuberger/Berman investment management business to be sold to Bain Capital and Hellman & Friedman LLC for $2.15 billion
– Nomura bought European and Asian business; sale price for Asia was $225 million; European price not disclosed
Lehman Chapter 11 Presents Complex Problems
• Only holding company filed chapter 11 on 9/15– Broker-dealer now in SIPA liquidation – Numerous subsidiaries have now sought
bankruptcy protection• Management gone: now down to 180 pre-bankruptcy
employees• Lehman being run by crisis managers• Lehman exiting from role as agent on syndicated loans• Lehman exiting from role as agent on commercial paper
programs• Lehman CDS trades settled at $0.92 recently
Resolving the Claims
• With the core businesses sold, focus will shift to selling remaining assets and resolving claims
– Process likely to be slow: UK administrator Pricewaterhouse Coopers has predicted that London wind-down will take 10 years
– Enron took three years to propose a chapter 11 plan• US litigation already beginning to develop
– Creditors pushing for bankruptcy investigation– 3 US attorney probes announced to date– Adequacy of public disclosure of Lehman risks likely to be
investigated
Collateral Performance: Delinquencies
© Moody’s Investors Service, Inc. and/or its affiliates. Reprinted with permission. All Rights Reserved.
Collateral Performance: Losses
© Moody’s Investors Service, Inc. and/or its affiliates. Reprinted with permission. All Rights Reserved.
Collateral Performance: Delinquencies
© Moody’s Investors Service, Inc. and/or its affiliates. Reprinted with permission. All Rights Reserved.
Collateral Performance: Losses
© Moody’s Investors Service, Inc. and/or its affiliates. Reprinted with permission. All Rights Reserved.
Pre-“Bailout” Legislative Enactments
• New Federal Housing Finance Agency with Broad Powers
• Receivership Powers Over Fannie Mae, Freddie Mac, Federal Home Loan Banks and the Office of Finance
• Housing Trust Fund - Unfunded
• HOPE for Homeowners - $300 Billion GNMA Insurance
• Foreclosed Home Purchase Fund - $4 Billion
• Servicer Fiduciary Requirements
• Nationwide Licensing of Loan Originators
Housing and Economic Recovery Act of 2008
Pre-“Bailout” Legislative Enactments (cont.)
• High-cost loans
• New subprime definition
• Non-traditional home loan
• Foreclosure restrictions and procedures on High-Cost Home Loans, Subprime Loans and Non-Traditional Home Loans
• New restrictions on terms of high-cost home loan terms
• New restrictions on terms of subprime mortgage loan terms
• New restrictions for licensing, for mortgage brokers and for servicers - fiduciary to borrowers
New York Legislation
Bailout Legislation
• Secretary may “purchase, and to make and fund commitments to purchase, troubled assets for many financial institution, on such terms and conditions as are determined by the Secretary.”
• “Financial institutions” and “troubled assets” broadly defined
• Major recent implementation steps:1. Direct infusions of equity into financial institutions
2. Direct purchases of commercial paper by the Federal Reserve
3. FDIC to back all newly issued senior unsecured debt and non-interest bearing deposit accounts at FDIC insured institutions
Bailout Legislation (cont.)
• Internal inconsistencies in legislative mandates
• Maximize assistance for homeowners and encourage lenders to participate in “voluntary” HOPE for Homeowners Program under HERA
• Hold assets to maturity or for resale until market is optimal, to maximize value for taxpayers and return on investment for federal government
Bailout Legislation (cont.)
• Direct purchases from specific institutions are permitted as long as Secretary pursues “additional measures to ensure that prices paid for assets are reasonable and reflect the underlying value of the asset.”
• Within 2 days of purchase, report transactions in electronic form.
• Purchase amount limits:
1. upon enactment of the Act, $250 billion;
2. upon Presidential certification to Congress, authority increases to $350 billion;
3. upon transmission of Presidential report, limit increases to $700 billion, unless the plan is vetoed by joint resolution
TARP – Troubled Assets Relief Program
In addition to insolvency counsel, our clients will need:
• Litigation counsel to recover losses caused by fraud
• White Collar defense counsel to defend executives of financial institutions
• Deal counsel for transfer of financial assets and asset-backed securities
• Executive compensation counsel for restructuring of compensation plans
• Corporate counsel for overhaul of corporate governance structures
• Insurance counsel for participation in default insurance program
• Regulatory counsel to advise on new financial markets regulation
• Securities counsel for preferred stock and warrant deals with government
• Capital Markets counsel for unwinding of structured credit and derivative investments
or Time for All Attorneys to be Recasting their Practices
Financial Crisis Update
Gary F. Eisenberg
Stephen B. Selbst
Patrick D. Sweeney
www.herrick.com
TAGLaw 2008 Fall Conference
