Lehman wind-up may be 'far more complicated' than thought

Tony Lomas, partner at administrator PricewaterhouseCoopers (PwC), has worked on all the key financial collapses of recent times, from Enron and BCCI bank to MG Rover, but none have come close to the scale and complexity of Lehman Brothers.

When he first took on the job as lead administrator for the failed bank in the UK, Mr Lomas described the task as being “10 times as large and more complicated” than the bankruptcy of Enron.

A year later and that view has not changed – if anything, he said the process is even more difficult than it first appeared in the dark days of last year’s financial crisis.

“It’s every bit as bad as we thought it would be,” he said. “Our fears as to the complexity of the issues and the quantum of work that would be required to get to the position of handing assets back and paying dividends to creditors - they were all proven right. Indeed it may well have proven far more complicated than I imagined.”

Around 2,000 people worldwide are working on the Lehman administration, with more than 200 from PwC. The UK team has also retained around 400 Lehman staff to help, with back office staff and traders among those helping with the wind down.

PwC has already recovered a mammoth $9bn (€6.2bn) in cash. “Not a bad start,” said Mr Lomas. But he said there were “many billions of dollars of additional recoveries” yet to make.

The process has been made vastly complicated by the structure of Lehman, with its many global subsidiaries meaning multiple administrators working in different countries, all with various insolvency rules.

There were also some 2.5 million so-called hung trades left frozen when it collapsed, some of which are in favour of Lehman and some not – all of which need to be reconciled with each of the 6,000 counterparties involved.

However, PwC’s job has been made even harder by the fact that just days before the decision to file for bankruptcy protection on September 15 last year, the American parent transferred a reported $8bn (€5.5bn) to cash from the London accounts.

The bankruptcy saw the US arm immediately cut ties with its subsidiaries, which left them to line-up with the rest of the creditors in the queue for cash owed.

It has been argued that the European operations, which were headed out of the bank’s Canary Wharf offices in London, were left hung out to dry.

Global operations around the world now have to make claims on the US parent, with a looming deadline of September 22.

PwC has estimated the UK claims alone could top $100bn (€68.8bn), submitted on behalf of more than 100 units that fell under London’s remit.

The claims largely relate to past guarantees that the former bank pledged to its global subsidiaries, according to Mr Lomas.

PwC said it was hoping to agree a standard approach to the “reconciliation of inter-company balances” with administrators worldwide. “If this can be achieved then it should reduce the likelihood of affiliates suing each other in pursuit of amounts that are owed,” said PwC in a sombre warning that the process has the potential to get nasty.

The UK wind up has already suffered a major set back with a court ruling against a single scheme of arrangement put forward by PwC for paying counterparties, which was designed to help speed up the process.

The decision will be appealed but it now means the PwC team are unlikely to break the back of their work for at least a year, he said. The total time of the administration could well run for a decade, he believes.

While not easy work, it is certainly highly lucrative for PwC and other advisers involved around the world. Mr Lomas said the US arm has already run up a bill of more than $300m (€206m), with the UK fees “in a similar order”.

PwC’s annual figures for the year to June 30 revealed record net fee income of £2.25bn (€2.6bn) in the UK – £100m (€114m) of which came from the Lehman work alone.

Administration expenses include, not least, ensuring the 400 Lehman staff retained are on market competitive rates and bonuses. Given that some are high-earning traders, this could mean significant handouts.

Mr Lomas said the scale of fees pale in comparison to the hit to Lehman’s assets from the stock market meltdown last October, which has had a far more devastating impact on money available for creditors.

Yet there is a “daunting” amount of work to be completed before the final pot can even be calculated, according to Mr Lomas.

He believes a better outcome for all involved – including the wider global economy and stock market – would have been to attempt a government-backed rescue where the “bad bank” and its assets were hived off to allow a sale of the desirable parts, akin to the Bradford & Bingley deal on these shores.

An orderly wind-up of the bad bank could then have been led without having to freeze assets and leave trades hanging.