Lehman Settlement Frees Cash for Creditors
Collapsed Investment Bank to Make $767 Million Payment to Freddie Mac
By
Joseph Checkler
Updated Feb. 19, 2014 9:56 p.m. ET
NEW YORK—Creditors of Lehman Brothers Holdings Inc. will receive hundreds of millions of dollars from the estate of the bankrupt firm following a settlement with Federal Home Loan Mortgage Corp. FMCC +13.23%
On Wednesday, a bankruptcy judge approved a $767 million payout from Lehman to settle Freddie Mac's claims over two loans the mortgage giant made to Lehman before the investment bank's 2008 collapse.
Lehman creditors already have received $60 billion out of the more than $70 billion Lehman's estate hopes to return, and more is expected in the near future.
The deal, approved by Judge Shelley C. Chapman of U.S. Bankruptcy Court in Manhattan, is structured similarly in some ways to a recently approved settlement between Lehman and Fannie Mae, FNMA +10.63% which will receive about $540 million for its claim based on the latest calculations. Freddie and Fannie will hand over loan information that will allow Lehman to pursue claims against mortgage originators for alleged misrepresentations. Lehman's lawyers said those claims can be substantial.
The previous judge in Lehman's bankruptcy case, James Peck, had ordered Lehman to set aside $5 billion for the Fannie and Freddie claims when he approved a liquidation plan in late 2011. Because those settlements were for far less than what was set aside, other creditors should get more back.
Another distribution is set for next month, and the payouts should continue into 2015 and beyond. The unwinding estate's chief general counsel, Matthew Cantor, on Wednesday told Judge Chapman Lehman still has $12.8 billion set aside in an account to pay claims that still haven't been resolved, and as those claims are sorted out, more money will be returned.
For other creditors, many of which are the hedge funds and other investment firms that bought claims cheaply in the months and years after Lehman's collapse, the approval means bigger recoveries, possibly soon.
Wednesday's hearing marked the first major Lehman decision by Judge Chapman, who took over for Mr. Peck after he retired from the bench last month.
"These are big shoes to fill," Judge Chapman said Wednesday.
Mr. Peck, 68 years old, is joining Morrison & Foerster LLP in March as co-head of the global business-restructuring and insolvency group.
Lehman, led by Chairman and Chief Executive Richard Fuld, collapsed into the largest bankruptcy ever in September 2008, a breaking point that accelerated the financial crisis. Those in charge of the holding company and its brokerage have sorted out tens of thousands of claims, hundreds of disagreements and the concerns of dozens of classes of creditors.
Lehman broke itself up into 23 subsidiaries for the purpose of its bankruptcy case, and divvied its creditors up based on which Lehman entities owed them money.
For instance, creditors of the Lehman Brothers Specialty Finance unit now are getting paid more than 55 cents on the dollar for their claims, while general unsecured creditors of Lehman's parent company are getting far less.
Lehman's estate has been very successful in recovering money to pay back the creditors, causing the expected recoveries to rise with each distribution.
Ever since Mr. Peck approved Lehman's distribution plan in December 2011, the failed bank called an initial $65 billion estimate a low-ball number. By August 2012, it increased the estimate to $67.5 billion but warned it still had key settlements to reach.
However, after reaching a landmark three-way deal with the trustee unwinding its U.S. brokerage and a U.K. affiliate, it became less conservative with its estimates and creditor recoveries increased.
Individual customers of the U.S. brokerage, which was unwound separately from the Lehman parent, received all $92.3 billion they were owed almost immediately after Lehman's bankruptcy. The bulk of the Lehman customer accounts, with assets of more than $40 billion, have been transferred to Barclays BARC.LN +0.30% PLC.
Other customers of the brokerage—mostly hedge funds and big banks—had to wait as trustee James W. Giddens sorted out claims issues both in the U.S. and overseas. However, those customers started receiving their money last year.
The case won't disappear from bankruptcy court quickly, though. Lehman has a new board of directors and $9.3 billion in assets—apart from its claims reserve and excluding money related to foreign affiliates and litigation reserves to manage and sell, Mr. Cantor said Wednesday. Those assets are mostly related to private equity. A large chunk of Lehman's real-estate assets have been sold.
Lehman, once the nation's fourth-largest investment bank, officially emerged from Chapter 11 protection in March 2012. But because of those remaining assets, and the claims it still has to sort out, the bank is expected to exist in some form for years to come.
Corrections & Amplifications
Lehman Brothers' $9.3 billion in remaining assets excludes money related to foreign affiliates and litigation reserves. The company has sold a large chunk, not "most," of its real-estate assets. A previous version of this article on said litigation reserves were included in the $9.3 billion figure and that the bank has sold most of its real-estate assets.