3 years on, Lehman on path to exit bankruptcy

Carl Felsenfeld in Reuters, September 14, 2011

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Three years after its collapse, Lehman Brothers (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) is still stuck in bankruptcy court -- but three years is not as long as it sounds, says the failed investment bank's lead bankruptcy lawyer.

"For the largest bankruptcy case in the world? Three years is not a particularly long period," attorney Harvey Miller said in an interview with Reuters.

Lehman filed for bankruptcy with $639 billion in assets three years ago on Thursday. Its Chapter 11 drama may soon be drawing to a close. The company received court permission on Aug. 30 to let creditors vote on its $65 billion payback plan, and it hopes to get the plan approved by a Manhattan federal bankruptcy court in December.

That could allow it to exit bankruptcy and begin making payouts to creditors in early 2012. For all the fears of a long court process, that would be relatively quick by historical standards, said Villanova University School of Law Professor Robert Miller.

"People at the time were thinking this was going to be a nightmare," said Prof. Miller, no relation to Harvey Miller. "A three-year bankruptcy is not a nightmare."

Bankruptcies have moved more quickly since legislative changes in 2005. The reforms were prompted by claims that companies such as Eastern Air Lines Inc and retailer Caldor Corp were using Chapter 11 to spend years tinkering with business plans.

One of the longest, the 10-year case of satellite company Iridium LLC, has ties to Lehman: both were overseen by Judge James Peck.

Other lengthy bankruptcy stints include Manville Corp, the roofing and insulation firm whose 1982 bankruptcy lasted more than five years, and Delta Air Lines Inc, which earlier this year wrapped up a nearly six-year bankruptcy after merging with Northwest Airlines.

Harvey Miller, of law firm Weil Gotshal & Manges, said the final obstacle will be getting the votes from creditors needed to approve its payout plan.

"Complex cases take a long time, even though the world has sped up," he said.

Lehman proposed the plan in June, touting it as a compromise with divided groups of creditors competing for bigger payouts from the Lehman estate. It has garnered support from some of the largest creditors, including a bondholder group led by hedge fund Paulson & Co and derivatives creditors that include Goldman Sachs Group Inc. (GS.N: Quote, Profile, Research, Stock Buzz)

The biggest hurdle, Miller said, is an objection by Lehman's European affiliate over whether its $8.9 billion claim can be treated as a customer claim. If so, it would receive higher payback priority and would be more likely to be repaid in full, but at the expense of other claims.

"There are negotiations going on in London right now, trying to resolve that," Miller told Reuters Tuesday evening.

Once its plan wins court approval, Lehman will have to meet certain conditions under the U.S. Bankruptcy Code to begin making payouts. In addition to the Paulson and Goldman groups, which hold a combined $100 billion in claims against Lehman, the company has secured support from Asian affiliates holding $20 billion in claims.

WHAT HAVE WE LEARNED?

Before Lehman, the biggest bankruptcy on record was WorldCom Inc, which filed in 2002 with $103.9 billion in assets. But the recession touched off the Lehman and Washington Mutual Inc (WAMUQ.PK: Quote, Profile, Research, Stock Buzz) bankruptcies, which were far bigger than WorldCom.

Harvey Miller was there when Lehman collapsed in bankruptcy on Sept. 15, 2008, and when it sold its North American business to Barclays Plc (BARC.L: Quote, Profile, Research, Stock Buzz) -- a deal he said salvaged considerable value, but at a cost.

"Ten thousand employees went to Barclays, and the IP systems were shut down," he said. "You really could not get information. It was chaos."

But if Lehman has lessons to teach, Harvey Miller is not convinced the world is ready to learn them. The regulatory overhaul that has come out of Lehman pales in comparison to the one that followed the Great Depression, he said.

He acknowledges the sweeping nature of the Dodd-Frank financial oversight law, which arose from the 2008 financial crisis. But some of the law's provisions are stuck in the discussion phase, he said, while others do not do enough to solve "the problem of too-big-to-fail."

Carl Felsenfeld, a professor at Fordham University School of Law, agreed that Dodd-Frank does not address the problems that related to Lehman's downfall, but said he does not believe any regulatory framework on its own ever could.

"Remember, Lehman didn't have to happen -- it was a regulatory decision not to bail them out," he said.

Most major financial institutions to survive the recession are bigger and more global than they were three years ago, and the financial community's lobbying efforts "are better than they've ever been," Miller said.

Serious overhaul, he said, means giving regulators the power to force companies to retract if they get too big.