Revealed: Who Profited From Lehman's Fall

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Despite the opposition of exchange operator CME Group (Nasdaq: CME  ) , a judge allowed the release of previously unpublished parts of the report by Lehman Brothers' bankruptcy examiner yesterday (the same report that revealed why Warren Buffett walked away from Lehman). At stake: the identity of the buyers of Lehman's CME-listed derivatives positions and information concerning additional collateral transfers Lehman made to the buyers.

The firesale: 3 winners, 1 loser
These transfers -- which were to compensate buyers against the risk of further loss on the positions -- added up to a $1.2 billion loss for Lehman:


Bought Out Lehman Positions in Following Derivatives Markets

Loss to Lehman

Goldman Sachs (NYSE: GS  )

Natural Gas, Equity Derivatives

$590 million

Barclays (NYSE: BCS  )


$335 million

DRW [Proprietary trading firm, private]

Foreign Exchange, Interest Rates, Agricultural

$303 million


Total Loss

$1.2 billion

Source: Lehman Brothers Holdings, Inc. Chapter 11 Proceedings Examiner's Report.

Although the author of the examiner's report, Anton Valukas, suggests that, "an argument can be made" that the transfer payments were effectively "fraudulent," he ultimately concluded that lawsuits against the firms that purchased Lehman's positions are unlikely to succeed. (Separately, the Lehman estate is already pursuing a lawsuit against Barclays, claiming it was the improper beneficiary of a $5 billion windfall on its purchase of Lehman's North American businesses.)

No harm done from transparency
CME Group resisted the release of this information on the grounds that it could have "a chilling effect on potential bidders' willingness to participate in any similar auctions." I don't think this argument carries much weight, particularly if Valukas' assessment of the buyers' legal risk is accurate. Even if it were true, the release of this information serves the public good at a time when the public trust in financial institutions has fallen to an abysmal low.

You're not on the hook this time!
Finally, this episode is a useful reminder that it is Lehman's creditors -- not taxpayers -- that are on the hook for the losses in this privately run auction. Goldman, Barclays, and DRW received no government backstops on the derivatives positions they purchased (hence the demands for a top-up in collateral) -- unlike JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) , who received taxpayer-backed guarantees on an aggregate $147 billion in troubled assets in the context of their acquisitions of Bear Stearns and Merrill Lynch, respectively.

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Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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  • Report this Comment On April 15, 2010, at 6:52 PM, JaneBond wrote:

    Finally, this episode is a useful reminder that it is Lehman's <b>creditors</b> -- not taxpayers -- that are on the hook for the losses in this privately run auction


    You don't see something wrong with this picture, when the ones who benefited to bailout money?

  • Report this Comment On April 15, 2010, at 11:37 PM, TMFAleph1 wrote:


    Thanks for your comment.

    First, of the three firms that purchased Lehman's listed derivatives positions, only Goldman Sachs was a recipient of government assistance.

    Also, the point you're making is distinct from the one I'm making in the final paragraph.


    Alex Dumortier

  • Report this Comment On April 16, 2010, at 6:08 AM, JaneBond wrote:


    They may not have received government backup for the bonds they did buy WITH BAILOUT MONEY, but they did receive bailout money with which to buy them.

    That is the same thing, as if the government gave me free money to go buy a house that has liens against it, not pay any of the vendors who had liens against it, flip it to make a profit, or show it on my books as an unencumbered asset (because the bankruptcy courts give me a license to legally do this), while at the same time stiffing the original lien holders.

    I think it is pretty sick. It's akin to Jessie James robbing Bonnie and Clyde, Jessie deposits the money in the bank he formally stuck up, and those who had money in the bank Bonnie and Clyde robbed can just cry a river.

    I'd say we have some pretty sophistcated bank robbers on our hands, but instead of using guns, they used the government and our courts to help them do it.

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