Join        Login             Stock Quote

Will Disclosure In Lehman Bankruptcy Case Lead To Lawsuit Against Federal Reserve?

 October 02, 2009 01:05 PM

Reporters at the WSJ have uncovered something very intriguing while they were combing through the billing records of Jenner and Block, whose chairman, Anton Valukas is currently moonlighting as the examiner of the Lehman Bankruptcy Case. In J&B's August fee statement, the firm discloses information that as part of its estate recoupment process, it has been contemplating suing none other than the Federal Reserve.

During its final days Lehman was a revolving door for Fed cash coming in (and promptly leaving) as the situation demanded. Whether borrowing at the Fed's discount window against garbage collateral (no doubt consisting of worthless toxic commercial real estate - yet, we will never know: the Fed has just appealed the decision to disclose who/what/why got access to its processing of taxpayer bailout funding, which likely means that unless some Second Circuit/SCOTUS judge finds it deep in his/her soul that representing the American public is more important than siding with Wall Street as always, that information will never see the light of day), using the TAF program, or otherwise, Lehman ended up gobbling an ungodly amount of cash from the Fed which was subsequently imporperly yanked by the Chairman, instead of being used to satisfy pari passu creditor claims. According to the WSJ:

[Related -What Is Your Sell Criteria?]

[Related -Oversold Airline Ready For A Quick Rebound]

The New York Fed lent Lehman $46.2 billion in cash and Treasury securities for $50.6 billion in collateral, according to Federal Reserve affidavits filed in bankruptcy court. As a result of Lehman's sale to Barclays PLC following its bankruptcy, the New York Fed was later paid back in cash, with the Treasury securities returned. Lehman's broker-dealer also borrowed tens of billions of dollars from the Fed in the period from Sept. 11 through Sept. 15 last year.

This is all fine and great, however where the issue lies is whether there was an improper superposition of the Fed relative to all other creditors of the firm. If, in fact, the Fed recouped any money at a point after the bankruptcy process was initiated (and potentially even before the instant of filing), Jenner can file a preference claim against the Federal Reserve. The suit would, in theory imply that there was an action of "avoidance" by the Fed to be considered a preferred creditor without legal justification or reason.

It is obvious why the Fed would have wanted to avoid this: General Unsecured Claims and unsecured Notes issued by Lehman Brothers traded down from 90 cents on the dollar in the days prior to September 15 all the way to 10 cents on the dollar in the week following. Had the Fed's assets become commingled in the GUC pool, it would have seen a loss of nearly $40 billion of taxpayer money. However, the Fed's gain is other creditors' loss. 

Which is why the revelations observed going thru J&B's billing statement are quite stunning, as they highlight that while Valukas has as yet not started any actual legal proceedings, which would claim there was a preference action by the Fed impairing other Lehman creditors, it is surely contemplating such.

Zero Hedge presents below relevant sections from the May Billing Statement filed by Jenner & Block in bankruptcy court. We hope Congressmen Ron Paul and Alan Grayson notice these potential legal overtures and promptly contact Mr. Valukas' office to determine what the process of any legal action may currently be and why it hasn't been made public yet, especially if the Fed has been found in breach of preference.



10/4/2009 10:35:38 PM
Lehman by John Hess
We need Lehman back: why should the other companies be bailed out while England purchases Lehman at a deep discount?  Should we keep American companies American?  What ever happened to stopping the flood of outsourcing?
Rating: (2) (5)

Comments Closed

rss feed

Latest Stories

article imageOversold Airline Ready For A Quick Rebound

Trading countertrend moves can be profitable but risky, so it pays to line up as many factors as possible read on...

article imageWhat Is Your Sell Criteria?

Every stock market cycle has its darlings—the stocks investors believe can do no wrong.  I remember 1999 read on...

article imageUS Employment Growth Continued To Slow In April

Company payrolls increased by a lower-than-expected 171,000 last month, the US Labor Department reports–the read on...

article imageMake America Great Again

Our weekly commentaries provide Euro Pacific Capital's latest thinking on developments in the global read on...

Popular Articles

Daily Sector Scan
Partner Center

Related Articles:

US Employment Growth Continued To Slow In April
More Articles on: Finance

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.