In the glory days before its collapse in September 2008, Lehman Brothers Holdings was the fourth-largest investment bank in the nation, headquartered in its own 32-story skyscraper on Manhattan’s Seventh Avenue with a block-long electronic billboard that flashed a promotional video night and day. Today the offices of Lehman Brothers are tucked away on two floors in the Time & Life Building, half a block away, where about 430 workers labor to unwind derivatives trades and sell illiquid assets that helped bring the firm down.
While Lehman Brothers’ bankruptcy filing—the largest ever in the U.S.—froze credit markets and plunged the economy into the deepest slump since the Great Depression, it didn’t kill the company. Having emerged from bankruptcy in March, the 162-year-old firm now lives with one goal: generating as much money as possible to pay off former clients, creditors, and trading partners, ranging from Goldman Sachs Group (GS) and the Abu Dhabi Investment Authority to the New York Giants. Coming out of bankruptcy “can be the starting point for a somewhat extended period during which the assets will be liquidated and distributions made,” says Weil Gotshal & Manges partner Harvey Miller, who has been Lehman’s lead lawyer since the bankruptcy. “It is often hard work.”
On April 17, Lehman made its first payment to creditors, $22.5 billion, which was 53 percent more than the company had said was likely in previous regulatory filings. Lehman has more than $21 billion in cash on hand now, though not all of it is available for the next payment, due in September. Facing claims of $300 billion, the company estimates it will end up giving creditors $53 billion, or 18¢ on the dollar, over the course of the next six years.
Creditors could do better than that—especially if the housing market continues to improve. As of Dec. 31, Lehman had $7.7 billion of real estate on its books. One promising asset is Archstone, which owns and develops apartment buildings in large cities across the country. By May, Lehman had agreed to pay $3 billion to acquire the 53 percent of Archstone it didn’t own. It has said it plans to sell the company or take it public. Half a dozen other Lehman properties, including On the Avenue, a Manhattan boutique hotel, and Miami Beach condos, are on the block or have been sold.
Among the most valuable of Lehman’s $6.3 billion in private equity investments is its 15 percent stake in auto racing company Formula One. Based on recent trades, the holding is worth about $1.4 billion. Formula One’s planned initial public offering may not happen until later this year, Chief Executive Officer Bernie Ecclestone said after Facebook’s (FB) IPO stumbled. Perhaps the most unusual asset disposed of so far: 450,000 pounds of yellowcake uranium, acquired as part of a commodities contract. Lehman sold the yellowcake at prices ranging from $51 to $65 a pound through broker ICAP.
Lehman’s employees are working their way through several thousand other assets, including loans and public securities, while seeking to reduce claims on the company by negotiating with creditors and challenging them in court. After putting in a claim for $4.5 billion, Canary Wharf, Lehman’s landlord in London, agreed to reduce that figure to $780 million.
The employees toil in offices Lehman rented pre-bankruptcy to accommodate a growing staff. About half are holdovers from Lehman; 72 come from restructuring firm Alvarez & Marsal, whose co-founder Bryan Marsal managed the investment bank while it was in bankruptcy. Alvarez & Marsal has earned more than $500 million for its work on Lehman since 2008, according to court papers, and has requested an additional $30 million.
John Suckow, an Alvarez & Marsal executive, serves as Lehman’s president. He is guided by an “active board” of seven, according to a regulatory filing. Board Chairman Owen Thomas was Morgan Stanley Asia’s CEO from 2008 to 2011. Suckow and Thomas declined to comment. The directors have an incentive to maximize distributions. If they raise $10 billion more than the $53 billion target, they share a bonus equal to 17 basis points (hundredths of a percentage point) of the extra money, and 44 basis points for the next $5 billion, according to a regulatory filing.
After its 2001 bankruptcy, energy trader Enron used lawsuits to recover money. Lehman’s efforts to raise money through lawsuits have had mixed success. The company lost a suit against Barclays (BCS), which it accused of unfairly earning a windfall when the London-based bank bought Lehman’s bankrupt North American business. In April, a judge narrowed Lehman’s claims in an $8.6 billion suit against JPMorgan Chase (JPM) that is still active.
One difference between Enron and Lehman is that no former Lehman top executives, including CEO Richard Fuld, have been charged with any criminal behavior. The bank operated within accounting rules allowed at the time, according to its auditor, Ernst & Young. “Usually you get more money out of people who allegedly aided real crooks than from people with bad business judgment,” says bankruptcy lawyer Chip Bowles of Bingham Greenebaum Doll in Louisville. “In Lehman’s case, executives skated within the law.”