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Lehman’s Marsal Pushed by Paulson Group to Get Busy or Get Out

Bryan Marsal
A month after a group including New York-based Paulson and the California Public Employees’ Retirement System filed a rival proposal intended to pay everyone faster, Lehman Chief Executive Officer Bryan Marsal published a revised plan and said he’d sell “important” real estate in 12 months. Source: Alvarez & Marsal via Bloomberg

Paulson & Co., the hedge fund that forced Lehman Brothers Holdings Inc. to sweeten payouts for senior bondholders, helped galvanize the bankrupt company into action after its managers and advisers pocketed more than $1.1 billion in fees in 28 months of bankruptcy.

A month after a group including New York-based Paulson and the California Public Employees’ Retirement System filed a rival proposal intended to pay everyone faster, Lehman Chief Executive Officer Bryan Marsal published a revised plan and said he’d sell “important” real estate in 12 months. He aims to raise $61 billion to pay $322 billion in claims, or an average of 18.6 cents on the dollar, he said this month.

“Paulson’s pressure caused Marsal to push the case forward,” said Mark Williams, a Boston University lecturer who wrote “Uncontrolled Risk,” a book on Lehman. “To the average creditor, it must have appeared that this was a personal piggy bank for Lehman bankruptcy managers” as the case dragged on, he said.

Paulson and other senior bondholders are offered 21.4 cents on the dollar in Lehman’s amended plan, filed Jan. 25 in U.S. Bankruptcy Court in Manhattan. Their payout will fall to about 17 cents on the dollar if they oppose Lehman’s new plan, according to the 450-page filing.

Lehman has “a ‘hope’ plan which is based upon the hope that creditors accept what the debtors propose,”” Christopher Shore, a lawyer for the Paulson-Calpers group, told a bankruptcy judge this month. “Very little, if any, real progress has been made towards exit” from bankruptcy, he said.

Ouster Possible

The Paulson-Calpers group, which includes Pacific Investment Management Co., got some, though not all, of what it wanted. Its rival plan would pay more to bondholders, and let creditors choose a new board of directors for Lehman that could lead to the ouster of Marsal and other existing managers.

Some $37 billion in relatively illiquid assets will be on the block, Marsal said in court on Jan. 13. Real estate accounts for about $12.1 billion in potential recoveries; derivative contracts could fetch $6 billion, and money management firm Neuberger Berman, which is 48 percent owned by Lehman, could bring as much as $2 billion in a sale, according to the new plan documents.

Marsal would be speeding up asset sales as real estate values start to pick up. U.S. commercial property prices rose for the third consecutive month in November, Moody’s Investors Service said on Jan. 24. Its real estate index is 42 percent below its October 2007 peak.

Greater Opportunity

“The pace of asset sales is related only to our strategy to maximize returns and do so in an expeditious fashion,” said Lehman spokeswoman Kimberly Macleod in an e-mail. “Since the market has improved significantly, there will be a greater opportunity to achieve the result we want in the coming months than has been the case previously. That is what is driving our time table.”

Marsal outlined his first liquidation plan for Lehman in March and April 2010. After objecting that the plan would spur litigation by creditors, the Paulson-Calpers group filed its rival proposal in December. Lehman’s official creditors’ committee supports the current plan, Lehman says.

Lehman has been preparing for asset sales by renovating buildings including the International Toy Center at 200 Fifth Avenue in Manhattan. An office building on East Main Street in Stamford, Connecticut, will be revamped, Lehman has said.

Big Seller

Still, potential buyers may drop their bids now that Marsal has said he’ll be a big seller in the next year, said Williams.

“It’s probably not a good move to put a time frame on selling assets,” he said. “Let’s hope the economy cooperates.”

Marsal’s first challenge will be putting his plan up for a vote by creditors, and getting final approval before the end of the year, as Lehman has said it aims to do.

The Paulson-Calpers group’s rival payment plan allocated 24.5 cents to bondholders and cut derivatives creditors’ payout to 25.7 cents, from what the group calculated as 38.8 cents under Marsal’s first plan, which gave them a right to get paid twice.

Big banks such as Goldman Sachs Group Inc., Morgan Stanley, Credit Suisse Group AG, Deutsche Bank AG and Bank of America Corp. filed derivatives claims against the Lehman Brothers Special Financing unit, according to court filings.

Marsal “is facing a huge challenge,” said Stephen Lubben, a bankruptcy professor at Seton Hall University School of Law in Newark, New Jersey.


“He’s got to get these Paulson people on board but he’s got to do it in a way that doesn’t alienate some other creditor group, so it’s a bit like whack-a-mole,” Lubben said, referring to the game where new obstacles keep popping up.

Marsal does have a stick to beat dissidents. The new plan would take away bondholders’ extra money if they oppose it; derivatives creditors might lose their second payment if they don’t go along.

The negotiations will be “complicated” and may delay final approval of Lehman’s plan till 2012 or longer, if Paulson keeps up its opposition, said Lubben, who posts analyses of the Lehman bankruptcy on a blog, Credit Slips.

Lehman, once the fourth-largest investment bank, listed real estate assets of $23 billion the day before its Sept. 15, 2008, bankruptcy, the largest in U.S. history. Its properties had a market value of about $14 billion nine months later, Lehman said in court papers.

Illiquid Assets

Marsal won approval from Lehman creditors last year to manage illiquid assets for as long as five years, investing in them with the hope of recovering some of their value if prices rose.

A unit called Lamco, staffed partly by employees of Marsal’s restructuring firm, Alvarez & Marsal, was set up to run the defunct investment bank’s real estate, private equity and other assets, also soliciting outside business.

Goldman, Morgan Stanley, Credit Suisse and other derivatives creditors objected to the Lamco scheme in April, calling it “a reorganization plan for debtors’ employees and management separate, apart and ahead of the reorganization plan for creditors.” They dropped their objection after Marsal said they would eventually have a stake in Lamco.

Now Marsal is revisiting parts of his five-year plan.

“The creditors, at least sufficient groups of them, are getting a little grumpy, so he’s got to at least meet them halfway,” Lubben said.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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