Two Years Later, Lehman Lives On

On Sept. 15, 2008, the bankruptcy of Lehman Brothers Holdings helped trigger the worst recession since the Great Depression. Two years later the failed investment bank is a business again. It has 500 employees and almost $20 billion in cash on hand. It shells out up to $45 million a month to pay its staff, outside managers, and advisers and is spending tens of millions of dollars on litigation expected to run at least until 2012.

Lehman is taking an unusual approach for a bankrupt company that's liquidating. Yet it could be the best strategy for the bank's creditors. Lehman Chief Executive Officer Bryan Marsal, 59, says he intends to raise $40 billion to $50 billion by selling Lehman assets over the next five years; selling soon after the 2008 financial crisis might have brought $20 billion or less. Even so, Lehman has said creditors ultimately may get only about 15 cents to 44 cents on the dollar.

Lehman "is acting like an ongoing investment concern," says Lawrence A. Larose, a lawyer with Winston & Strawn's financial restructuring practice in New York, which is not involved in the case. There's general agreement among creditors, Larose adds, that to "just dump these tens of billions of assets into a very questionable market will destroy value."

The distressed ventures Lehman bankrolled range from Hawaii's 463-room Ritz-Carlton Kapalua resort, on which it is seeking to foreclose, to a boarded-up hospital building in Oakland, Calif., on a site that used to house transients, according to a court filing in Lehman's bankruptcy case. In April, Lehman won court approval to set up a unit called Lamco to manage some of its real estate, private equity investments, derivatives, and corporate loans for five years.

Along with selling assets, Marsal, who has been Lehman's CEO since 2008, intends to use lawsuits to recover money for creditors. From Barclays (BCS), Lehman wants as much as $11 billion because of what it calls the "windfall" the U.K. bank reaped as a result of its purchase of Lehman's defunct brokerage. Lehman also has sued JPMorgan Chase (JOM), claiming that the bank helped cause its collapse by demanding $8.6 billion in collateral as credit markets contracted in 2008; it put the damage at billions of dollars. Both banks have denied wrongdoing and are fighting back. The Barclays trial in bankruptcy court will continue at least through this month. JPMorgan's is set for 2012. "Lehman's litigation strategy is a bit optimistic, but they have some chance of getting money out of this," says Claude R. "Chip" Bowles, a bankruptcy lawyer at Greenebaum Doll & McDonald in Louisville, who has written about Lehman.

Lehman filed the biggest U.S. bankruptcy ever in September 2008, with $639 billion in assets. Creditors include Goldman Sachs (GS), UBS (UBS), the New York Giants, and the Abu Dhabi Investment Authority, as well as individuals who hold Lehman bonds. Lehman hasn't announced when it will pay creditors, saying only that distributions must wait until after its reorganization plan is approved, possibly in the first half of 2011. Through July, Lehman handed out almost $918 million to its managers, lawyers, and other advisers, including $326 million to Alvarez & Marsal, Marsal's restructuring firm. Alvarez & Marsal also stands to collect a portion of the money it recovers for creditors.

Lehman's spending already tops the $757 million price tag for energy trader Enron's three years of bankruptcy, according to data compiled by Lynn M. LoPucki, a bankruptcy law professor at the University of California, Los Angeles. Lehman is the Jarndyce and Jarndyce of our time, says Nancy B. Rapoport, a bankruptcy law professor at the University of Nevada, Las Vegas' William S. Boyd School of Law, referring to the almost interminable case in Charles Dickens' Bleak House. "It has no economic reason to stop."

The bottom line: To recover more money for creditors, Lehman CEO Marsal is holding on to distressed assets, hoping they'll gain in value.

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