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Tuesday, 19 May 2009

Lehman want to know if they were short changed

Lawyers for Lehman Brothers Holdings said they have become aware of “apparent material discrepancies” relating to Barclays’ obligation to pay employee bonuses and cure amounts, so they have done what all good Americans would do in the circumstances, and have gone to court. Assiduous readers of this blog may remember that they made a fuss about this in March.

It appears that the sale agreement had certain value adjustments relating to liabilities, taxes and bonuses, and the Lehman lawyers queried in March whether those liabilities were in fact honoured or paid. According to the lawyers the amounts in the contract were “significantly overstated or inaccurate and, further, that Barclays may not have actually paid these obligations.”

So the lawyers question whether “the purported assumption of up to $4.25bn in liabilities, an integral component of the sale transaction, was genuine, adequate and fair consideration for the asset purchase…” A US bankruptcy court approved the sale of Lehman’s US brokerage business to Barclays last September. There were no other offers. The creditors committee neither supported nor opposed the sale (more fool them, when it's gone, it's gone), saying that there was insufficient time to determine whether it was the best deal available, but a group of bondholders holding over $9bn of Lehman paper did object.

Were Lehman short-changed? Of course they were, but that's life.

Barclays booked a £2.6 billion gain on the sale, but probably because they could reverse deferred tax liabilities after the sale. We know that £400 million of the gain came from the writeback of a deferred tax asset (assume they were trapped US tax losses that became usable against Lehman liabilities after the acquisition), but the source of the other £2.2 billion of profits that Barclays booked as a gain on acquisition are less clear. Lehman says that there was an oblgation to pay $2 billion in bonuses which may or not have been honoured. This got Lehman really mad, because the court filing says

“The apparent large size of these discrepancies appears more troubling to the Debtor when considered in connection with Barclays’ recent announcement of its financial results for the year ending December 31, 2008. In that regard, Barclays announced that it had secured a £2.262 billion gain from its acquisition of Lehman’s North American business, just over two months after closing the Sale Transaction (and during a period when the global economy was essentially frozen), suggesting that excess assets may have been given to Barclays.”

Of course if Barclays hadn't booked such a large gain Lehman's wouldn't be after them. Nobody likes to look foolish, particularly investment bankers and there lawyers. But then as we have already discovered, without £2.6 billion of profits from this purchase and £1.6 billion of gain from the widening of credit spreads on its own debt, the rest of Barclays' businesses, its zillions of branches, employees, traders, managers, bankers, clerks etc. only turned a £2 billion profit last year, less than 30% of the headline figure.

The court filing is here.

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