STOCK MARKET WATCH - Wednesday, 11 January 2012

[Demeter]

25. Lehman Still Doing Deals in a Second Life on Wall Street IT'S ALIVE!

http://dealbook.nytimes.com/2012/01/10/lehman-still-doing-deals-in-a-second-life-on-wall-street/?ref=business

Things that refuse to die include Dracula, fungus, Jason from the “Friday the 13th” movies, zombies — and Lehman Brothers... in 2008, Lehman filed for bankruptcy and soon afterward its investment banking arm was sold to Barclays of Britain for $250 million. That same week, Bank of America bought Merrill Lynch and most likely overpaid by tens of billions. BUT, Like all good horror villains, Lehman still exists, sort of. The Lehman Brothers estate is in its fourth year of administration in Federal Bankruptcy Court in Manhattan. It’s the largest bankruptcy in history, involving the liquidation of $65 billion in assets. As of October, the estate had made substantial progress settling almost $100 billion in claims. Yet Lehman still has about $40 billion in assets to unwind. Not only is Lehman the largest bankruptcy in history, it is possibly the most complex, with multiple proceedings, including bankruptcies in Britain, the Cayman Islands and Hong Kong. The Lehman estate has paid well over $1 billion in fees and expenses.

The Lehman estate is even scheduled to exit bankruptcy soon, but don’t think this will end the story. Lehman is looking to get bigger. The focus of Lehman’s efforts is Archstone-Smith, the same entity that played a major role in bringing down Lehman. In 2007, Lehman’s real estate geniuses partnered with Tishman Speyer to pay $22.2 billion for Archstone-Smith, an apartment owner. The deal quickly went sour, leaving billions of debt on Lehman’s balance sheet that it was unable to sell. While the exact reasons for Lehman’s demise remain murky, there is little doubt that its huge amount of mortgage debt from the Archstone acquisition and other deals contributed to the market’s loss of confidence in the firm. After a series of defaults and restructurings, the Lehman estate now owns 47 percent of Archstone. The remaining 53 percent is held by Bank of America and Barclays, two lenders in the initial acquisition who foreclosed on their interest. The three co-owners are in a fight over the future of Archstone. Not surprisingly, the banks want to get rid of their interest as soon as possible. Real estate isn’t their business, and frankly they could use the money.

The Lehman estate wants to hold on to the stake for an initial public offering or future sale in the hope that Lehman can reap greater value. Lehman successfully pursued this strategy with Neuberger Berman, the asset manager, refusing to sell its entire stake in the crisis of 2008 and waiting until 2011 to sell for about $1.5 billion. The three tried unsuccessfully to sell Archstone last summer, but no bid was high enough. In early December, the banks went their separate way from Lehman and agreed to sell about half their interest, or 26.5 percent, of Archstone to Equity Residential, a company controlled by Sam Zell, for $1.35 billion. In doing so, the banks rejected offers from two other parties to buy their entire stake for reasons that are unknown. Mr. Zell, you may remember, is the man who just before the credit bubble’s end took the Tribune Company private in a deal that put $13 billion in debt on the newspaper company, leading to its bankruptcy less than a year later. Wall Street’s deal makers have made any parting complicated, believe it or not. Lehman has a right of first refusal to purchase any shares of Archstone sold by the banks. Lehman has until Jan 23. to exercise that right....Lehman appears willing to risk holding almost 75 percent of Archstone for a few more years to reap a higher return. And given that it has billions of cash from liquidating its assets, Lehman can sit back and do so. The firm is betting that the hot market for apartments will not cool and that it is not purchasing at the top of the market. This has been a problem before for Lehman.

This Wall Street tale has a wider lesson. Lehman’s investment is setting it up to exist for several more years at least. There is a real chance that we will have Lehman around a decade after its bankruptcy. The quick resolution of these complex financial institutions is just not going to happen, as we will see again with the smaller MF Global. The related question is whether we want to allow them to get even bigger during bankruptcy, as Lehman is doing.