Bankrupt Lehman Bros back in business

By Linda Sandler, David McLaughlin

Lehman Brothers is a business again - two years after declaring the biggest bankruptcy in history, with billions in cash, 500 employees, real estate and investments in other bankruptcies.

The defunct New York-based investment bank, run by Bryan Marsal, has US$20 billion in cash and a monthly payroll of up to US$45 million for managers and advisers.

Hard-to-sell investments are being managed by 400 staff, and the firm is spending tens of millions on litigation set to stretch to at least 2012.

Lehman's strategy is unusual for a bankrupt company that's liquidating. Marsal, 59, is betting he'll raise twice as much by holding Lehman's worst-performing investments as he would by conducting a fire-sale.

Marsal is not only pouring cash into distressed assets he inherited. He spent US$1.4 billion to buy loans from bankrupt Frankfurt affiliate Lehman Brothers Bankhaus on a bet he can sell at a profit.

Lehman, once the fourth-largest investment bank, with assets of US$639 billion, foundered on September 15, 2008, because of risky real-estate bets and too much debt, which it tried to hide from investors.

Marsal has been Lehman's chief executive since 2008. His restructuring firm, Alvarez & Marsal, has earned US$326 million from Lehman. Lehman won court approval in April to set up a unit called Lamco to manage its real estate, private-equity investments, derivatives and corporate loans for five years, with jobs for employees of Lehman and Marsal's firm.

Distressed ventures financed by Lehman range from Hawaii's 463-room Ritz-Carlton Kapalua resort, on which it is seeking to foreclose, to a site with a boarded-up hospital building in Oakland, California.

Marsal intends to raise US$40-50 billion selling Lehman assets for unsecured creditors. Selling soon after the financial crisis might have brought US$20 billion or less, he said. He plans to slash creditors' claims, initially US$1 trillion, to US$260 billion by disallowing unsubstantiated demands. About half Lehman's US$19.3 billion in cash on July 31 came from closing out derivatives trades, Lehman has said.

Some of Marsal's rescue missions for Lehman assets have faltered. This month, the company said it would close or sell its two banks, Woodlands Commercial in Salt Lake City and Aurora FSB in Delaware.

By the time it is ready to take those actions, Lehman will have spent US$1.4 billion of creditors' money to shore up the banks and protect equity of US$1.4 billion.

Lehman's bid to control a hotel investment company's bankruptcy plan was rejected by a judge this month after creditors said it was "a classic insider transaction".

Lehman, up to July, paid its managers, lawyers and other advisers almost US$918 million. That topped the US$757 million that Enron's three years of bankruptcy cost.

Marsal's restructuring firm, in addition to its hourly fees, has a stake in every dollar brought in for creditors.

Its "success fee" will equal 0.175 per cent of all the money above US$15 billion paid to unsecured creditors and can run to 25 per cent of the fees his firm gets for dismantling Lehman over the life of the case.

The Lehman bankruptcy is the Jarndyce and Jarndyce of our time, said Nancy Rapoport, a bankruptcy-law professor at the University of Nevada, Las Vegas, referring to the never-ending case in Charles Dickens' Bleak House. "It has no economic reason to stop," she said.

One difference: Marsal says he'll raise billions for creditors. Jarndyce and Jarndyce depleted all the assets at stake.

Marsal intends to use lawsuits to recover money for creditors. From Barclays, Lehman wants as much as US$11 billion because of an alleged "windfall" the UK bank made on the purchase of Lehman's defunct brokerage.

Lehman accused JPMorgan Chase of helping cause its collapse by demanding US$8.6 billion in collateral as credit markets contracted in 2008. It put the damage at billions of dollars. Both banks are fighting back.

- BLOOMBERG

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