Monday, January 26, 2009

We Are All Experts Now

"As much as $75 billion of Lehman Brothers Holdings Inc. value was destroyed by the unplanned and chaotic form of the firm's bankruptcy filing in September, according to an internal analysis by the company's restructuring advisers. ... An orderly filing would have enabled Lehman to sell some assets outside of federal bankruptcy-court protection, and would have given it time to try to unwind its derivatives portfolio in a way that might have preserved value, the study says. ... Unsecured creditors have asserted in court filings that they are owed about $200 billion. ... 'While I have no position on whether or not the federal government should have provided further assistance to Lehman, once the decision was made not to provide further assistance, an orderly wind-down-plan should have been pursued. It was an unconscionable waste of value,' said Bryan Marsal, co-chief executive of the advisory firm who now serves as Lehman's chief restructuring officer. Mr. Marsal estimates that the total value destruction at Lehman will reach betweeen $50 billion and $75 billion, once losses from derivatives trades and asset impairment are combined. Much of the destruction of value comes from the bankruptcy filing of the parent guarantor, Lehman Holdings. ... The problem for creditors is that this also terminated contracts in which Lehman was owed money. Mr. Marsal said a few extra weeks would have allowed Lehman to transfer or unwind most of its 1.1 million derivatives trades, preserving more cash for creditors. ... 'This filing, which was pretty much dictated to the board of directors at Lehman that weekend, occurred with no planning,' said Mr. Marsal, whose New York firm was hired by Lehman's board around 10:30 PM Sept. 14. That was just hours before Lehman [LEH] filed for the largest bankruptcy in U.S. history, after the U.S. government declined to offer its backing. ... 'Had fundamental rules of crisis management been followed, much of the value that was lost by the unsecured creditors would have been prevented. This loss in value was a big hit to the public holders and could have been mitigated,' Mr. Marsal said. ... About 150 Alvarez and Marsal [A&M] employees are on site at Lehman offices in New York, London and Hong Kong, combing through creditor claims and managing operations. They are piecing together what happened at the moment of Lehman's collapse", my emphasis, Jeffrey McCracken at the WSJ, 29 December 2008.

How interesting. A&M was hired before LEH's bankruptcy. What if anything did A&M tell LEH before filing? Is A&M's report designed to protect A&M from a malpractice suit for failure to warn LEH's board of this at least, reasonably possible result? If A&M did not anticipate this $50+ billion disaster, why listen to A&M now? What does "value was destroyed" mean? Did an "Act of God" cause it? Aren't derivatives a "zero-sum" game? If so, counterparties gained at LEH's expense! Should LEH's bankruptcy estate sue them? Or is A&M protecting these counterparties by saying value "destruction", not transfer? Has LEH preference payments or fraudulent transfers to pursue? Does A&M recognize LEH's counterparties may give it future referrals with nothing more to gain from LEH, a "repeat player advantage"? A better title for the WSJ article, "Lehman's Chaotic Bankruptcy filing Destroyed Billions in Value", would have been "Lehman's Consultant Claims ... ". The WSJ accepted A&M's claims at face value. "Preserved value" or cost counterparties more? "This also terminated contracts". Did the "Three Musketeers", Henry Paulson (HP), Zimbabwe Ben (ZB) and Chris Cox (CC) know this on the night of 14 September?

Why believe "experts"? Look at KPMG's recent BCE "solvency" opinion. Citigroup was to be a BCE buyout lender. Citigroup gained by the buyout falling through. As Citigroup is also a KPMG client, KPMG should have refused this assignment, my 18 December 2008 post. What does Marsal mean by, "pretty much dictated to the board of directors at Lehman"? Who? Marsal name names. Did Goldman Sachs (GSG), orchestrate this through HP? Or was this CC's or ZB's doing? No matter, LEH's board should not have filed on 15 September if it was not in the interest of LEH's shareholders and creditors. PERIOD! Did Marsal discuss these "fundamental rules" with LEH's board on the night of 14 September? If not, why not? Where was Harvey Miller (HM), LEH's bankruptcy counsel on the night of 14 September? Should LEH sue HM for malpractice? The WSJ headline is revealing. Creating chaos may conceal bankruptcy fraud so intentional acts appear to result from oversight or mistake. Did that happen here? Is the SDNY US Attorney's Office looking into this? The WSJ might have used this title, "Lehman Counterparties Screw Unsecured Creditors Out Of $50 Billion".

One commenter on Yves Smith's 29 December 2008 piece, link:, cited this 14 December 2008 NYT article, link: I hadn't read it before, thinking it a HM profile. Here goes, "From his perspective as Lehman's undertaker, Mr. Miller believes that the fallout from the firm's messy bankruptcy could have been avoided. Regulators could have stepped in, he says, not necessarily to save Lehman, perhaps, but to head off the meltdown that followed. 'They totally missed it,' he says. 'Look what happened.' ... In the days after Lehman filed for bankruptcy, he notes, demand for corporate debt utterly evaporated. The failure of a Wall Street firm poses its own special risks, because other companies that rely on it--such as counterparties to complex financial contracts known as derivatives--are all financially exposed to its collapse. That's why Mr. Miller says it was crucial for the government to head off the wholesale termination by counterparties of all their transactions with Lehman Brothers before the firm was forced into bankruptcy. "If the Fed or the Treasury said, "Let's say to Lehman, there's no bailout, we're not going to save the company," they could have supported an orderly unwinding of all the transactions over a period of months," he says. 'It probably would have cost the economy a lot less money'," my emphasis, Johnathan Glater (JG) at the NYT, 14 December 2008, link:
"This matter came on for trial, on September 30, 1992, upon plaintiff/trustee's second amended complaint for avoidance of transfers, preferential, fraudulent and post-petition, of funds and assets by Debtor to defendant Society Bank in an amount approaching $3,000,000. Upon consideration of the evidence adduced at trial and the record herein, the court finds that certain transfers made to defendant should be avoided, and that the trustee should be granted judgment against defendant in the amount of $2,148,499.43. On August 20, 1990, an involuntary petition under chapter 7 of title 11 was filed against Debtor Parker Steel Company. ... Plaintiff, in the instant complaint, seeks to avoid certain payments, as preferential. Plaintiff claims that defendant received paymennts from Debtor, while insolvent, within one year of Debtor's petition, benefitting certain guarantors", In Re Parker Steel, 149 BR 834, 838 (Bkrtcy, ND Ohio, 1992). Parker Steel was decided before 1994's change to section 404 of the bankruptcy code, or under Deprizio. "Therese A. Zmuda, employed as a CPA with Holt, Kisoff & Moseley, Inc., testified that she had been retained by plaintiff to review Debtor's records", 841. "Zmuda's opinion, using the 1989 audited statement and 1990 reviewed statement, applying these adjustments to Debtor's valuation of assets and liabilities, was that Debtor was insolvent in August, 1989, continuing until March, 1990. ... Zmuda opined that, based upon the relationship between the draws on the line of credit and the amount of accounts payable, Debtor was attempting to pay down the line of credit", 842. The time of insolvency is critical as are payment practices. I call this a secured-unsecured creditor debt swap. "Michael Clodfelter, a partner of Ernst & Young, defendant's witness, testified that he is a consultant for creditors and Debtors in bankruptcy situations, valuing privately held businesses. ... It was Mr. Clodfelter's opinion that Debtor was solvent through March, 1990; Debtor's solvency is more doubtful beginning in April, 1990", 843. "The issue contested by defendant is the solvency of the Debtor from August, 1989 until July, 1990. ... Initially, the court notes that insolvency is to be determined at the time of the transfer, not at the time the petition was filed. ... Additionally, the court must consult the bankruptcy code definitions is assessing the imapct of the Sharon liability", 844. "This balance sheet test refers, then, to insolvency when a Debtor's liabilities exceed its assets, at a fair value. ... In valuing Debtor's liability to Sharon, although GAAP are relevant, they are not controlling", 845. LEH's CDS counterparties must prevent an insolvency determination, lest they be found to be beneficiaries of billions in preference payments. I note the court found the Ernst & Young experts testimony to be less credible than Zmuda's.

"Appellant Helig-Meyers Company and five of its wholly-owned subsidiaries appeal the decision by the [US] Bankruptcy Court [BC] for the Eastern District of Virginia that debtors were solvent on the date of the alleged preferential transfers to Wachovia Bank, N.A., and others (collectively 'the lenders'), as part of a financial restructuring on May 25, 2000. ... The debtors argue that the [BC] improperly applied the balance sheet test and relied upon an analysis of the creditor's expert on the mistaken belief that sich expert executed a balance sheet test of the debtor's solvency", In Re Helig-Meyers, 328 BR 471, 474 (ED Va., 2005). "The burden is on the trustee to prove the avoidability of a transfer under subsection (b); however, 'the debtor is presumed to have been insolvent on and during the 90 days immediately preceeding the date of the filing", 475. "The definition of insolvency nicely frames the issue. An insolvent debtor's financial condition is such that 'the sum of such entity's debts os greater than all of such entity's property at a fair valuation.' ... The qualification of 'a fair valuation' in the definition often requires that the judge sort through the differing presentations by the parties' valuation experts and to make factual findings. Not surprisingly in this case, the two valuation experts reached vastly different conclusions regarding the value of the debtors' assets. ... As a threshold matter, Judge Tice considered whether, on the date of the transfers, the debtors collectively operated as a going concern or were on their deathbed", my emphasis, 477. "A debtor lies on its deathbed where the debtor is 'in a precarious financial condition' so that 'liquidation was imminent when the petition was filed", 477. "As a going concern, the court applies the balance sheet test to measure the debtors' solvency. The balance sheet method 'contemplates a conversion of assets into cash during a reasonable period of time'," 477.

If HM is right, "the fallout ... could have been avoided", why does HM think the regulators "totally missed it"? Did they? Was the result intended? In reading this I conclude A&M and HM "cleared" reports before release. They both want to protect LEH's board and the counterparties. "Look what happened"! Yes, look! "Forced into bankruptcy", what nonsense. Either ZB, CC and HP did not anticipate what looks like the counterparities $50 billion gain, or they did. Is A&M preparing a smiliar AIG report at this minute? "Orderly unwinding"? Should HM come back, in his next life, he could make a fine offensive lineman, protect that quarterback! What does "cost the economy" mean? Which participants in the economy? "Counterparties ... are all financially exposed". Yes they were. Should they be dragged into federal district court? Well HM, how big are your cojones? Will you make enemies of every other Wall Street house to benefit LEH's unsecured creditors? If not, you should be replaced. I refer again to Switzer, my 18 December post:

Look at some expert "advocacy". In about 1971, McKinsey, the big consulting firm, disgraced itself, in my opinion, by writing Pan American's plea for government subsidies. In about 1999, KPMG wrote a report economically "justifying" subsidies for a Hartford, Connecticut sports stadium. Forensic experts produce junk to attempt to mislead juries into convicting defendants with forensic evidence, my 8 June 2008 post: No matter how much expertise A&M supposedly has, we don't know why it wrote what it did. No document reveals the circumstances of its preparation, my 7 February 2008 post, link:

A significant similarity between LEH and AIG is: the derivatives counterparties were protected. HP, ZB and CC seem to have their answer to "Carthago delenda est", i.e., "The counterparties will be protected".

What Judge Tice did at Helig cannot be done for AIG lest someone conclude AIG was insolvent months ago and that liquidation, not going concern valuation was appropriate.


Anonymous said...

Counterparty tricks.

Government Sachs.


Printfaster said...

I think what they were hoping for was to cram down a bunch of questionable assets to the counterparties so that everyone could maintain the fiction that the "assets" still had value.

A game of hide the sausage for one more iteration.

My view is very strong that AIG should be prosecuted for fraud. It is akin to a ponzi scheme in that they knew perfectly well that they could not guaranty payment to all counterparties in the CDS debacle.

As we all know, CDS's belong under insurance regulation and need huge syndicates like Lloydes to manage risk. They may be more like earthquake or hurricane insurance in that they need government backstop. If CDOs need government backstop, they should never have been written. They were a fiction of accounting.

Independent Accountant said...

I see this as a "Maltese Falcon" problem, my 3 November 2007 post, Why? If the DOJ tries to take down AIG, AIG can "pull a Sampson" and collapse the whole building. I agree, AIG was like a Ponzi scheme. Look at the monoline insurers. How did they stay in business? I have no sympathy for the counterparties. For my money, Goldman and the like can all drown in AIG's stew. Why did Eric Dinallo let AIG's insurance subs upstream $20 billion to the parent in September? How did that help the policyholders?
I look at the bottom line: the counterparties were made whole and AIG's unsecured creditors and subsidiary policyholders may get clobbbered.

Printfaster said...

Thanks IA.

Hostage taking is never welcome, and I for one would rather see the hostage killed in a raid that might save the hostage, than paying off the hostage takers.

The management of AIG is anathema. They and their cronies, all of them need to be destroyed and cast out.

Who will be our Samson and cast out the corrupt by taking down the temple of mammon? A great deal of license here, I know, including mixed metaphor, but what is writing, if not fun?

Anonymous said...

Put a fork in AIG... fat piggies...

What about the $20 billion raised in May? Poor suckers or misrepresentation?