Thursday, October 15, 2009
Fed as a Lehman Creditor
"A court-appointed examiner investigating Lehman Brothers Holdings Inc.'s bankruptcy has been exploring whether the [Fed] improperly cut in front of other creditors owed money in the $613 billion bankruptcy case, records show. ... Fed loans were crucial to propping up Lehman during its final days, and were part of an extraordinary government attempt to stabilize lehamn in the chaotic weeks of mid-September 2008. ... Should the examiner determine that the Fed got preferential treatment, bankruptcy adminstrators could pursue court claims to recover assets for Lehman's creditors from the Fed, on the theory those assets should have remained with Lehman when it filed for bankruptcy last September. ... Yet it could bring a focus to one of the unresolved questions of the financial crisis: just how much special treatment the federal government receives above private-market players when it beocme a direct participant in the markets. ... [Sovereign immunity] generally holds that the government can't be held legally accountable for its actions. But Lehman's estate could have an opening, because by the standards of bankruptcy law, the government isn't supposed to receive immunity, said Richard Levin, a partner at law firm Cravath, Swaine & Moore LLP who helped write the US bankruptcy code. 'The Lehman estate could sue the Fed.' Mr. Levin said, adding that the Fed would likely argue it can't be held liable", Jeffrey McCracken and Mike Spector at the WSJ, 2 October 2009, link: http://online.wsj.com/article/SB125443891097957691.html.
Will the Fed argue it is a branch of the federal government? I thought it was an independent entity like say Fannie Mae or Freddie Mac. Stay tuned, this could become interesting.