Lehman Brothers Creditors Could Get Money Back in Full - PwC

Lehman Brothers International Europe's creditors could receive all their money back, following an affiliate's landmark dispute settlement nearly five years after the parent investment bank failed and caused a systemic collapse of the finance sector.

According to a statement from PriceWaterhouseCoopers (PwC) seen by IBTimes UK, an additional $9.1bn (€7bn / £6bn) in assets have become available and will be distributed later this year to creditors, after the administrators in charge of dissolving Lehman reached an agreement with an affiliate.

"To be able to advise ordinary unsecured creditors that we now have a reasonable chance of eventually repaying their claims in full, marks a significant milestone for the Administrators. This would not have been possible without a huge combined PwC and Lehman effort over the past four and a half years," says Tony Lomas, lead administrator and partner at PwC.

"There is still a lot to do before finalising the wind-down but we do expect to pay a second, significant dividend to creditors in the near future, taking us another step towards this new target," he adds.

PwC says that LBIE's administrators have told creditors that in the best case scenario, they might now be repaid their claims in full and that the same administrators "updated their estimate of the likely range of financial outcomes in their Ninth Progress Report which was posted to creditors on 12 April."

AV Lomas, SA Pearson, PD Copley, R Downs and JG Parr were appointed as Joint Administrators of LBIE to manage its affairs, business and property as agents without personal liability.

In September 2008, Lehman filed the largest bankruptcy in history, after being weighed down by too much debt and toxic real estate investments, such as asset-backed securities (ABS). The collapse of the bank led to a systemic contagion in the banking and finance industry and left many creditors out of pocket by billions of dollars.

Several years later, administrators are still trying to liquidate the failed investment bank and are trying to resolve claim disputes from both Lehman and many of its creditors.

In 2012, Lehman said it was owed $45.2bn from its affiliates, including its Swiss group Lehman Brothers Finance and its brokerage Lehman Brothers Inc.

In tandem, creditors are lining up to be repaid and Lehman International only made its first interim distribution to unsecured creditors in November last year. It paid around $10.7bn for 1,582 claims.

According to administrators PwC, Lehman has also returned $20.8bn in cash and securities to clients, who had deposited money at its now defunct brokerage.

Now that the freed up $9.1bn is available for distribution to LBIE creditors, the estate is apparently preparing an initial $340m payment to its clients, with unsecured creditors receiving at least $4.3bn over three payments this year.

"The LBIE administration continues to be an extraordinarily large and complex challenge with many very high value disputes still to be resolved with counterparties. The value difference to LBIE's creditors between success and failure in the Administrators settling these disputes is potentially very significant indeed. As a result the task still consumes the time of a large number of continuing Lehman employees and PwC specialists," says Lomas.

Lawsuits Mount for Banks on ABS

ABS is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities and was largely to blame for the credit crisis of 2007 and 2008.

The toxic nature of these products not only brought down the behemoth of Lehman Brothers, but also caused a systemic collapse in the banking system.

Since the onset of the credit crisis in 2007, investors around the world have launched a raft of lawsuits, in a bid to reclaim money lost through these risky investments, mainly citing being misled by the banks' and the level of risk that was involved.

At the end of last month, US bankruptcy judge James Peck approved a $45m settlement between a group of insurers and Lehman Brothers Holdings Inc.'s Australian unit, over claims that the investment bank had misled a group of towns, charities and churches into buying risky ABS products.

A number of similar cases are still underway nearly five to six years later.

The third largest bank in the US, Citigroup is facing a number of major class action lawsuits, in regards to its sale of ABS related products to investors.

Most recently, US Manhattan Federal Judge Sidney Stein refused to give the greenlight on Citigroup's proposed $590m settlement, for shareholders claiming that the bank hid billions of dollars of toxic mortgage assets, after questioning the fairness of the legal fees and settlement allocation.

In addition to this, Citigroup has agreed to pay a substantial settlement to investors, who bought the bank's debt and preferred stock in the two years leading up the one of the world's worst financial crisis', after claiming they were misled by the company's disclosure.

Citigroup says that, subject to court approval, it will pay $730m to settle a separate class action lawsuit brought on behalf of investors who purchased the bank's debt and preferred stock during the period 11 May 2006 through 28 November 2008.

Meanwhile, other banks have settled or been fined for similar cases related to the sale of financial products linked to ABS.

The UK's Financial Services Authority, now Financial Conduct Authority, hit UBS with a £9.45m fine following the mis-selling and a series of failings in a fund sale that left nearly 2,000 investors exposed to the type of financial instruments that brought on the global financial crisis.

The FSA issued the Swiss bank with a fine for a series of failings in the sale of the AIG Enhanced Variable Rate Fund, which led to 1,998 high net worth customers being "exposed to an unacceptable risk" and a high proportion being mis-sold the product.

The UK watchdog said that unlike a standard money market fund, UBS' AIG fund sought to deliver an enhanced return by investing a material proportion of the Fund's assets in asset backed securities and floating rate notes.