By Patrick Fitzgerald
Of DOW JONES DAILY BANKRUPTCY REVIEW
Lehman Brothers Holdings Inc. (LEHMQ) is asking a bankruptcy judge to slash at least $35 billion from what some of Wall Street's biggest banks claim they are still owed from the investment bank over losses tied to residential mortgage loans that Lehman packaged and sold to investors at the height of the housing bubble.
Lehman, which last month won court approval of its $65 billion plan to repay creditors, wants to begin to start doling out the cash in the coming months. But before it can do that, Lehman needs to resolve more than $37 billion in disputed claims filed by seven big banks--among them U.S. Bancorp (USB), Citigroup Inc. (C) and Wells Fargo & Co. (WFC)--for damages suffered by Lehman-sponsored trusts that issued mortgage-backed securities.
Representatives of U.S. Bancorp and Citi declined to comment. A Wells Fargo spokeswoman couldn't immediately be reached for comment.
Before its collapse, Lehman purchased and funneled millions of residential mortgages to its securitization subsidiary, which then bundled the loans into securities. The subsidiary, known as Secured Assets Securities Corp., or Sasco, established hundreds of securitization trusts and special-purpose vehicles that in turn issued the securities that were sold to pension funds, insurance companies and other institutional investors.
The banks served as the trustees for the securitization trusts that issued the securities. They say that Lehman and a subsidiary breached its representations and warranties about the origination and quality of the mortgages that went into the trusts.
In court papers filed Thursday in U.S. Bankruptcy Court in New York, Lehman said the banks' claims are "drastically overstated" and contain numerous duplicate claims against Lehman, and Lehman estimates its probable liability for all the banks' claims between $1.1 billion and $2.4 billion. It wants to set aside the latter amount so it can begin distributing cash to creditors.
The investment bank is asking Judge James Peck, who is overseeing its Chapter 11 case, to estimate the banks' claims against its bankruptcy estate. Under bankruptcy law, a debtor can ask a judge to estimate a disputed claim so it can begin making distributions to creditors under a Chapter 11 plan.
Otherwise, Lehman says, it would have to set aside the full amount until the disputes were resolved or the loans, more than 1.5 million in all, matured. Either scenario would take years and, in any event, leave a much smaller pool of funds for creditors of its holding company.
A hearing on the issue is set for Jan. 26.
Lehman is proposing to set aside a little more than $1.1 billion for U.S. Bank, which filed more than $6 billion in claims, as trustee, against Lehman and its Sasco subsidiary. Lehman wants to reserve $450 million for Citigroup, which filed more than $20 billion in claims in its role as trustee.
In addition, Lehman would set aside slightly less than $350 million for M&T Bank Corp.'s (MTB) Wilmington Trust, which in its role as trustee filed $8 billion in claims, and a little more than $340 million for trustee Wells Fargo. As for other banks--including Deutsche Bank AG (DB), HSBC Holdings PLC (HBC) and Bank of America Corp. (BAC)--that served as trustees for Lehman-sponsored trusts, the bankruptcy estate would reserve anywhere from $0 to $1 million, court papers said.
Representatives for Wilmington Trust, HSBC, Bank of America and Deutsche Bank weren't immediately available for comment.
Lehman's Chapter 11 filing on Sept. 15, 2008, marked the largest U.S. bankruptcy case filed.
Creditors filed more than $1 trillion worth of claims against the investment bank and its subsidiaries. But a team of hundreds of bankruptcy professionals under the direction of Alvarez & Marsal was eventually able to slash that amount to under $400 billion.
Lehman says its creditors can ultimately expect to recover up to $65 billion under its plan, and the estate has some $25 billion in cash on hand ready to be distributed later this year.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)
-By Patrick Fitzgerald, Dow Jones Daily Bankruptcy Review; 202-862-3544; firstname.lastname@example.org