Lehman Returns: Bank Emerges from Bankruptcy 3.5 Years Later

Lehman Brothers emerged from bankruptcy Tuesday and announced the failed bank widely credited with tipping the U.S. into recession in 2008 will start repaying creditors in April.

Three and a half years after it filed the largest bankruptcy in U.S. history, the bank expects it will eventually distribute $65 billion.  (To put that in context, Bloomberg calculates that Google has $72 billion in total holdings.)

“We are proud to announce Lehman's exit from Chapter 11 and entrance into the final stage of this process – distributions to creditors,” the firm's president, John Suckow, said in a statement.

Lehman’s bankruptcy marked a tipping point in what became the worst recession since the Great Depression. Since that moment in September 2008, the restructuring firm Alvarez and Marsal has been running the company. 

Its mission has been to collect as much money as possible in order to pay the bank’s creditors. That has included collecting money owed from other institutions, selling assets and, in some cases, investing money in properties instead of selling them at a loss. 

At the same time, the bank negotiated with its many creditors to determine who would receive payments and how much. Though initial claims totaled more than $1 trillion, those were later reduced to around $370 billion.

“Creditors are getting a fairly decent recovery,” said Stephen Lubben, a law professor at Seton Hall University who specializes in corporate bankruptcy. “If this has just been liquidated, they would have lost 100 percent.”

On average, creditors will get about 17 or 18 cents for every dollar Lehman owes, though some investors will get more and some less. 

Steven Cohn, who works for Alvarez and Marsal, arrived at Lehman to be the company’s treasurer two days after it filed for bankruptcy. 

“The classic description for the first year [after filing for bankruptcy] is drinking water from a fire hose,” he said. “There’s just so much information coming in, so much that needs to be dealt with, we had to create and organization.”

Days after Lehman filed for bankruptcy, it sold significant portions of the bank to other institutions including part of its 110,000 brokerage accounts to the British bank Barclays. That led to the transfer of more than 10,000 employees. 

Cohn said when he arrived, there were about 20 people left at Lehman.

To handle the more than 67,000 claims, the bank hired additional staff, eventually growing to more than 700. Some of those employees were people who had worked at Lehman Brothers before the bankruptcy.

“That institutional knowledge is unbelievably beneficial in terms of knowing why we’re in certain real estate investments, why we were in certain private equity investments,” he said. “We managed to hire and maintain people who were familiar with them — that’s been incredibly valuable.”

The outline of deal with creditors came after a marathon negotiating session last June. With a plan for a potential settlement agreed to, Lehman spent the fall formalizing the deal with creditors and eventually getting approval from Judge James Peck overseeing the bankruptcy.

The speed of the resolution surprised many people directly involved as well as outside observers.

“The judge used terms like, 'Miraculous.' We probably don’t think in terms of miracles,” Cohn said. “When you are in the middle of it, working like crazy you think you should be able to get there but the fact that it came to fruition, honestly, a little surprising.”

“The thought of a huge financial institution would file for Chapter 11 first of all was just inconceivable at the time,” said bankruptcy professor, Lubben.  “That it would be out of Chapter 11 three years later is quite remarkable.”

Exiting bankruptcy does mean, business-as-usual. Its mission now is to pay its creditors and then put itself out of business – this time for good.

“Our job is to work ourselves out of a job,” said Cohn.

That could take years.  For example, the bank has ongoing lawsuits against J.P. Morgan and Citigroup. And it won't be able to sell all of the assets it still owns for some time.  In the meantime, the professional fees for the restructuring experts, lawyers and other consultants is nearly $1.6 billion.

The first payment from Lehman to creditors is expected to be around $10.5 billion.