Lehman Recovery Seen as Justifying $2 Billion Bankruptcy
By Erik Larson - Sep 11, 2013 12:00 AM ET
Harvey Miller, the lawyer guiding Lehman Brothers Holdings Inc. through the biggest-ever U.S. bankruptcy, sipped a cappuccino at a tourist-filled cafe near Manhattan’s Central Park and reflected on how his client’s collapse five years ago went from unthinkable to inevitable.
Lehman’s demise “ignited a worldwide conflagration that almost brought down the global financial system,” said Miller, who filed the Chapter 11 petition at 2 a.m. on Sept. 15, 2008, in New York after the bank failed to win U.S. government aid or attract a buyer. “The consequences were unknown.”
Lehman Brothers Holdings Inc., which listed $613 billion in debt when it filed, is scheduled to pay out $14 billion to creditors on Oct. 3, bringing total distributions to $43 billion since the Chapter 11 plan was approved, according to court records. Photographer: Chris Hondros/Getty Images
Five years later, Miller takes credit for helping fend off some creditors’ liquidation demands and instead turning the remains of one of the biggest failures of the financial crisis into a going concern. In the process, the Lehman estate has paid more than $2 billion in fees and expenses to professionals like him for that work, dwarfing the previous record of $757 million in Enron Corp.’s bankruptcy.
In exchange for that eye-popping payday, approved by the judge in charge of the case, Lehman creditors are poised to get 18 cents on the dollar by 2016, from an estate valued at $65 billion, according to a liquidation plan approved in December 2011. Miller, 80, estimated that recovery may rise to as much as 22 cents as the value of Lehman’s assets increases over the next three years to about $80 billion.
His estimate is a “somewhat educated guess,” Miller said in an interview near the offices of his law firm, New York-based Weil, Gotshal & Manges LLP. “I am sure debt traders have their own projected recovery valuations.”
A file photo shows Harvey Miller, a partner at Weil Gotshal & Manges LLP, right, testifying during a hearing of the Financial Crisis Inquiry Commission as former Lehman Brothers Holdings Inc. Chief Executive Officer Richard Fuld listens in Washington, D.C., on Sept. 1, 2010. Photographer: Brendan Smialowski/Bloomberg
Lehman, which listed $613 billion in debt when it filed, is scheduled to pay out $14 billion to creditors on Oct. 3, bringing total distributions to $43 billion since the Chapter 11 plan was approved, according to court records.
Miller’s firm, which also worked on the Enron case, has made almost $500 million since the Lehman bankruptcy started, and more than $600 million has gone to the restructuring company Alvarez & Marsal Inc., whose employees ran Lehman after the collapse and are still unwinding complex derivatives contracts to generate cash for creditors.
The Lehman case is “one of a kind” and should be viewed as a success, even with the fees, said Stephen Lubben, a bankruptcy professor at Seton Hall University School of Law in Newark, New Jersey.
“The creditors got a pretty decent recovery given the circumstances, and the world didn’t come to an end,” Lubben said in a phone interview. “If you think of the fees as the price the creditors pay to get this recovery, I’m sure most of them would be willing to pay.”
Robert Lawless, a professor at the University of Illinois College of Law in Champaign, said Lehman’s fees are well within historical norms for very large cases, particularly for a case involving assets of $639 billion. He said fees usually total 2 percent to 4 percent of a bankrupt company’s assets.
“It’s easy to be outraged and say it shouldn’t happen, but is this emblematic of a system that’s broken and isn’t working? I can’t look at $2 billion in fees in a $639 billion case and say that,” Lawless said in a phone interview.
Miller said the fees are reasonable considering they went to hundreds of people, including financial advisers, investment bankers, forensic accountants, appraisers, tax specialists, real-estate specialists and regulatory specialists.
“It has been the largest, most complex case ever filed,” he said in an e-mail. “Professionals had to be engaged all over the world to protect Lehman assets.”
The judge-approved expenses would have been higher if not for cuts sought by Tracy Hope Davis, the U.S. Trustee who supervises bankruptcies for the Justice Department. Davis has objected repeatedly to payments that she argued were “not reasonable.” She has also criticized creditors such as Goldman Sachs Group Inc. that fought Lehman to improve their own payout and then asked the estate to pay their lawyers.
Another reason Weil and other bankruptcy lawyers might have received the stamp of approval for most of their proposed fees: Judges don’t often challenge payments to attorneys whose firms bring in big cases because those lawyers are free to take future filings to competing courts that won’t question the fees, Lynn LoPucki, a bankruptcy professor at the University of California, Los Angeles, said in his 2005 book “Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts.”
Alvarez & Marsal Chief Executive Officer Bryan Marsal, who led Lehman after the bankruptcy, said in 2009 that it made more sense to stretch out the process and incur more fees because it was smarter to manage the bank’s properties to maximize their value rather than liquidate them at “fire sale” prices.
Miller said that plan worked. Marsal, 62, had no immediate comment on the case.
Lehman technically exited bankruptcy in March 2012, although the case will linger for three to five more years as the reorganization is executed and related multibillion-dollar lawsuits are dealt with, Miller said.
“We were dealing with a humongous failure and we achieved a realization of value that was unanticipated,” according to Miller, who wouldn’t say how much he was personally paid for the case. “Almost everybody has been surprised by the success of the administration.”
Miller, who also worked on the General Motors bankruptcy, said the expense can be blamed in part on the Lehman case’s chaotic start, after Federal Reserve Chairman Ben S. Bernanke and then-U.S. Treasury Secretary Hank Paulson declined to bail out the 158-year-old firm.
The pair wrongly concluded that any disruption from the collapse of the world’s fourth-biggest investment bank would stabilize within a few days and that it should therefore be allowed to die, Miller said.
“Bernanke and Paulson were under the impression that the financial markets were prepared for Lehman’s demise,” he said. “They were wrong. They were so wrong that the financial markets almost collapsed.”
Paulson said at a White House briefing on the day of the bankruptcy that he “never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers.” That decision contrasted with deals he helped broker to provide Fed financing for JPMorgan Chase & Co. (JPM)’s agreement in March that year to buy Bear Stearns Cos. and his takeover of mortgage-finance companies Freddie Mac and Fannie Mae.
Miller’s highest-profile success for Lehman came early on when the company’s still-functioning brokerage unit was sold to Barclays Plc (BARC) for $1.75 billion — a figure based mostly on the value of Lehman’s headquarters in Manhattan and two data centers in New Jersey. The court approved the sale at a speed that U.S. Bankruptcy Judge James Peck in Manhattan said at the time was “unheard of.”
More recently, in November, Lehman agreed to sell its Archstone Inc. (ARS) apartment unit toSam Zell’s Equity Residential (EQR) and AvalonBay Communities Inc. (AVB) for $6.5 billion, dropping plans to take the company public in an initial stock offering. The price included $2.69 billion in cash along with stock valued $3.8 billion.
The fees and expenses could have been lower if Lehman had had more time to prepare the filing and create a plan in advance, said Chip Bowles, a bankruptcy lawyer at Bingham Greenebaum Doll LLP in Louisville, Kentucky.
The case was “so complex, so nasty, so heavily litigated, it’s very hard to come back and say you could have saved money here and there,” he said. “Bankruptcies, when they are planned and organized, are cheaper than those that are chaotic.”
In June, three months after Lehman’s plan took effect, Weil fired 60 salaried attorneys and 110 staff and cut some partners’ pay. Miller said such developments are predictable when a big case like Lehman winds down.
He also said there’s no basis for claims that Lehman took too long to begin repaying creditors.
“Other big cases have taken much longer,” he said. “Given the complexity and size of the case, it’s extraordinary that distribution has occurred in only four and a half years.”
The fees are justified given the effort put into the case, including many days of “24-7” work by employees, Miller said. He compared attorneys’ compensation to that of plumbers, who are also paid by the hour, “though plumbers are more appreciated than lawyers.”
Weil, which represented Lehman in financial matters for more than two decades before the bankruptcy, won court approval in 2008 to bill as much as $950 an hour for its top lawyers. That figure rose to $990 by 2010 and as much as $1,000 for partners working overseas, court records show.
“When you’re working on an hourly basis, it’s not a great way to make money,” Miller said. “If you come up with a good idea that’s very valuable, you only get paid one hour for it.”
The case is In re Lehman Brothers Holdings Inc., 08-bk-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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