Lehman Brothers Rears Its Ugly Head In Germany

Another Lehman Brothers kerfuffle has erupted, this time in Germany, in broad daylight. With a stunning amount: up to €800 million ($1.04 billion) in fees for the insolvency administrator. It blows away the prior German record of €70 million paid to the insolvency administrator of Arcandor AG, the parent of department store and mail-order retailer KarstadtQuelle.

Hedge funds, which have massively bought up claims of the original Lehman creditors, are raising a ruckus. Apparently, they want to shame insolvency administrator Michael Frege, a partner at CMS Hasche Sigle, Germany’s largest law firm, into backing off his demands. As insolvency administrator, he is at the center of the case and is personally liable for willful or grossly negligent errors. He “must not receive a success premium, especially since he made some bad decisions by having sold assets below market value,” hedge funds postulated. More than €250 million would be out of the question.

It worked. Almost.

“€800 million in fees for processing a scrapped bank,” Sahra Wagenknecht chimed in. As deputy chairperson of the Left Party with an anti-capitalist agenda, she has jumped on the hedge-fund bandwagon. Employees or retirees, she said, “could only shake their heads” (her solution wouldn’t please the hedge funds: “We need a 75% tax bracket for income millionaires”).

But now CMS counterattacked with its own publicity campaign. And allegations. When Lehman went bankrupt in September 2008, only €100 million in liquid assets were available in the accounts of Lehman’s German operations, according to CMS Managing Partner Hubertus Kolster. To chase down and sell every possible asset, CMS put 100 lawyers and insolvency experts on the case. Now €5.6 billion could be paid back to the Bundesbank, and between €9 and €10 billion could be distributed to the remaining creditors, including the German deposit insurance fund and hedge funds. Creditors would receive about 80% of their claims—a lot more than originally expected.

(He didn’t mention that massive money printing and asset purchases by central banks around the world have created an epic credit bubble that inflated asset values and bailed out just about everyone, not just Lehman creditors.)

“Creditors who have been there from the beginning are all highly satisfied with the proceedings,” Kolster said. But the 100 lawyers and experts that CMS had assigned to the case already billed over €200 million. The court would make the decision over the final amount based on the complexity of the case and the amount of the assets. He conceded that it would likely be less than €800 million. On the other hand, he refused to say how much Frege would receive, but a success premium would be included.

Then Kolster fired his broadside: Hedge funds were creating a public outcry over the fees to pressure Frege into prioritizing and accelerating service of their claims. “But there was nothing to negotiate,” he said.

Frege lashed out against the hedge funds as well. In his function as insolvency administrator, he was solely concerned with the fundamental principle of German bankruptcy law that all creditors were to be treated equitably, he said, but for hedge funds that principle was “a foreign word.” What they wanted was preferential treatment.

At the creditors’ meeting on November 29, he’d propose a plan to complete the insolvency process in two to three years, which he considered extremely fast. If that failed, the courts could be working on this case for five to ten years, he said. It was the ultimate threat: if the hedge funds threw a monkey wrench into his grand plan, they might have to wait a long time to see the benefits of their bets.

But the fight, regardless of how it will turn out, demonstrates that big rotten banks can be unwound. It’s messy and unfair. It’s a corrupt smelly process with a lot of strong-arming. Bondholders, counterparties, stockholders, and others re-learn the notion of risk, re-experience the consequences of their decisions, and re-discover that there is a market for every crappy asset—even claims for the detritus of a collapsed house of cards—as long as it’s still an asset. If the price is low enough.

The alternatives to that messy cleansing process of failure are endless bailouts, the nonsensical horror show of TBTF, markets that no longer function freely but are controlled or manipulated by central banks, and untouchable bankers who get to propagate a profoundly corrupt system.

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