Lehman Brothers files for bankruptcy

Financial Times,  September 15 2008

Lehman Brothers Holdings on Sunday filed for bankruptcy protection as it emerged that Japanese banks were the US group’s top unsecured lenders and authorities in Tokyo have ordered Lehman’s Japanese subsidiary to retain assets in the country.

The collapse of the 158-year-old Wall Street institution will cause thousands of job losses among the investment bank’s 25,000-strong staff.

The petition for bankruptcy protection does not include Lehman’s broker-dealer operations and other divisions, including Neuberger Berman, the asset manager.

This signals that the bank is either in talks to find buyers for the operations or is planning to unwind the businesses gradually.

The Chapter 11 filing reveals that Japan’s Aozora is owed $463m in unsecured bank loans, more so than any other banks, while Mizuho is in second place with $289m owed.

Aozora is controlled by the US private equity group Cerberus. In August, it had to revise its profit downward to take into account a loss from its investment in GMAC, the US financial services group.

The Financial Services Agency in Japan issued the order to Lehman on Monday. A spokesman told Bloomberg: “We are in contact and co-operation with overseas regulators including those in the US … We are currently gathering information and working to understand the situation.”

Citibank and The Bank of New York Mellon Corporation are the largest unsecured bondholders in their roles as trustees, with a combined exposure of around $138bn.

PricewaterhouseCoopers has begun the process of winding down Lehman’s European units on Monday morning.

Counterparty risk *
  Q2 2008 (€ m) 2007 (€ m)
Société Générale  473,329 487,959
Credit Agricole  383,995 364,178
BNP Paribas  NA  597,578
Natixis  NA  202,928
Barclays  460,423 352,133
Deutsche Bank  1,138,090 1,193,131
Credit Suisse 277,362 331,807
UBS  652,972 757,271
* European banks – outstanding trading positions with Lehman
Source: JPMorgan estimates, Company data

The London Financial Services Authority said in a statement: “Lehman Brothers is a US institution regulated by the [Securities and Exchange Commission], so the FSA is working closely with the US authorities to ensure an orderly wind down of its principal UK trading subsidiary, Lehman Brothers International (Europe), which was placed into administration earlier this morning.”

“The FSA is working with market practitioners, including the London Clearing House, to ensure the process connected with the winding down of this wholesale business is completed in an orderly manner to minimise any market disruption.”

Germany’s regulator BaFin imposed a so-called moratorium on Lehman’s unit in the country, an order aimed at preserving its remaining assets.

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