This Will End Well: Lehman Bros Sues Intel Over Bad Business Deal
Back in 2008, Lehman Brothers -- once the fourth-largest investment bank in the United States -- tanked in September of 2008 as part of the subprime lending crisis. Its collapse kicked off the Dow's worst performance in a decade and the data that emerged in the aftermath made it clear that LB was over-leveraged and hugely arrogant. Its CEO dismissed talk of reducing yearly bonuses as "embarrassing" days before the entire company collapsed.
For the past few years, Lehman has been in bankruptcy proceedings. It's emerged from under this rock to file a suit against Intel in an apparent bid to recover assets it claims Santa Clara improperly claimed. The deal between the two companies, signed in the period right before LB went bankrupt, was as follows:
A Lehman derivatives unit signed an agreement to borrow $1B from Intel. In return, the derivatives unit promised to trade Intel 50.5 million shares of stock and put up a billion in cash collateral. The purpose of this sort of deal is to prop up balance sheets -- it's the kind of behavior that ultimately sank Lehman. The company had a habit of selling assets (reportedly about $50B) through repurchase agreements, temporarily recognizing the profits of the sale as revenue, then promptly rebuying them.
What happened with Intel is fairly simple. Lehman Brothers agreed to the exchange, then went bankrupt. Intel took the collateral and went home. Now Lehman's corpse is suing Intel, claiming that the value of the Intel shares was "$873 million, not $1 billion." Lehman is asking for unspecified fees and damages in the exchange.
There's a certain hilarious chutzpah at work here. The purpose of collateral, in any loan, is to safeguard the interests of the lender. Lehman thought nothing of over-leveraging itself to the point that a downturn in the housing market destroyed the company, but it wants Intel to pay fees for having the temerity to seize collateral that was worth more than the promised value of the stock. Meanwhile, actually giving Lehman the money won't compensate any of the millions of people whose savings were wiped out in the Great Recession -- it would simply go to fund the bankruptcy proceedings.
It's not quite as stupid as Goldman-Sachs threatening to sue the US government over the conditions of the bailout, but it's not far off.
For the past few years, Lehman has been in bankruptcy proceedings. It's emerged from under this rock to file a suit against Intel in an apparent bid to recover assets it claims Santa Clara improperly claimed. The deal between the two companies, signed in the period right before LB went bankrupt, was as follows:
A Lehman derivatives unit signed an agreement to borrow $1B from Intel. In return, the derivatives unit promised to trade Intel 50.5 million shares of stock and put up a billion in cash collateral. The purpose of this sort of deal is to prop up balance sheets -- it's the kind of behavior that ultimately sank Lehman. The company had a habit of selling assets (reportedly about $50B) through repurchase agreements, temporarily recognizing the profits of the sale as revenue, then promptly rebuying them.
What happened with Intel is fairly simple. Lehman Brothers agreed to the exchange, then went bankrupt. Intel took the collateral and went home. Now Lehman's corpse is suing Intel, claiming that the value of the Intel shares was "$873 million, not $1 billion." Lehman is asking for unspecified fees and damages in the exchange.
There's a certain hilarious chutzpah at work here. The purpose of collateral, in any loan, is to safeguard the interests of the lender. Lehman thought nothing of over-leveraging itself to the point that a downturn in the housing market destroyed the company, but it wants Intel to pay fees for having the temerity to seize collateral that was worth more than the promised value of the stock. Meanwhile, actually giving Lehman the money won't compensate any of the millions of people whose savings were wiped out in the Great Recession -- it would simply go to fund the bankruptcy proceedings.
It's not quite as stupid as Goldman-Sachs threatening to sue the US government over the conditions of the bailout, but it's not far off.
