Lehman Brothers Holdings on Thursday won a judge’s approval to split into two businesses: one to manage its illiquid assets for five years and another to handle work arising from its 2008 bankruptcy.
A unit called Lamco would run Lehman’s real estate and private equity assets, while the parent company would keep 220 employees to handle claims stemming from its Chapter 11 filing, Lehman said in March.
The Lehman parent might be able to pay almost $41 billion to creditors with allowable claims of $294 billion within five years, compared with $25 billion, or less than 9 cents on the dollar, if the assets were liquidated now, Lehman said in a disclosure explaining its plan.
Lehman revised the Lamco proposal after it was criticized by Goldman Sachs Group and eight other financial companies including Morgan Stanley, Credit Suisse Group and Deutsche Bank. They called it “a reorganization plan for debtors’ employees and management separate, apart and ahead of the reorganization plan for creditors” in an April 5 court filing in U.S. Bankruptcy Court in New York.
Lamco, which would also manage assets such as derivatives and corporate loans for Lehman affiliates, also drew creditors’ criticism for denying those affiliates a stake in the venture. Affiliates would help fund Lamco, yet Lehman would deprive them of “any governance or ownership interest,” said the banks, which are derivatives creditors of a Lehman affiliate, Lehman Brothers Special Financing.
Lehman on Wednesday said it would “enhance the governance right” of its creditors committee by giving it sole right to appoint an independent director to Lamco’s board and eventually distribute some of its Lamco stock to affiliates. The moves fended off some objections to Lamco and “resolved the issues raised” by the derivatives creditors and Lehman’s U.K. units, which also objected to the Lamco plan, it said in a court filing, asking the judge to overrule any remaining objections.
U.S. Bankruptcy Court Judge James Peck, who has jurisdiction over the largest bankruptcy in U.S. history, has generally allowed Lehman’s requests to undertake longer-term investments that aren’t usual for bankrupt companies. In January, he agreed to let it spend $1.4 billion of creditors’ money to buy loans and mortgages from an insolvent German affiliate, Lehman Brothers Bankhaus.
Last month, Mr. Peck voiced reservations even while approving a settlement between Lehman and J.P. Morgan Chase that would produce more assets for Lamco to manage. Under the accord, J.P. Morgan is to return to Lehman $9 billion in illiquid securities and real estate that are hard to value, taking cash and collateral in exchange.
“It’s hard to see the benefit to the Lehman estate,” Mr. Peck said in court. “Is this just to prime the pump of Lamco?”