Pay the Bums

Over at the NY Times, William Cohan has a post complaining about a pending motion in Lehman. Unfortunately this represents just another example of how the mainstream press continues to muddle their reporting of chapter 11.

The motion in question asks the court to confirm that the automatic stay does not prevent Lehman's former officers and directors from recouping their legal defense costs from several D&O polices that Lehman purchased pre-bankruptcy. Cohan asks

Why should Lehman’s creditors, who stand to get pennies on the dollar when the bankruptcy case winds up years from now, foot the rapidly mounting legal bills for people like the former chief executive Dick Fuld and two of his top officers, Erin Callan and Ian Lowitt? 

Well, Lehman no doubt committed to do so under Delaware law. And why do you think Lehman bought these insurance policies?

More importantly, Cohan does not explain how this motion has any effect on Lehman's creditors. Your average Lehman bondholder has no right to submit a claim again the insurance policies; the policies in question only pay D&O claims, nothing else. But not paying the claims of former officers and directors would result in them asserting claims against the estate for reimbursement. So not allowing access to the insurance policies seems more likely to harm creditors, by expanding the pool of unsecured claims.

Thus, while we might well complain about the feeble duty of care in Delaware, there is really nothing to the idea that granting this motion represents any sort of harm to the Lehman estate, which is the entire point of the Times post. The harm, if any, was done back when Lehman used the money to buy these policies.