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Lehman & Barclays

posted by Stephen Lubben

Lehman has sued Barclays over the incredibly rushed sale of Lehman's key brokerage assets to Barclays a year ago. No doubt the financial industry crowd will use this to further promote their argument that chapter 11 does not work for large financial firms, thus supporting the need to reinvent the wheel create a new "resolution authority."

This, of course, ignores the degree to which the financial community created the Lehman mess, by both undermining chapter 11 through the reckless expansion of the derivative safe harbors in 2005 and by the general refusal to work with the existing chapter 11 system both before (Bear Sterns) and after (AIG) Lehman. In the case of AIG, this also connects to today's story about the Fed's decision to pay top dollar to AIG's counterparties, whereas a credible threat to put AIG into chapter 11 might well have saved  billions of dollars. Of course, Treasury and the Fed were unable to make such a credible threat, given their generally dismissive relationship with chapter 11 and an extreme case of cold feet following Lehman.

To be sure, Lehman's old management should get a good deal of the blame for calling bankruptcy counsel on the day they wanted to file. It strikes me as a breach of fiduciary duty to conduct no advance planning  for the largest chapter 11 case, ever. The trick, of course, is whether the estate can make the breach into a duty of loyalty claim, as duty of care claims are essentially useless as a result of Delaware's §102(b)(7).

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