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Lehman in Jakarta

posted by Stephen Lubben

On Friday, Lehman filed a fascinating motion to enforce the automatic stay and adversary proceeding that seeks essentially the same relief. The pleadings involve Lehman's attempt to settle a dispute regarding a swap transaction in the bankruptcy court in New York, and the counterparty's attempt to litigate in Indonesia, despite a choice of law clause that says "New York."

These pleadings have provoked a few unrelated thoughts, but in this post, let's talk about the deal itself.  And maybe also ask, "what was Lehman thinking?"

The parties to the swap are a Lehman subsidiary and an Indonesian corporation, PT Mobil-8 Telecom, which is publicly traded in its home country.

I'm told the swap in question is called a "Range Accural Trade." But the swap can be best understood as a series of daily digital interest rate options, with the corporate counterparty paying Lehman a fixed rate and Lehman paying either nothing or 80 basis points more than the fixed rate. Lehman's contingent payment was determined by whether the 30 year Euro swap rate was higher than the 2 year Euro swap rate. The deal is based on a notional amount of $100 million, so these interest payments, which were to be netted every March and September from 2008 to 2013, were potentially quite large.

In short, a purely speculative transaction. But why didn't Lehman get any "up front" collateral from its corporate counterparty? If the deal went it Lehman's favor, it was to receive more than $2 million every six months. Yet it essentially allowed itself to have an unsecured exposure of that amount to a counterparty located in jurisdiction not known for strong legal institutions. 

Lehman made the first payment on the swap -- a bit over $400,000, which only highlights how speculative the deal was from the counterparty's perspective. After that, the deal went in Lehman's favor and the payments stopped coming. But according to the complaint, it seems Lehman didn't notice until two years latter.


Choice of law and waiver of venue are two different legal concepts. Your reference to the choice of law being New York is close to irrelevant.

Also, what do you mean "what was Lehman thinking?" That was their business model: taking the other side of the trade without collateral is how Lehman made money. In fact, a lot of their trades had one-way collateral provisions requiring only Lehman to post. Moreover, the issue isn’t whether Mobile-8 is capable of paying, it’s Mobile-8’s attempt to sue in Jakarata, which is a violation of the automatic stay.

The venue issue will be the subject of the next post on this -- but it is both a choice of law and venue clause.

As for the remainder of the comment, I'm not sure what to make of grand statements about Lehman's business model. Certainly the many hedge funds now fighting to get their IA collateral back from Lehman London seem to contradict the notion that Lehman routinely went uncollateralized.

Lehman in Jakarta?

Darmok and Jalad at Tanagra!

The viewing habits of the readership are revealed to be what everyone expected. I actually preferred Enterprise, save for the last episode, which I pretend didn't happen.

Did you read section 13(b) before you posted? The 92 Master specifically provides that each party can bring an action in any jurisdiction. Your reliance on the New York choice of law provision is frivolous.

You're not sure what to make of my "grand statements" about Lehman's business model? If you really think the premise of my statement--that in the ordinary course of business Lehman took above-market risks with their swap book--is a grand statement or in any way baseless or even questionable, then please explain.

I've only been reading your posts for a short time, but you have a habit of taking the wrong position and then defending it for no apparent reason. You are wrong on both points here.

Yeah. I'm with SD on this. Choice of law is one thing; choice of forum is another. I be confused.

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