Failed in­vest­ment bank al­leges for­mer trad­ing part­ner con­cocted in­flated claims

New Straits Times - - Business -


AL­MOST a decade af­ter the global fi­nan­cial crisis, the fate of an­other US$2 bil­lion (RM8.68 bil­lion) from the wreck­age of Lehman Brothers Hold­ings Inc is about to be de­ter­mined.

The failed in­vest­ment bank is seek­ing to re­coup the cash from one of its old deriva­tives trad­ing part­ners, Cit­i­group Inc.

In a trial that started last week in Man­hat­tan bank­ruptcy court, Lehman al­leged Cit­i­group cre­ated “phantom trans­ac­tion costs” in or­der to jus­tify a bank­ruptcy claim that would al­low it to keep US$2 bil­lion in cash Lehman had de­posited on the trades.

Cit­i­group con­tended it did noth­ing wrong and used rea­son­able prac­tices.

The trial opens a rare win­dow into the fren­zied week­end be­fore Lehman’s bank­ruptcy fil­ing on Septem­ber 15, 2008.

Banks were sup­posed to use a Sun­day trad­ing ses­sion to mit­i­gate dam­age to the fi­nan­cial sys­tem by re­duc­ing their ex­po­sure to the bank. Lehman, which first sued over the US$2 bil­lion in 2012, claimed that Cit­i­group ef­fi­ciently hedged its risks, but went on to in­flate its claim by mark­ing its books to its ben­e­fit.

The pro­ceed­ing is be­ing closely watched by the deriva­tives in­dus­try, which had been over­haul­ing the way it man­ages coun­ter­party risk.

There were un­re­solved ques­tions about whether the mar­ket’s shift to us­ing cen­tral clear­ing­houses was ef­fec­tive, said Peter Niculescu, a part­ner at Cap­i­tal Mar­ket Risk Ad­vis­ers.

The firm ad­vises fi­nan­cial in­sti­tu­tions and law firms on is­sues in­clud­ing the ter­mi­na­tion of deriva­tives agree­ments, and had rep­re­sented around 15 par­ties with re­gards to their Lehman ex­po­sure, but not Cit­i­group.

“Most banks are of the opin­ion that the non-de­fault­ing coun­ter­party is en­ti­tled to the re­place­ment cost, whether or not they do in fact re­place the po­si­tion” said Niculescu, adding that there was hope the Lehman and Cit­i­group trial would pro­vide clar­ity on that point.

Pro­ceed­ings that be­gan last Tues­day will de­cide whether Cit­i­group had to re­turn any of the money. Lawyers and wit­nesses would delve into how the two fi­nan­cial be­he­moths be­haved on the eve of a bank­ruptcy that helped throw the global fi­nan­cial sys­tem into dis­ar­ray.

At the time of the bank­ruptcy, it and Cit­i­group had en­tered into more than 30,000 deriva­tives trades tied to an es­ti­mated US$1.18 tril­lion of wa­gers on ev­ery­thing from in­ter­est rates to cor­po­rate and sov­er­eign debt.

Lehman’s bank­ruptcy gave Cit­i­group the right to ter­mi­nate the agree­ments and de­ter­mine its dam­ages.

Lehman claims that in the days, and even months af­ter its bank­ruptcy, Cit­i­group con­cocted an in­flated claim, which it even­tu­ally filed in Septem­ber 2009.

Lawyers for Lehman said in court last Wed­nes­day traders at Cit­i­group were in­structed to stray from con­ven­tion in valu­ing their po­si­tions.

In­stead of pric­ing trades at the mid-point of bid and of­fer prices, the bank marked the trades on one side or the other, de­pend­ing on which was to their ad­van­tage.

“Citi cherry-picked the val­u­a­tion curve,” said An­drew Ross­man, a lawyer for Lehman. Bloomberg


At the time of its bank­ruptcy, Lehman Brothers Hold­ings Inc and Cit­i­group Inc had en­tered into more than 30,000 deriva­tives trade tied to an es­ti­mated US$1.18 tril­lion of wa­gers.

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