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The failure resolution of Lehman Brothers

Author

Listed:
  • Michael J. Fleming
  • Asani Sarkar

Abstract

This study examines the resolution of Lehman Brothers Holdings Inc. in the U.S. Bankruptcy Court in order to clarify the sources of complexity in its resolution and to inform the debate on appropriate resolution mechanisms for financial institutions. The authors focus on the settlement of Lehman?s creditor and counterparty claims, especially those relating to over-the-counter (OTC) derivatives, where much of the complexity of Lehman?s bankruptcy resolution was rooted. They find that creditors? recovery rate was 28 percent, below historical averages for firms comparable to Lehman. Losses were exacerbated by poor bankruptcy planning and mitigated by timely funding from the Federal Reserve. The settlement of OTC derivatives was a long and complex process, occurring on different tracks for different groups of derivatives creditors. Consequently, the resolution process was less predictable than expected, and it was difficult to obtain an informed view of the process.

Suggested Citation

  • Michael J. Fleming & Asani Sarkar, 2013. "The failure resolution of Lehman Brothers," Economic Policy Review, Federal Reserve Bank of New York, pages 175-206.
  • Handle: RePEc:fip:fednep:00016
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    References listed on IDEAS

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    1. Bruche, Max & González-Aguado, Carlos, 2010. "Recovery rates, default probabilities, and the credit cycle," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 754-764, April.
    2. Acharya, Viral V. & Bharath, Sreedhar T. & Srinivasan, Anand, 2007. "Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries," Journal of Financial Economics, Elsevier, vol. 85(3), pages 787-821, September.
    3. Bliss, Robert R. & Kaufman, George G., 2006. "Derivatives and systemic risk: Netting, collateral, and closeout," Journal of Financial Stability, Elsevier, vol. 2(1), pages 55-70, April.
    4. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
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    Cited by:

    1. Biais, Bruno & Heider, Florian & Hoerova, Marie, 2018. "Variation margins, fire sales, and information-constrained optimality," CEPR Discussion Papers 13192, C.E.P.R. Discussion Papers.
    2. Bruno Biais, 2016. "Optimal margins and equilibrium prices," 2016 Meeting Papers 270, Society for Economic Dynamics.

    More about this item

    Keywords

    Chapter 11; derivatives;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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