Wall Street’s hopes to squeeze $37bn out of Lehman Brothers Holdings Inc for its role in the mortgage crisis have long been dashed. Now firms are about to find out what fraction of that amount they can recover.
US Bankruptcy Judge Shelley Chapman will rule from the bench in Manhattan court today on a long-running dispute over Lehman’s residential mortgage-backed securities, known as RMBS. The decision will put a final tally on what RMBS buyers can recover for alleged breaches Lehman made when it pooled together individual home loans made during the housing bubble.
While Lehman has said that holders of the RMBS should get, at most, $2.38bn, and some institutional holders have agreed to a similar number, a group of trustees has been fighting for $11.4bn. The ruling comes after a complex estimation trial that ran from November to February. With each mortgage document — many of which are thousands of pages long — declared unique, the case waded through thousands of loan records on which the trustees asserted breaches.
At stake are billions of dollars in potential disappointments for hedge funds that own streams of payments tied to the securities, and are represented by the trustees. Other Lehman creditors are expected to benefit as a resolution will free up money that can’t be distributed until this matter is resolved.
A resolution of the RMBS claims leaves only one major dispute remaining for defunct Lehman. After recently closing a $2bn dispute with Citigroup Inc over derivatives after a trial that unearthed 2008 trash talk from traders, a parallel dispute with Credit Suisse remains.
Lehman isn’t the only bank to have dealt with RMBS claims, Royal Bank of Scotland Group Plc this week agreed to pay $500mn to resolve a New York state probe on how it marketed RMBS, becoming the latest bank to settle such a probe.
The case in front of Judge Chapman concerns hundreds of thousands of loans that Lehman packaged into RMBS from 2002 to 2007, representing to buyers that the documents for each loan it included contained no “untrue statement” and that borrowers hadn’t given “false” or “misleading” information.
After Lehman’s 2008 bankruptcy, trustees representing hedge funds and institutional investors brought a claim, saying Lehman breached its contract.
“Lehman’s own documents show it was aware of the widespread problems and deteriorating performance of the loans it had securitised, even as compared to the rest of the industry,” at one point finding half the loans contained material misrepresentations, the trustees said in a court filing.
Lehman argued that the trustees took a “blunderbuss approach” in an aggressive attempt to squeeze money out of its defunct estate. As an example, they cite an abrupt turnaround when they decided at one point not to pursue 40% of their initial breach claims.
At one point, around 14 large institutional holders, including Goldman Sachs Asset Management LP and BlackRock Financial Management, broke ranks with hedge funds and accepted a settlement valuing claims around $2.4bn.
But some hedge funds continued to fight hard for the $11.4bn number, sending the process to trial. If they succeed in bringing in a number above $2.38bn, all investors will benefit. If Chapman gives a number far below that, it could cause a rift between the hedge funds and the trustees.
The trustees representing RMBS holders are Deutsche Bank National Trust Co, Law Debenture Trust Company of New York, US Bank National Association and Wilmington Trust Co, according to court papers.
A group of hedge funds, including Whitebox Advisors LLC, Deer Park Road Management Co, Tilden Park Capital Management LP, was formed in 2016, and expanded in May 2017 to include Prophet Capital Management LP, Tricadia Capital Management LLC, BlueMountain Capital Management LLC and others, according to court records.