Lehman Brothers files for Chapter 11 protection

[September 16, 2008]  NEW YORK (AP) -- Lehman Brothers, a 158-year-old investment bank choked by the credit crisis and falling real estate values, filed for Chapter 11 protection in the biggest bankruptcy filing ever on Monday and said it was trying to sell off key business units.

The filing was made in the U.S. Bankruptcy Court in the Southern District of New York by Lehman Brothers Holdings Inc., the bank's holding company. The case had been assigned to Judge James M. Peck.

Lehman fell under the weight of $60 billion in soured real estate holdings, and the credit market's dislocation ultimately forced it to seek court protection. The credit crisis has caused global banks to write down more than $300 billion in asset value since last year, and caused the shotgun sales of Merrill Lynch & Co. and Bear Stearns Cos.

Lehman's bankruptcy filing marks the end of a Wall Street firm that started the U.S. cotton trade before the Civil War and financed the railroads that built a nation.

The company's roots began in 1844 when Henry Lehman immigrated from Rimpar, Germany, to Alabama, where he established a dry goods store that catered to local cotton farmers in Montgomery. Lehman Brothers evolved from merchandising to a commodities broker, and then later into underwriting where the firm helped finance construction of the Pennsylvania Railroad, among others.

Chairman and Chief Executive Richard S. Fuld, who joined Lehman as a college student in 1969 and was the longest serving CEO on Wall Street, now has the dubious task of winding down the company's $639 billion of assets. It has about 25,000 employees worldwide, joining the swell of unemployed bankers and traders hurt by the credit crisis.

Many Lehman employees seen entering its headquarters in midtown Manhattan tucked their chins down to avoid talking to the media and others who had lined up behind metal barriers in front of the building.

Some carried empty shopping, tote bags or gym bags in to the office. Some walked in with ties undone or wore more casual clothes like polo shirts than they may have otherwise.

Lehman's filing is the biggest corporate bankruptcy in history in terms of assets held, Mike Bickford of Jupiter eSources said. The next biggest bankruptcy was Worldcom Inc., with $126 billion in assets, and Enron Corp., with $81 billion. The figures are not adjusted for inflation.

Lehman plans an orderly liquidation of its assets in the coming months, and possibly years.

"It is going to be big, it's going to be complicated, it's going to involve a phenomenal number of professionals and it will be very expensive," John Penn of Haynes & Boone LLP said about the case.

Martin Bienenstock, a partner at Dewey & LeBoeuf who was the lead lawyer on the Enron case, said that while Lehman's case was is the largest ever in terms of asset size, it could end up being far less complicated than Enron and get wrapped up within three to four months.

"It's in a race against time because its franchise is really its people," Bienenstock said, adding that Lehman's main mission would be to sort out its case before its employees find new jobs and move on.

In Washington, the Securities and Exchange Commission said its examiners will remain at the offices of Lehman Brothers to oversee an "orderly transfer" of assets in retail customer accounts to one or more brokerage firms that are insured by the Securities Investor Protection Corp.

The SEC noted in a statement that Lehman's decision to file for bankruptcy protection does not affect the SIPC protection covering the firm's retail securities customers.

The SEC also said it is coordinating with overseas regulators to protect Lehman's customers and to maintain orderly markets.

"We are committed to using our regulatory and supervisory authorities to reduce the potential for dislocations from Lehman's unwinding, and to maintain the smooth functioning of the financial markets," SEC Chairman Christopher Cox said in a statement.

In London, the administrators who have taken control of key Lehman Brothers' businesses in the United Kingdom said it could take years to dispose of the company's assets to pay off creditors.

Tony Lomas of PriceWaterHouseCoopers said liquidating those assets will be more complex than disposing of Enron's European assets, which took six years after the U.S. energy company's 2001 bankruptcy.

Lehman's last hope of surviving outside of court protection faded Sunday after British bank Barclays PLC withdrew its bid to buy the investment bank. The troubled investment bank learned at a last-minute meeting on Friday with federal officials that it would not be getting any emergency funding to give it the liquidity it needed, Chief Financial Officer Ian Lowitt said in an affidavit.

"Management believed that divorcing the real estate assets from the rest of the company would relieve the pressure on the company," he said in the affidavit.

Investors didn't buy the plan, sending shares down 75 percent last week. The stock was worth pennies in electronic trading on Monday, an astonishing descent from the $67.73 it was worth one year ago.

"It's a weird case because ordinarily you think of bankruptcy as giving you breathing space -- it's not clear it will here," said David Skeel, a bankruptcy law historian at the University of Pennsylvania. "They've used up a lot of their lives already. They desperately tried to find a solution. They've tumbled into bankruptcy kind of having run out of near-term options. This is a company that is in free-fall."

The filing had been made so hastily that the company had not yet filed motions by Monday morning that are typically made on the first day, such as asking the court for permission to continue paying employees.

Filing for Chapter 11 protection allows a company to restructure while creditor claims are held at bay. The company most likely chose to file under Chapter 11, rather than a Chapter 7 liquidation, so that it could retain more control over the selling off of assets, said Stephen Lubben, the Daniel J. Moore professor of law at Seton Hall Law School. In a Chapter 7 filing, the court would immediately appoint a trustee to take over the case.

"I'm sure they think they could conduct a better liquidation themselves, and that's probably true," Lubben said.

The investment bank had said earlier that none of its broker-dealer subsidiaries or other units would be included in the Chapter 11 filing. That means customers of its broker-dealers will not be subject to claims by creditors in the bankruptcy case.

Penn of Haynes & Boone said leaving some entities out of the bankruptcy filing allows the market to deal with them contractually rather than have the bankruptcy case "walk in and stop everything."

"There are so many types of securities vehicles that are carved out of bankruptcy protection completely," he said.

In its bankruptcy petition, Lehman listed Citigroup among its biggest unsecured creditors, with about $138 billion in bonds as of July 2. The Bank of New York Mellon Corp. was listed as holding about $17 billion in debt.

Citi and Bank of New York both said Monday they serve as trustees for Lehman debt, not that they are creditors themselves. Citi issued a statement to say that its role is "administrative in nature and does not represent exposure for Citi to Lehman." Bank of New York said, "In this situation, our role has been to serve as a trustee for certain Lehman Brothers bond offerings. We have no outstanding loans to Lehman."

Lehman said that as of May 31, it had assets of $639 billion and debt of $613 billion.

[Associated Press; By VINNEE TONG and JOE BEL BRUNO]

AP Business Writers Candice Choi and Sara Lepro in New York, Marcy Gordon in Washington, and Bob Barr in London contributed to this report.

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