FDIC: Dodd-Frank Act would have increased Lehman creditor recovery

By Caroline Salls

Pittsburgh, April 18 - The Federal Deposit Insurance Corp. released a report Monday that Lehman Brothers Holdings Inc. creditors could have recovered substantially more under the orderly liquidation authority of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act than under the company's bankruptcy proceedings if the law had been in effect before the company failed.

According to an FDIC news release, Lehman's general unsecured creditors could have recovered $0.97 on every $1 of claims, at no cost to taxpayers, if the Dodd-Frank law had been in effect.

Under the bankruptcy proceedings, general unsecured creditors are currently estimated to receive $0.21 on their claims.

The agency said its report found that the powers provided to the FDIC under the Dodd-Frank Act to act decisively to preserve asset value and structure a transaction to sell Lehman's valuable operations to interested buyers, which are drawn from those long used by the FDIC in resolving failing banks, "could have promoted systemic stability while recovering substantially more for creditors than the bankruptcy proceedings."

"The powers to implement an FDIC liquidation of a systemic financial company during a future crisis give us the tools to end Too Big to Fail and eliminate future bailouts," FDIC chairman Sheila C. Bair said in the release.

"The Lehman failure provides an excellent model to contrast the tools available to the FDIC to effectuate an orderly resolution of a large financial institution against the process used in bankruptcy which, unlike our process, is not specifically designed to deal with the failure of a financial entity."

In addition, the FDIC said Lehman's lengthy bankruptcy proceeding has allocated resources elsewhere that could have otherwise been used to pay creditors. Through February, more than $1.2 billion in fees have been charged by attorneys and other professionals principally for administration of the company's estate.

Among the powers granted to the FDIC under the Dodd-Frank Act are advanced resolution planning, domestic and international pre-planning, providing a source of liquidity and flexible transactions.

The agency said the law also gives it speed of execution to conduct due diligence, identify potential buyers and troubled assets and conduct sealed bidding "all before Lehman ever failed and was put into receivership under Title II."

New York-based Lehman Brothers Holdings Inc. was the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15, 2008 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 08-13555.

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