Economic Policy Review
The Failure Resolution of Lehman Brothers
December 2014   Volume 20, Number 2    
JEL classification: G33, G23, G01

Authors: Michael J. Fleming  and  Asani Sarkar

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.

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