In Lehman Buy, Barclays Got a Remarkable Bargain

Andrew Ross Sorkin|The New York Times

When is a good deal too good?

That question is being whispered around Wall Street these days, a year after Lehman Brothers went bust in the biggest bankruptcy ever.

Sure, the panicked days of last autumn might seem like ancient history. After all, for much of Wall Street, the financial crisis is receding quickly, and many banks are minting money again.

And yet all these months later, heads are still being scratched over the way Barclays managed to scoop up the remains of Lehman.

Barclays, it turns out, cut itself a remarkably good deal. A recent court filing — this one free of redactions — even accuses Barclays of making off with $5 billion without anyone noticing, an amount that Lehman’s creditors seem to think should be treated as the largest theft in banking history.

In simplest terms, the creditors to Lehman’s estate — including large pension funds and hedge funds — claim that Barclays bought the American firm for $5 billion less than it was worth.

How could that possibly happen?

According to the filing, Barclays received Lehman securities valued at about $50 billion for just $45 billion in cash.

The complaint suggests more was going on here than some flubbed back-of-the-envelope math. A spokeswoman for Barclay’s declined to comment.

Some Lehman executives who negotiated that deal, the complaint asserts, knew they would receive offers to work at Barclays. One such executive, Lehman’s president, Bart McDade, was offered a compensation deal worth $37 million. This, of course, was all happening during the week that the financial world seemed about to fall off its axis. (Mr. McDade left the firm, never received the money, and some people close to Barclays said he was never offered the money.)

According to the complaint, which was brought by Lehman’s estate on behalf of its creditors and includes excerpts of depositions of crucial players, Barclays had Lehman executives undervalue its assets so that they appeared to be $5 billion lower than they really were.

At the time of the transaction, the deal was presented in bankruptcy court to Judge James Peck by Lehman’s own lawyers as a wash — meaning that Barclays was buying Lehman’s assets for their true market value.

But an e-mail message, sent at the time the deal was being negotiated, seems to suggest that some Lehman executives knew the deal represented a discount.

“Well it took all night and lots of back and forth but the deal is done and ready for the board,” Martin Kelly, a Lehman managing director wrote in his e-mail message to a colleague. “Final price did not change meaningfully approx a $5b all in economic loss versus our marks.”

Barclays was never shy about trying to do what anybody in a buyer’s market would do, which was to try to acquire Lehman assets at a discount.

Ian Lowitt, Lehman’s chief financial officer at the time and now an employee of Barclays, explained the discount in his deposition this way:

“I was aware that the — that Barclays was going to purchase a substantial block of assets for less than the amount that we had on our books to reflect a sort of bid offer that reflected both the size of the purchase, as well as inherent volatility in the market, which was significant that week.”

That explanation makes some sense. People close to Barclays say the complaint by the creditors of Lehman’s estate misconstrues what happened, and that the numbers reflected in the complaint referred to asset values at the beginning of the week when the deal was signed, not by the end of a volatile week when the deal was presented to the judge.

But if that were the case, the obvious question is why the deal was presented to the judge as a wash when it was consummated.

One answer, according to the complaint, is that Lehman’s own lawyers were kept in the dark about the discount.

The filing, which shows only excerpts of deposition testimony and may therefore be leaving out important context, says that Lehman, at the direction of Barclays, inflated its liabilities to make the deal more valuable to Barclays.

It says that Barclays, behind the scenes, never planned to make good on certain liabilities, like the $2 billion in compensation that had been set aside as part of the deal.

The agreement was “that we would assume a liability related to compensation but we didn’t agree that we would pay the whole thing out,” Barclays’ chief operating officer, Rich Ricci, said in his deposition. Again, when presented in bankruptcy court, Barclays was going to pay the $2 billion in compensation. People close to Barclays said the entire amount was paid.

All of this might seem irrelevant bickering, except that Lehman’s creditors say they are out hundreds of billions of dollars and this is a crucial piece of the financial crisis puzzle.