Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, November 28, 2011

What Role did Derivatives Play in the Collapse of Lehman Brothers?

The Stanford Law Review Online has just posted a succinct and provocative article on Misconceptions About Lehman Brothers' Bankruptcy and the Role Derivatives Played, by Kimberly Summe, who identifies herself as former Managing Director, Lehman Brothers.  It is especially timely as on Nov. 4, 2011 Lehman Brothers' creditors voted on the firm's liquidation plan, with approval from the bankruptcy court expected to follow on December 6, 2011.  The Article offers a brief overview of some of the most persistent misconceptions regarding Lehman Brothers' bankruptcy and the role that derivatives played in it.  In particular, she emphasizes that the 2,209 page report prepared by Lehman Brothers' bankruptcy report never mentions derivatives as a cause of the bank's failure, instead identifying poor management choices and a sharp lack of liquidity as driving factors.  She also notes that, according to the bankruptcy expert's report, regulatory agencies (SEC) had considerable data about the firm's financial situation but took no action to regulate the firm's conduct.  Moreover, "[u]ltimately, then, the largest bankruptcy filing in U.S. history has shown that resolution can be achieved in just over three years, and that derivatives caused the largest enhancement to the bankruptcy estate."  Finally, she rejects the notion that the bankruptcy code is not optimal for systemically important bankruptcies.

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