Lehmans administration - the ultimate test

Lehman Brothers represents the biggest administration the UK has seen in
recent years, certainly since MG Rover ­ and, arguably, it is far more
significant.

Administrators are used to peeling away the layers at companies with a lot of
moving parts, but the fall of an investment bank is in a league of its own.

The prospect of unravelling Lehman’s derivatives book, which PwC’s joint
administrator Dan Schwarzmann dubbed ‘extraordinarily complex’, is far from
pretty.

Think about the number of transactions an investment bank makes in a day and
the scale of PwC’s task is put into perspective.

The consensus in the insolvency community is that PwC is in for a bumper
payday in return. One IP didn’t even ‘want to think’ about the fees PwC would
make.

Last week it emerged that PwC had 80 staff initially working on the
administration, with more expected to be brought in.

A Public Accounts Committee report showed that a partner could expect £425
for an hour’s work at MG Rover, as at 11 April 2005, while a manager’s hourly
rate was £247. Taking inflation and higher demand for IPs into account, the
hourly rate will have gone up by more than the rate of inflation.

One source familiar with these issues said that a middle manager could expect
£300 an hour today. ‘If you think about 80 people getting paid at an average of
£300 an hour, working 10-12 hour days, you can work it out for yourself.’

That would mean PwC racking up fees at more than £1m a week.

So how did PwC land the job ahead of everyone else?

‘I have no doubt PwC were the least conflicted. The Big Four have enormous
conflict issues, increasingly so because of Sarbanes-Oxley,’ said a mid-tier IP.

‘When you provide a material amount of advice to that particular company you
are ruled out.’

The administration will test PwC’s business recovery arm to the core but,
perhaps more than anyone, it has the firepower to do the job.

It has about 900 staff in 23 offices and is the UK’s largest business
recovery services practice, providing advisory services to lenders, creditors,
companies and individuals.

Recovery means working with colleagues from other departments. PwC has
already said it is also handling corporate finance, financial services, real
estate, human resources, asset recovery and tax at the company.

PwC’s workload will become a lot easier if the firm manages to find a buyer
for the solvent parts of the company. On the other hand, the administrators have
already warned that they could not rule out more companies in the Lehman Bros
Europe fold going under.