Lehman administration: other institutions helping

Steven Pearson, one of the PwC administrators at Lehman Brothers, has
detailed the steps the firm’s partners are taking to deal with the complex
administration of the collapsed investment bank.

Speaking as part of a PwC webcast on the collapse, Pearson said there were
various steps the administrators were taking.

‘I just want to spend a bit of time talking through some of the specific
steps and actions that we’re taking in order to assert control of the companies’
books and assets.

‘We’re in ongoing discussions with a number of global financial institutions
to assist us with a number of things

‘Firstly in assisting us in transacting certain market positions. The company
has effectively been suspended from trading by the various dfferent exchanges
and by working through third party brokers we’re hopeful that we’ll be able to
transact market positions relatively soon.

‘Secondly they’re assisting us in finding a resolution to the failed trades,
the various different market positions that the company took towards the tail
end of last week which weren’t settled.

‘Thirdly we’re working with them to get together with the company’s
management to identify a strategy for optimally liquidating the various
different interests that the company has got across its various books.

‘We’ve worked extensively with the two principal clearing houses in Europe,
Eurex and the London Clearing House and we have an arrangement with each of
those parties now whereby certain client positions are effectively being

‘That should allow an orderly transition of client funds to third parties.
We’ve arranged for a standstill on certain margin calls with the exchanges and
we’ve got an exercise that we’ll jointly be doing with Lehman staff and staff
from relevant clearing houses to ensure that we minimise the impact on the
affected parties.

‘This ultimately should meet the first objective which we identified which is
to ensure that we realise cash for the benefit of the companies’ creditors and

‘The second area where we spent extensive time is in dealing with specific
assets pledged by third party clients.

‘Now the entire market is aware of the many substantial positions… hundreds
of billions of funds that have been invested through Lehman and that there are a
number of client-account positions in respect of that.

‘Now I should emphasise that this is exceptionally complex.

‘Whilst on the face of it the mechanisms for putting in place client monies
into protective positions is relatively simple, the mechanisms by which those
are affected are extremely complex. Whether they do or don’t constitute client
funds is an area in which we’re taking extensive legal advice from our lawyers

‘In practice that means we won’t be in a position to transfer certain client
accounts to certain client funds in the relative short term and indeed I can’t
at this point give clarity as to when positions will be transferred.

‘Clearly we’re here to look after Lehman in the first instance and the market
in the second instance and that exercise should ensure that we do that.

‘The company has also provided significant leverage to clients in order to
take market positions. We expect to liquidate a number of those positions in the
coming days using the third party brokers that I referred to.

‘And as part of that we do expect to realise assets for the estate. Whether
or not there will be any residual interest to the clients on behalf of those
leveraged positions taken we don’t’ know at this point in time. And at this
point in time we don’t’ have a definite position as to whether that excess would
indeed be client funds as I referred to a moment ago.

‘I also want to make mention of the company’s derivative book. Lehman had
very substantial derivative positions in various markets. As a consequence of
the company’s administration, that’s a termination of the company’s derivative
contracts. ‘As a consequence it’s likely that the counter-parties may have
terminated positions and indeed we’ve received many thousands of termination
notices which is what’s to be expected in these circumstances.

‘In practice that means it’s quite difficult for the company to understand
its position on a counter party by counter party basis because they’ve not been
through the exercise of valuing the consequences of those termination notices.
And indeed our experience is that it may take some months or even years to fully
assess the extent of the specific crystallised losses or in the money positions
that are established by virtue of those terminations.

‘I should emphasise that we are working with our advisers Linklaters and
third party advisers in order to formulate strategies for each of the trading
books that the company has.

‘We have been working with the heads of each of the trading books to cover
each of the principal activities that the companies engaged in and we’ve been
undertaking a stratification process by region and in order to determine
appropriate strategy in each area.’

‘We expect to be in a position to be transacting certain parts of the book
over the coming day or so.

‘I can’t give any further clarity on timing of that dependant upon both the
collaboration of certain exchanges that we’re working through and the brokerage
arrangements that we’re currently putting in place.

‘That should however enable the company to start freeing up some of its
trades and we are ensuring that we’re consulting with the regulatory authorities
and the different market participants as part of this process.’

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