© 2017 The Texas Lawbook.
By Allen Pusey
(April 5) — In a small but important step toward ending its long-running bankruptcy, the estate of Lehman Brothers has agreed to repay $2.416 billion in claims for substandard mortgages—loans that formed the basis for residential mortgage backed securities (or RMBSs) sold to 244 trusts.
The deal was negotiated by the Houston-based law firm Gibbs & Bruns on behalf of 14 major investor clients — including Metropolitan Life, BlackRock, Goldman Sachs, Voya and the Federal Home Loan Bank of Atlanta — who helped mediate the agreement with Lehman for the benefit of the various trusts.
It also represents the latest in a string of settlements charted by the litigation boutique between major financial institutions and investors in RMBS trusts. The firm was involved closely in a $8.5 billion settlement with Bank of America/Countrywide, a $4.2 billion settlement with JPMorgan and a $1.5 billion settlement with Citigroup.
Lehman Brothers, then the nation’s fourth largest investment bank, filed for bankruptcy in September 2008, declaring $613 billion in undersecured debt, much of it from the purchase and sale of RMBSs. Over time, investors—including some of the world’s most sophisticated financial institutions—learned that an unexpectedly large proportion of the individual loans underlying the securities included overburdened debtors, overvalued properties and outright financial fraud.
Lehman’s spectacular failure reverberated throughout financial markets, vaporizing hundreds of billions in assets thought to be secured by the relatively safe long-term loans represented by residential mortgages.
To allay concerns about the viability of underlying loans, investment contracts had included “buy-back” agreements for certain classes of underperforming residential loans. And it was the enforcement of these “buy-back” agreements that Gibbs & Bruns lawyers sought to address on a global basis.
If accepted by the various trustees and the court, the agreement sets a range of value for the buy-back claims at $2 billion to $2.416 billion. However, Lehman’s plan administrator has agreed to peg the repurchase value at $2.416 billion, so long as the court assesses the claim at any figure greater than the $2 billion base. In exchange, the parties waive appeal, a process which the trusts themselves estimated might take as long as 12 years.
Still, the final value—even if all agree—is not likely to be the full $2.416 billion. Historically, Lehman bankruptcy payouts are running at about 40 to 45 cents to the dollar, Madden said.
But an end to the process also ends a major headache. The 244 trusts are composed of hundreds of thousands of residential mortgages, 94,000 of which are claimed to be substandard loans—each of which could be litigated. “For investors worried about the time-value of money, ending that possibility comes as a great relief,” Madden said.
© 2017 The Texas Lawbook. Content of The Texas Lawbook is controlled and protected by specific licensing agreements with our subscribers and under federal copyright laws. Any distribution of this content without the consent of The Texas Lawbook is prohibited.
If you see any inaccuracy in any article in The Texas Lawbook, please contact us. Our goal is content that is 100% true and accurate. Thank you.