It took a special type of chutzpah to gaze on the quivering remains of Lehman Brothers circa 2011 and think, “yeah, I bet I can get a billion dollars out of that.” But as we know, that very thought crossed the minds of not one but several hedge funds – Paulson & Co. and CarVal Investors among them – for whom buying up claims at thirty-something cents on the dollar was too juicy an opportunity to pass up.
So it was that sometime in 2011 or 2012 a group of investors answered the call of Credit Suisse when it wanted to offload the better part of a $1 billion claim it had on Lehman's assets. This claim stemmed from canceled Lehman-facing derivatives Credit Suisse had back in 2008 before the bust. All Credit Suisse had to do was resolve a legal dispute over that sum – Credit Suisse wanted $1.2 billion, which is about a billion more than Lehman wanted to cough up – and it could pay the hedgies back, with interest. Here are the details of the deal, per Bloomberg:
While terms of each trade varied, at least some of the claims traded at around 37 cents on the dollar, the people said. And Credit Suisse agreed to pay interest on the proceeds until the litigation was resolved, they said. At 37 cents, the bank would have received about $340 million in cash. In all, according to the people with knowledge of the transactions, the trades would have allowed Credit Suisse to hive off more than $900 million of its exposure to bankrupt Lehman. At the same time, the people said, the deals limited the Swiss bank’s upside while leaving it responsible for the principal, plus interest.
But that plan ain't looking so good now. Credit Suisse is the last of the major banks to settle with Lehman over its derivatives trades, and its chances of recouping its requested sum appear to be slim.
For background: In the months after Lehman's default, pretty much every one of Lehman's Wall Street trading partners stuck the bank with a steep bill over its 900,000 canceled derivative wagers, tallying the hypothetical costs of replacing each and every trade that they had facing Lehman. There was some subjectivity in the exercise, as well as a fair amount of opportunism, and Lehman would eventually argue that the totals were greatly exaggerated.
Most of the big banks settled in an industry-wide settlement whose total recoveries tended to be substantially less than what the banks had asked for originally. Others, including Credit Suisse, dug in and fought.
One of the holdouts was Citi. In the course of the resulting trial, the jury and everyone else learned that Citi's traders adopted a let-them-come-sue-us attitude toward Lehman's derivative exposures. One trader told his subordinates to treat Lehman's trades as one would “a slow-moving deer.” Citi tried its darnedest to make its argument stick, but earlier this month agreed to settle for $350 million. Citi had wanted $2.2 billion. Oof.
This should be an instructional case for Credit Suisse. According to sources familiar with the cases, the derivatives portfolios are similar, at least in broad strokes. Neither Citi nor JPMorgan nor Goldman nor anyone else has managed to squeeze Lehman's estate for the full amount they originally demanded. It's going to be an uphill battle.
What does that mean for Credit Suisse? There's a chance they'll succeed in court where others have failed. There's also a chance – a much better one – that they'll eventually settle at some much reduced number, as everyone else has. In that case, the bank will have to pay back the nine figures it owes its hedge fund creditors at least in part with its own cash. Oof.