Lehman's Hedge Fund Clients Face Margin Calls on Frozen Assets and Unraveling of 141,000 Failed Trades
Oct. 15 (Bloomberg) -- Lehman Brothers Holdings Inc.'s hedge-fund clients may have to pay more collateral on $65 billion of assets frozen when the investment bank went bankrupt a month ago.
Lehman's London-based prime brokerage has about 3,500 active clients including hedge funds that own about $45 billion in securities, Steven Pearson, the partner at PricewaterhouseCoopers responsible for unraveling the unit, said in an interview. They hold an additional $20 billion in short positions, or bets that prices will fall.
While investors are largely unable to access their Lehman accounts, the value of the securities continues to fluctuate along with the markets. The clients may be required to put up more collateral if the value of those securities drops, a process known as a margin call.
``If your bank fails, you still have to pay your mortgage,'' Pearson, 43, said in an interview in Lehman's Canary Wharf office. ``Who is the holder of the risk of the securities? The hedge funds. If the value of the securities fell, they have to meet margin calls.''
Lehman's bankruptcy, the world's biggest, has rocked hedge funds that relied on the firm to provide loans, clear trades and handle administrative tasks. MKM Longboat Capital Advisors LLP will shutter its $1.5 billion Multi-Strategy fund in part because assets are stuck at Lehman. The freeze has contributed to the $1.9 trillion hedge fund industry's worst year in two decades, according to Chicago-based Hedge Fund Research Inc.
Managers with assets at Lehman include New York-based firms Amber Capital LP and Bay Harbour Management LLC, as well as RAB Capital Plc and GLG Partners Inc., both based in London. Olivant Ltd., run by ex-UBS AG President Luqman Arnold, said this month it can't access a 2.78 percent UBS stake it held through Lehman.
`Years to Unravel'
PwC has been sorting through assets to separate those Lehman held in trust on behalf of clients and those the bank held as collateral from clients that it could then loan to other investors, a practice known as rehypothecation.
``The biggest losers will be those who had the most assets rehypothecated because they're gone,'' said Pearson. ``Asset that have been rehypothecated rank together with all creditors as to when they will get money back.''
Clients with ``trust claims'' will be returned in ``due course,'' said Pearson. PwC won't return those assets until the firm is satisfied no other clients have a claim on them, he added.
``It's going to be many months and maybe beyond many months,'' he said. It could take years to unravel.''
Limbo
Hedge funds have been urging PwC to work faster. Arpad ``Arki'' Busson, who runs $14 billion in hedge-fund investments as chairman of EIM SA, called on PwC last week to work ``around the clock'' to unlock assets.
Until then, clients are stuck in limbo.
``Every second that they waste hurts,'' said Edward Chin, who runs Pride Revelation Fund, one of dozens of hedge funds in Hong Kong that used Lehman as their sole prime broker. ``We're looking at many hedge funds that will have to shut down, but they can't even shut down because they don't know what they have left. The thing is I cannot now even liquidate the fund.''
PwC has told some clients they can get their securities back early provided they agree to return them at a later date if other creditors have claims on the same assets.
Guarding the `Trough'
PwC won court approval last week for its plan to prioritize claims, and won't gain anything by adding to the team sorting out the accounts, Pearson said.
``Throwing more bodies at this doesn't solve the problem,'' said Pearson, who said he has a team of ``some dozens,'' including Lehman staff, sorting through the prime-brokerage assets, and 141,000 failed trades.
``It shouldn't be he who shouts loudest,'' said Pearson. ``The purpose of the moratorium is to give this process order, otherwise it's first to the trough. We're a gatekeeper with a mission to keep this orderly.''
Pearson, one of the administrators for Enron Corp.'s U.K. bankruptcy, said the payout in that case rose to between 30 cents and 40 cents on the dollar from initial projections of a fraction of a cent by patiently selling assets. Enron assets that finally sold for 700 million pounds initially had bids of 20 million pounds, he said.
``If you play the long game you can unlock value, and we can play the long game,'' said Pearson. ``If you hold a fire sale you get fire-sale prices. You don't want to be selling assets in a falling market.''
Full Story: bloomberg.com
Cheers,
delete my post |
