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Barclays Didn't Know What Backed $45 Billion Lehman Loan, Witness Says

Date: Thursday, August 26, 2010
Author: Linda Sandler, Bloomberg

Barclays Plc didn’t know its risk when it bought Lehman Brothers Holdings Inc.’s brokerage and was told by the U.S. Federal Reserve to lend the defunct firm $45 billion, a former Barclays trading executive testified.

Stephen King, who was assigned by Barclays managers to value the loan collateral in the 2008 financial crisis, said people kept telephoning to ask if the loan was safe.

“We don’t even know what we’ve got, guys, so I can’t tell you that you’re collateralized,” King said he told Barclays executives. The brokerage sale closed a week after Lehman’s Sept. 15, 2008, bankruptcy, the biggest in U.S. history.

King, who now runs New York hedge fund C12 Capital Management LP, was a witness in U.S. Bankruptcy Court in Manhattan as London-based Barclays defended itself against Lehman’s claim that it should pay as much as $11 billion for an allegedly undisclosed “windfall” on its purchase of the defunct brokerage, including $5 billion on the Fed collateral.

As Barclays negotiated the purchase, the Fed told the U.K. bank that it had to take over a $45 billion loan the Fed had made to Lehman, witnesses have testified. In exchange, Barclays was promised collateral valued at about $49 billion.

About $7 billion of the collateral didn’t arrive, and was replaced by cash, King told U.S. Bankruptcy Judge James Peck. Some $10 billion of what was delivered were securities not on a list Barclays had received, which “theoretically could have been worthless.”

‘Private Label’

They included “private label” securities designed by Lehman for borrowing, $1 billion face amount of a security that had never traded, and $8 billion of equities, including a sparsely traded Argentine petroleum company.

“We didn’t know what the individual items were or how to hedge them,” King said. “The equity markets could fall 10 percent or 20 percent, and we could lose $1 billion or $2 billion in a heartbeat.”

Lehman has said Barclays deliberately undervalued the collateral to give itself a quick gain on the deal. King told Lehman’s lawyer that his hedge fund runs $12 billion of assets bought from Barclays with a loan from the U.K. bank. He didn’t participate in setting the price of the securities bought from Barclays, he said.

Peck said when he approved the deal that it would help stabilize the credit markets during the subprime lending crisis. Lehman, its creditors and the brokerage trustee, James Giddens, sued Barclays last November as markets rebounded.

‘Bonus’ Squabble

Yesterday, Lehman and Barclays squabbled over the definition of “bonus.” Lehman said Barclays came up $500 million short of some $2 billion in bonuses promised to Lehman employees it took on with the brokerage. Barclays said it paid the full amount if “bonus” is defined to include benefits, cash awards and severance.

Lehman also said Barclays took cash it wasn’t entitled to, including $1 billion in a margin account backing Lehman’s derivatives trades.

Edward Rosen, a lawyer at Cleary Gottlieb Steen & Hamilton LLP who helped Barclays with the acquisition, testified that he drafted a phrase for the final sale document that allotted the cash to Barclays.

The sale document was signed by Lehman’s advisers and a lawyer for the brokerage trustee, Barclays has said. Giddens, the brokerage trustee, is seeking $6.7 billion from Barclays, which has said he is withholding $3 billion owed to Barclays.

Money for Creditors

The nonjury trial, which resumed this week after a summer holiday, pits the U.K.’s third-biggest bank, represented by lawyer David Boies, against Lehman, which wants money from Barclays to pay creditors.

The money would help Lehman creditors, who may recoup only 15 cents to 44 cents on the dollar, Lehman has said, and hurt Barclays, which made 2.4 billion pounds ($3.7 billion) in the first half.

The cases are In re Lehman Brothers Holdings Inc., 08- 13555, and Giddens v. Barclays Capital Inc., 09-01732, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Linda Sandler in U.S. Bankruptcy Court in New York at +1- lsandler@bloomberg.net and;