Barclays has agreed to acquire Lehman Brothers’ North American investment banking and capital markets operations and supporting infrastructure for about US$1.75 billion.
It will acquire trading assets with a current estimated value of $72 billion and trading liabilities with a current estimated value of $68 billion for a cash consideration of $250 million.
Barclays has also agreed to acquire Lehman’s head office in New York City and two data centres in New Jersey for close to their current market value, estimated at $1.5 billion.
The acquisition is subject to a number of conditions including the approval of the United States Bankruptcy Court for the Southern District of New York.
“This is a once in a lifetime opportunity for Barclays,” says Barclays president Robert E. Diamond Jr. “We will now have the best team and most productive culture across the world’s major financial markets, backed by the resources of an integrated universal bank. We welcome the opportunity to add Lehman’s people and capabilities to the Barclays team.”
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Lehman Bankruptcy Puts Risk Management to the Test
It’s unclear what the full extent of the damage will be as a result of Lehman Brothers filing for bankruptcy, but pension funds are exposed in more ways than one, according to Mercer.
“As well as the more conventional impact on pension funds through losses due to holdings in equity markets, the developments at Lehman represent the first real test of the documentation underlying many liability driven investment or LDI strategies,” says Jon Exley, a principal at Mercer’s financial strategy group in the United Kingdom.
Many pension funds now use derivative contracts for risk management purposes. These include interest rate and inflation swaps and equity derivatives. While larger funds have worked directly with investment banks on these contracts, others are exposed as a result of actions taken by their investment managers.
These strategies have worked very well in the main, protecting funds against recent adverse market movements, he adds. The underlying contracts, however, involve complex legal documentation and arrangements around collateral—the assets backing valuation movements in derivative contracts.
“Lehman’s bankruptcy will in most cases necessitate a termination of any derivative contracts between Lehman and pension funds—whether entered into directly or through asset managers),” explains Exley. “This will have two direct consequences. Firstly, the market value of collateral backing contracts will be tested given current market conditions. Secondly, there will be a time lag before new contracts can be put in place during which funds will be exposed to volatility.”
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BNY Mellon Clarifies Lehman Association
Bank of New York Mellon says it is not one of Lehman Brothers’ largest unsecured creditors.
The company made the announcement after the Associated Press reported that as a fact.
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“Often, there is a common misunderstanding of the role that we play when serving as a trustee,” says a statement from BNY Mellon. “In this situation, our role has been to serve as a trustee for certain Lehman Brothers bond offerings. We have no outstanding loans to Lehman.”
The bank adds that in its role as trustee, it facilitates the payment of interest and principal between the issuer of debt and investors as well as other services.