25.4 If the present situation continues for very much longer the funds are virtually certain to lose the confidence of their investors so that they will suffer revenue impairment; the confidence of the boards of the companies in which they have made their investments; and the confidence of other investments in the same companies. Moreover some of those companies … may face collapse in direct consequence of the funds’ inability to raise capital and confidently engage in restructuring caused by the immobilisation of their securities
Among the multifarious consequences of the Lehman Brothers collapse, one in particular continues to harm hedge funds, and, per the above, companies they invest in.
Since Lehman went into administration, all prime brokerage accounts have been frozen. Which means that if you were one of the few hedge funds to loyally stick with Lehman up to that fateful Monday, you haven’t been able to access any of your holdings since. This, of course, is a big problem.
If you’re a US hedge fund, too, it might be something of a surprise. In the US, brokerage accounts are often ring-fenced to protect clients in the event of the broker going under.
Not so here, where the hedge funds just have to line up with all the other Lehman creditors and spend the next few years slugging it out.
One highlight for the denizens of Mayfair, W1 and Greenwich, CT was the election of several hedgies onto the insolvency committee earlier this month. But the insolvency process is long and arduous.
So some hedge funds took PWC – the administrator – to court in order that their assets might be released sooner. In the court filing, as shown above, the funds indicated that if their accounts were not unfrozen soon, then they – or the companies they had invested in – risked severe impairment or collapse.
In a subsequent witness statement served very shortly before this hearing, the applicants have sought to spell out what the consequences will be for two of the applicant funds in the event that the information order being sought is not made or “no substantial progress can be shown by mid-December 2008 towards the recovery of their property from LBIE”. The statement explains that on mid-December the managers of the two funds will be providing a plan to those funds relating to their future management. It states that if there is a realistic prospect that all or nearly all of the property belonging to those funds will be returned within a reasonable time then the funds may continue to be viable in the interim, but if by mid-December the managers are not in the position to provide the funds with substantially more information than is currently available and they are unable to give assurances as to the likelihood of and time by when the funds will have recovered all or nearly all of their property at LBIE “it is likely that the funds will be wound down forthwith”. The statement then states that the consequences of a decision to wind down the funds will be that the funds’ property at LBIE will have to be treated as irrecoverable for the purposes of active management, the managers will have to cease charging management fees for that portion of the funds’ assets, personnel will lose their jobs, and the funds’ inability to engage in restructuring will probably lead to the collapse of at least four companies in which securities are held.
The judgement on the case has just come through. The hedge funds’ claims have been dismissed.
Sympathetic though I am to the applicants’ plight, just as I am to the plight of others who have assets locked up in LBIE, I am firmly of the view that it would be quite wrong to accede to this application and make the order sought, or any part of it.
So its curtains for those funds and four companies come mid-December. The names of the funds involved, and the four companies which will “probably…collapse” have naturally been redacted.
Not that PWC are the villains in all this though. The court documents also reveal something of the complexity of the task they face:
The identification of unencumbered client assets is therefore complex and considerable data is needed to establish an accurate position on a client by client basis. This is further complicated as LBIE’s systems booked trades on a ‘contractual settlement’ basis rather than an ‘actual settled’ basis. As such, postings in the systems need to be reversed to reflect the position at 15 September 2008. The reconciliation steps that are required to be undertaken include, for example, amending the LBIE books and records for some 140,000 failed trades, pending transactions that have been contractually settled and corporate events that have not been recorded; adjusting LBIE’s books and records to reflect market participants’ actions post Administration and analysing the impact on the client assets if applicable; determining the location of the assets (custodian, counterparty, loaned, re-hypothecated) and obtaining statements, analysing assets from a legal perspective and determining final positions.
Related link:
Groups in Lehman asset trap – FT
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