Friday, May 13, 2011

Don’t Bring a Knife to a Gunfight, Lehman Resolution Edition

Not wanting to waste too much more time dealing with someone who is either unable or unwilling to understand the issues, I’ll confine myself to the worst mistakes in Yves Smith’s latest post. She’s really grasping at straws at this point.

“The FDIC showing up on site and digging through records runs the very real risk of kicking off an even faster response than the Bear rumors did.”

Let me make this clear, yet again: the FDIC would already have permanent on-site personnel, under their Title I resolution plan authority. Since resolution plans are an ongoing process, the FDIC’s on-site personnel would already be routinely requesting the exact same type of information that they would be requesting during pre-resolution due diligence. So this would not have been a situation where there are no FDIC personnel at Lehman, and then suddenly a bunch of FDIC people show up, telegraphing the resolution. How many times does this need to be explained to Yves before she processes it?

“Dodd Frank has no force under English law. That means that the FDIC cannot prevent contract termination for agreements under English law. The FDIC and EoC can huff and puff all they want, but the US regulators do not have the power to overturn foreign statutes and case law.”

Neither I nor the FDIC ever said that Dodd-Frank has any force under English law. The FDIC explicitly stated, however, that it would have conditioned its P&A for the holding company on the acquirer’s acceptance of LBIE (Lehman’s UK broker-dealer). That does not require Dodd-Frank to have any force under English law. It would also mean that LBIE would not have had to file for bankruptcy in the UK (or “administration,” as they call it across the pond), which would have prevented the vast majority of contract terminations for contracts under English law. This is not that difficult to understand.

“Let’s assume that the FDIC had moved to resolve Lehman in March of 2008. What might a smart foreign creditor do? Well, if his agreement with Lehman was under English law, he could argue that the fact that Lehman was being resolved meant it was trading insolvent and it needed to put into administration now to protect him from exposure to further losses.”

Huh? Yves is confusing the start of the pre-resolution planning process (in March 2008) with the actual resolution (in September 2008) — an extremely basic distinction. The FDIC starting the pre-resolution planning process is not termination event, so no, foreign creditors could NOT have pre-emptively put LBIE into administration.

“And the critical point is that Barclays was NOT ready to buy Lehman, unless a liquidity backstop was in place. This has been widely misreported in the US, and EoC falls right into line with that bit of PR, blaming the FSA for killing the Barclays deal.”

This isn’t accurate — and the FSA paper (which is of dubious accuracy in the first place) doesn’t say what Yves claims it says. What prevented Barclays from buying Lehman was indeed the issue of a guarantee of Lehman’s trading obligations. But it wasn’t because they weren’t willing to guarantee Lehman’s trading obligations — that is, it wasn’t the economics of the deal. It was because in order to issue the guarantee, they needed the FSA to waive the UK’s Listing Rules, which required shareholder approval for such a guarantee. The FSA was unwilling to provide that waiver. But Barclays was willing to buy Lehman, contingent on the waiver from the FSA.

“We’ve said before that Economics of Contempt too often relies on slurs and rhetorical tricks, waving his credentials as a securities lawyer when he is on weak ground. His latest post is an extreme example of his reliance on distortions to cover for a bankrupt argument.”

Actually, I didn’t mention my credentials at all. Good try though.

As for which one of us “is simply not to be trusted,” I’m going to go out on a limb and say it’s the one who has made a series of basic legal and factual mistakes.

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