By Anousha Sakoui and Nicole Bullock
Published: January 26 2010 19:48 | Last updated: January 26 2010 19:48
The US judge in charge of the Lehman Brothers bankruptcy has decided that the failed bank’s claims in the unwinding of a special purpose vehicle to which it was a counterparty should not be subordinated to other creditors.
It is a controversial ruling which will be closely scrutinised for its implications for the structured products and derivatives markets.
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Judge Peck decided on Monday that a provision that would normally subordinate Lehman’s claims is unenforceable under US bankruptcy law. The decision goes against a ruling by the English courts last summer which determined that a group of investors in the vehicle should be paid ahead of the failed bank in its unwinding.
“The court anticipates that the current ruling may be a controversial one, especially due to the resulting conflict with the decisions of the English courts,” said Judge Peck in his ruling. “It is to be expected, [...] that the cases [...] on occasion would break new ground as to unsettled subject matter. This is one such occasion.”
The dispute centres on the priority of claims for the Dante SPV. Dante is one of a string of SPVs created to issue credit-linked notes and to which Lehman was a swap counterparty, an arrangement known as a synthetic collateralised debt obligation.
The case is drawing attention because swap counterparties are normally repaid ahead of other creditors, unless the counterparty is in default. It highlights the complexities Lehman administrators face in trying to unwind 1.2m derivative contracts worth a net $40bn to which the bank was a counterparty. Dante is one such transaction.
It is thought that there are about 1,000 transactions that Lehman is linked to which carry a similar subordination clause.
Some rating agencies have warned of potential downgrades for similar structured products as a result of these cases.
A hearing is set to take place on February 10 in the US courts to find a way to harmonise the decisions of the US and the English courts.
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