As widely reported, in the latest Lehman bankruptcy “fundraiser,” managers of the Lehman estate are now demanding millions of dollars from non-profit retirement homes, colleges and hospitals. Lehman claims that it was somehow “shortchanged” by multiple non-profit organizations that were forced to pay to exit derivatives that were unwound as a result of Lehman’s filing for Chapter 11 protection.
Before the financial crisis, governments and non-profits purchased derivatives known as interest-rate swaps, which had the potential to lower the cost of borrowing. But after Lehman filed for bankruptcy, the market for some of the municipal bonds that was tied to the swaps collapsed, and nonprofits and local and state governments had to pay more than $4 billion to Wall Street banks to exit the swaps.
You might reasonably question whether the nonprofits and governmental agencies were made aware of the risks by Lehman and its Wall Street brethren when entering into these transactions. But what Lehman questions is why the nonprofits and local and state governments paid “only” $4 billion.
Lehman is now knocking on these nonprofits’ doors, demanding additional payment. In addition to the base amount to unwind the swaps, Lehman is demanding 14% annual interest on alleged unpaid swap debts, which is the LIBOR rate plus 13.5% (the controversy over the fixing of the LIBOR rate notwithstanding).
Why spend money researching disease?
In one example, the Buck Institute for Research on Aging, in Novato, California, paid Lehman $2 million in October 2008 to cancel a swap contract used to manage fluctuating interest rates. Lehman, however, says it now wants $12.1 million more, as well as at least an additional $4.7 million in interest. The amount Lehman is currently seeking is more than half of what Buck spent last year researching Alzheimer’s, Parkinson’s and other diseases.
But it seems that from Lehman’s point of view, why spend money to fight diseases when you can use that money to pay an entity whose spectacular collapse helped trigger the downturn in the US housing market that is continuing to this day.
Some non-profits are fighting back
While some entities are settling with Lehman, others, such as Havenwood-Heritage Heights which runs a retirement community in Concord, MA, refuse to accede to Lehman’s demands.
Lehman’s tactics in unwinding the interest rate swaps are strikingly similar to the strategy it has employed against its former correspondent lenders in its many repurchase demands. Some nonprofits, such as Havenwood-Heritage Heights, are fighting back. We continue to encourage loan originators to do so as well.