Did Barclays Cheat Lehman?

A year after Lehman's failure, the holding company that serves as the empty shell for the former investment bank is complaining about its deal with Barclays. The British bank acquired many of Lehman's assets and most of its investment banking talent, particularly in the U.S. At the time, the deal seemed risky, since the fate of the financial world was still unknown. I have long believed that it may have been the finest acquisition of any bank during the crisis. What's left of Lehman is now complaining that the deal may have been a little too good.

Specifically, Lehman Brothers Holdings believes that Barclays got an $8 billion windfall from the acquisition. Here's some detail, from the Wall Street Journal:

The windfall occurred when Barclays pumped $45 billion into Lehman in exchange for $50 billion in securities, according to the court papers. Instead of allowing Lehman to later buy back the securities for $45 billion, Lehman and Barclays executives decided to leave the securities with the U.K. bank, resulting in the windfall, the court papers said.

Barclays also unfairly reaped $2.7 billion it demanded as one of the conditions of closing the deal, according to Lehman's court filing. In all, the filing said that Barclays underpaid for Lehman's assets by up to $10 billion.

When something is sold at fire sale prices, I think it's pretty obvious that if the investment turns out to be a good one, then the buyer will reap a huge profit. That's what we're seeing here. Neither of these accusations seems particularly unethical. The first seems to amount to Barclays deciding to keep assets it purchased. The second is an additional cushion Barclays demanded for closing the deal at a time when market conditions warranted such a premium for closing.

I agree with Barclays' assessment of the situation, via WSJ:

Barclays called Lehman's allegations "an opportunistic claim. Now that the economy has begun to stabilize, the Lehman estate is trying to retrade the deal on the basis of a meritless argument."

Clearly, what's going on here is some seller's remorse. They money they accepted for their assets was less than they are now worth, and they provided a carrot that would no longer be needed to close a deal in the improved economic climate.

The only potentially legitimate complaint I believe Lehman has is this one, if true:

In its court filing, Lehman said some of its former executives had been offered "lucrative Barclays employment contracts" conditioned on the sale closing. It alleged those contracts gave incentive to Lehman executives to favor Barclays in deal talks.

So if those current Lehman, future Barclays employees did purposefully misrepresent the value of assets to make the deal sweeter for Barclays, then that's bad. But shouldn't the holding company have known what the assets it was selling were worth to prevent this? Besides, Lehman kind of squashes this argument itself by saying:

A person familiar with Lehman's legal strategy said executives involved in the deal may have acted in good faith under trying circumstances and still produced an unfair deal. Lehman's estate is "not throwing bricks at anybody on this," the person said.

The deal only seems unfair now because things have gotten much better. Back then, Lehman was probably happy to get anything for those assets. Remember, the main reason that former Treasury Secretary Paulson cites for failing to bail out Lehman was that no one wanted to buy it. The windfall that Barclays makes off the sale is their return for the significant risk they took in purchasing these assets then. I can't really fault them for that.