The husk of Lehman Brothers lost a bid to collect some $500 million on crisis-era subprime mortgage bond trades Wednesday when it suffered defeat in a trial over the proper valuation of credit default swaps.
Lehman Brothers International Europe, a London-based subsidiary of the defunct bank, has been fighting with Assured Guaranty Ltd. over whether the bond insurance firm deprived LBIE of about $500 million when settling 28 credit default swaps in 2009. Assured didn't use market prices when it closed out the swaps, tallying them up instead through a method LBIE's lawyer said defied "the laws of financial physics" during
Assured, however, argued that prices weren't available — it held an auction for the swaps and found no buyers — so it modeled future payouts from the contracts and found it owed Lehman nothing. In fact, Assured found LBIE owed it about $20 million.
More than a year after the five-week trial, the New York judge overseeing the skirmish has sided with Assured. Justice Melissa Crane on Wednesday
"When this trial first started, the court was skeptical about how, given such a large discrepancy, Assured's calculation could ever be reasonable," Crane wrote in her decision Wednesday. "As the trial progressed, however, there was a growing realization that the marriage of catastrophic, historical financial circumstances with bespoke contractual terms, along with strong structural protections in the Securities, lent itself to the conclusion that at least LBIE's calculations were not reasonable."
Crane said markets were so broken at the time the swaps were settled that prices could not have been used to close them out. She added that market prices would not be relevant anyway, because the contracts allowed Assured to value the positions in "any reasonable manner" after trying and failing to find buyers for them.
LBIE is reviewing the decision and expects to appeal, said Andrew Rossman, a lawyer for the firm. A spokesperson for the administrators of LBIE, at PriceWaterhouseCoopers LLP, declined to comment.
"This has been a long-running litigation and we are pleased with the Court's decision," Robert Tucker, Head of Investor Relations and Communications at Assured Guaranty, said in an emailed statement.
The ruling is a blow for Lehman creditors still hoping to recover more money from the bank's downfall. The case is one of few remaining matters hanging over one of the largest insolvencies the world has ever seen.
