Lehman Brothers declares bankruptcy

NEW YORK - (AP) - Lehman Brothers, a 158-year-old investment bankchoked by the credit crisis and falling real estate values, filedfor Chapter 11 protection in the biggest bankruptcy filing ever onMonday and said it was trying to sell off key business units.

The filing was made in the U.S. Bankruptcy Court in the SouthernDistrict of New York by Lehman Brothers Holdings Inc., the bank'sholding company. The case had been assigned to Judge James M. Peck.

Lehman fell under the weight of $60 billion in soured realestate holdings, and the credit market's dislocation ultimatelyforced it to seek court protection. The credit crisis has causedglobal banks to write down more than $300 billion in asset valuesince last year, and caused the shotgun sales of Merrill Lynch &Co. and Bear Stearns Cos.

Lehman's bankruptcy filing marks the end of a Wall Street firmthat started the U.S. cotton trade before the Civil War andfinanced the railroads that built a nation.

The company's roots began in 1844 when Henry Lehman immigratedfrom Rimpar, Germany, to Alabama, where he established a dry goodsstore that catered to local cotton farmers in Montgomery. LehmanBrothers evolved from merchandising to a commodities broker, andthen later into underwriting where the firm helped financeconstruction of the Pennsylvania Railroad, among others.

Chairman and Chief Executive Richard S. Fuld, who joined Lehmanas a college student in 1969 and was the longest serving CEO onWall Street, now has the dubious task of winding down the company's$639 billion of assets. It has about 25,000 employees worldwide,joining the swell of unemployed bankers and traders hurt by thecredit crisis.

Many Lehman employees seen entering its headquarters in midtownManhattan tucked their chins down to avoid talking to the media andothers who had lined up behind metal barriers in front of thebuilding.

Some carried empty shopping, tote bags or gym bags in to theoffice. Some walked in with ties undone or wore more casual clotheslike polo shirts than they may have otherwise.

Lehman's filing is the biggest corporate bankruptcy in historyin terms of assets held, Mike Bickford of Jupiter eSources said.The next biggest bankruptcy was Worldcom Inc., with $126 billion inassets, and Enron Corp., with $81 billion. The figures are notadjusted for inflation.

Lehman plans an orderly liquidation of its assets in the comingmonths, and possibly years.

"It is going to be big, it's going to be complicated, it'sgoing to involve a phenomenal number of professionals and it willbe very expensive," John Penn of Haynes & Boone LLP said about thecase.

Martin Bienenstock, a partner at Dewey & LeBoeuf who was thelead lawyer on the Enron case, said that while Lehman's case isthe largest ever in terms of asset size, it could end up being farless complicated than Enron and get wrapped up within three to fourmonths.

"It's in a race against time because its franchise is reallyits people," Bienenstock said, adding that Lehman's main missionwould be to sort out its case before its employees find new jobsand move on.

In Washington, the Securities and Exchange Commission said itsexaminers will remain at the offices of Lehman Brothers to overseean "orderly transfer" of assets in retail customer accounts toone or more brokerage firms that are insured by the SecuritiesInvestor Protection Corp.

The SEC noted in a statement that Lehman's decision to file forbankruptcy protection does not affect the SIPC protection coveringthe firm's retail securities customers.

The SEC also said it is coordinating with overseas regulators toprotect Lehman's customers and to maintain orderly markets.

"We are committed to using our regulatory and supervisoryauthorities to reduce the potential for dislocations from Lehman'sunwinding, and to maintain the smooth functioning of the financialmarkets," SEC Chairman Christopher Cox said in a statement.

In London, the administrators who have taken control of keyLehman Brothers' businesses in the United Kingdom said it couldtake years to dispose of the company's assets to pay off creditors.

Tony Lomas of PriceWaterHouseCoopers said liquidating thoseassets will be more complex than disposing of Enron's Europeanassets, which took six years after the U.S. energy company's 2001bankruptcy.

Lehman's last hope of surviving outside of court protectionfaded Sunday after British bank Barclays PLC withdrew its bid tobuy the investment bank. The troubled investment bank learned at alast-minute meeting on Friday with federal officials that it wouldnot be getting any emergency funding to give it the liquidity itneeded, Chief Financial Officer Ian Lowitt said in an affidavit.

Lowitt said the company had hoped to "restructure operations,reduce overall cost structure, and improve performance." There wasa plan in place to sell a majority stake in its investmentmanagement business, which includes money manager Neuberger Berman,and to spin-off of its troubled real estate assets into a publiclytraded company. It says it is exploring the sale of itsbroker-dealer operations and is in "advanced discussions" to sellits investment management unit.

"Management believed that divorcing the real estate assets fromthe rest of the company would relieve the pressure on thecompany," he said in the affidavit.

Investors didn't buy the plan, sending shares down 75 percentlast week. The stock was worth pennies in electronic trading onMonday, an astonishing descent from the $67.73 it was worth oneyear ago.

"It's a weird case because ordinarily you think of bankruptcyas giving you breathing space - it's not clear it will here," saidDavid Skeel, a bankruptcy law historian at the University ofPennsylvania. "They've used up a lot of their lives already. Theydesperately tried to find a solution. They've tumbled intobankruptcy kind of having run out of near-term options. This is acompany that is in free-fall."

The filing had been made so hastily that the company had not yetfiled motions by Monday morning that are typically made on thefirst day, such as asking the court for permission to continuepaying employees.

Filing for Chapter 11 protection allows a company to restructurewhile creditor claims are held at bay. The company most likelychose to file under Chapter 11, rather than a Chapter 7liquidation, so that it could retain more control over the sellingoff of assets, said Stephen Lubben, the Daniel J. Moore professorof law at Seton Hall Law School. In a Chapter 7 filing, the courtwould immediately appoint a trustee to take over the case.

"I'm sure they think they could conduct a better liquidationthemselves, and that's probably true," Lubben said.

The investment bank had said earlier that none of itsbroker-dealer subsidiaries or other units would be included in theChapter 11 filing. That means customers of its broker-dealers willnot be subject to claims by creditors in the bankruptcy case.

Penn of Haynes & Boone said leaving some entities out of thebankruptcy filing allows the market to deal with them contractuallyrather than have the bankruptcy case "walk in and stopeverything."

"There are so many types of securities vehicles that are carvedout of bankruptcy protection completely," he said.

In its bankruptcy petition, Lehman listed Citigroup among itsbiggest unsecured creditors, with about $138 billion in bonds as ofJuly 2. The Bank of New York Mellon Corp. was listed as holdingabout $17 billion in debt.

Citi and Bank of New York both said Monday they serve astrustees for Lehman debt, not that they are creditors themselves.Citi issued a statement to say that its role is "administrative innature and does not represent exposure for Citi to Lehman." Bankof New York said, "In this situation, our role has been to serveas a trustee for certain Lehman Brothers bond offerings. We have nooutstanding loans to Lehman."

Lehman said that as of May 31, it had assets of $639 billion anddebt of $613 billion.

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