The Failure Resolution of Lehman Brothers

We examine the resolution of Lehman Brothers Holdings Inc. in the U.S. Bankruptcy Court in order to understand the sources of complexity in its resolution and inform the debate on appropriate resolution mechanisms for financial institutions. We focus on the settlement of Lehman's creditor and counterparty claims, especially those relating to over-the-counter derivatives, where much of the complexity of Lehman's bankruptcy resolution was rooted. We find that creditors' recovery rate was 21 percent, below historical averages for firms comparable to Lehman. Losses were exacerbated by poor bankruptcy planning and mitigated by timely funding from the Fed. The settlement of OTC derivatives was a long and complex process, occurring on different tracks for different groups of derivatives creditors. Consequently, the resolution process was less predictable than expected, and it was difficult to obtain an informed view of the process