Lehman Brothers seeks approval of settlement, capital contribution to avoid bank receivership

By Caroline Salls

Pittsburgh, Feb. 11 - Lehman Brothers Holdings, Inc. requested court approval to increase the capital level of Lehman Brothers Bank, FSB through a settlement and a direct $15 million capital contribution to avoid appointment of a receiver, according to a Wednesday filing with the U.S. Bankruptcy Court for the Southern District of New York.

According to the motion, it is critical that the regulatory capital level of Lehman Brothers Bank, which is an indirect wholly owned non-debtor subsidiary of Lehman Brothers, be increased to preserve the company's opportunity to realize the fair value of both Lehman Brothers Bank and Woodlands Commercial Bank in order to maximize recoveries to Lehman's creditors.

Although the composition of the bank's assets and debt has not changed significantly since Sept. 30, Lehman said the extraordinary conditions that have hit the financial markets in the last few months resulted in a fair value accounting methodology requiring the bank to show the value of Lehman's equity interest to have materially decreased.

The company said the bank's loan portfolio must be reflected at substantially lower values below those that management believe could be achieved through an orderly asset sale under normal credit market conditions.

Unless the bank complies with these regulations, Lehman said the bank faces an imminent risk that a receiver would be appointed, which would likely result not only in seizure and fire sale of the bank's assets, but also a risk that Woodlands could be seized.

As a result, Lehman said any opportunity to realize the value of both Lehman Brothers Bank and Woodlands would be permanently lost.

Under the settlement, Lehman will convey ownership of some rights and funds to Lehman Bank wholly owned subsidiary Aurora Loan Services, LLC.

A $15 million cash capital contribution will be made to the bank to enable the bank to comply with the reporting requirements.

As a result of the settlement, the bank, through Aurora, is expected to realize a roughly $189 million economic benefit. In addition, Lehman said the bank would come close to achieving the 8% total risk-based capital ratio required for capital adequacy.

New York-based Lehman Brothers Holdings is the fourth largest investment bank in the United States. The company filed for bankruptcy on Sept. 15. Its Chapter 11 case number is 08-13555.

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