Lehman sues to recover credit swap payments

By David Pitt

AP Personal Finance Writer

DES MOINES, Iowa (AP) -- Lehman Brothers Holdings Inc. is trying to recover more than $3 billion from banks, insurers and other financial services companies that it claims it lost when its bankruptcy filing in 2008 caused its priority payment status to be modified.

Lehman, in a filing Tuesday as part of its federal bankruptcy case, claims it and its creditors should have been paid ahead of noteholders who were party to 43 collateralized debt obligation deals. CDOs are asset-backed securities which derive their value from underlying investments such as mortgages or bonds.

The bankruptcy filing caused Lehman's priority payment status to be revised, costing the company and its creditors $3 billion.

The company says the bankruptcy court has previously ruled that similar payment modification provisions were unenforceable.

The largest of the CDO deals involved Toronto-based Canadian Imperial Bank of Commerce, which Lehman alleges owes it $1.3 billion. Lehman claims in the lawsuit that its bankruptcy filing triggered language that caused noteholders such as Canadian Imperial to move ahead in line of payment from proceeds of deals including the CDOs.

Canadian Imperial said Wednesday the issues raised in the lawsuit are not new and have been discussed in its quarterly reports dating back to the fourth quarter of 2009.

The company said it continues to believe previous decisions releasing the bank of any financial obligation to Lehman should be upheld by the court.

"We continue to believe that the CDO indenture trustee's actions were fully supported by the terms of the governing contracts and the relevant legal standards," the company said in a statement.

Canadian Imperial is one of 76 companies listed as noteholder defendants in the case.

At the center of the legal dispute are swap agreements signed as part of the CDO deals in which Lehman bought credit protection on residential mortgage-backed obligations and corporate bonds.

As the value of the underlying mortgages and bonds fell, the value of Lehman's interest rose significantly.

Lehman has asked the court to declare its right to payments valid. Payments could help creditors in the company's bankruptcy case recover significantly more money.

Lehman's bankruptcy was the biggest in U.S. history and triggered a panic in financial markets.

After the subprime mortgage bubble burst in 2007, credit default swaps collapsed. That helped bring the downfall of Lehman.

U.S. government officials declined to rescue the company. Instead, they injected tens of billions of dollars into other financial firms.

Published: Fri, Sep 17, 2010