The Lehman Brothers Bankruptcy G: The Special Case of Derivatives

Yale Program on Financial Stability Case Study 2014-3G-V1

19 Pages Posted: 12 Apr 2015

See all articles by Rosalind Wiggins

Rosalind Wiggins

Yale Program on Financial Stability

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: October 1, 2014

Abstract

When it filed for bankruptcy protection in September 2008, Lehman Brothers was an active participant in the derivatives market and was party to 906,000 derivative transactions of all types under 6,120 ISDA Master Agreements with an estimated notional value of $35 trillion. The majority of Lehman’s derivatives were bilateral agreements not traded on an exchange but in the over-the-counter (OTC) market. Because derivatives enjoyed an exemption from the automatic stay provisions of the U.S. Bankruptcy Code, parties to Lehman’s derivatives could seek resolution and self-protection without the guidance and restraint of the bankruptcy court. The rush of counterparties to novate Lehman’s derivative contracts, and the confusion following contracts that were terminated after its bankruptcy filing, added to the stress of the financial crisis in two ways: (1) loss of value to the Lehman estate and (2) exacerbating the contagion effects of the bankruptcy. This case explores the disposition of Lehman’s derivatives and its impacts.

Keywords: Systemic Risk, Financial Crises, Financial Regulation

JEL Classification: G01, G28

Suggested Citation

Wiggins, Rosalind and Metrick, Andrew, The Lehman Brothers Bankruptcy G: The Special Case of Derivatives (October 1, 2014). Yale Program on Financial Stability Case Study 2014-3G-V1. Available at SSRN: https://ssrn.com/abstract=2593080 or http://dx.doi.org/10.2139/ssrn.2593080

Rosalind Wiggins

Yale Program on Financial Stability ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Andrew Metrick (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States
(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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