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Document Type

Case Study

Case Series

The Lehman Brothers Bankruptcy

JEL Codes

G01, G28

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) exacerbation of the contagion effects of the bankruptcy. This case explores the disposition of Lehman’s derivatives and its impacts.

Date Revised

2019-03-20

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