Citi's Lehman Settlement Closes Door on 2008 Post-Mortem
By Andrew Scurria
Citigroup Inc. will hand over $1.74 billion to walk away from disputes with now-defunct Lehman Brothers Holdings Inc., a deal that cuts short an autopsy of the banks' crisis-era derivative-trading practices.
A deal announced Friday concludes several outstanding disputes between Citi and a team of Lehman Brothers bankruptcy administrators, most notably a $2 billion lawsuit over the cost of replacing derivatives trades terminated upon Lehman's bankruptcy on Sept. 15, 2008.
Since April, U.S. Bankruptcy Judge Shelley Chapman has heard 42 days of evidence and testimony in the case, in which 170 people gave depositions and 30 witnesses wrote expert reports seeking either to justify or discredit Citi's calculation of what it was owed.
Pending approval of the deal, the judge won't have to decide the critical question of how banks should determine their damages when the institution on the other side of its derivatives positions shuts its doors.
Lehman had derivatives trades with roughly 6,700 counterparties when it entered bankruptcy. With Citi's deal, only one holdout counterparty, Credit Suisse, hasn't settled with the bankruptcy estate.
A Citi spokeswoman said the settlement "furthers management's goals of resolving legacy matters stemming from the financial crisis and focusing on Citi's strategic business objectives."
Citi had more than 30,000 derivatives trades on its books facing Lehman. The trial was supposed to determine Citi's proper compensation for having to replace the economic terms of those positions. It shed new light on the frantic weekend before Lehman went under, and the immediate aftermath, when traders allegedly used chaos in the marketplace to justify running up huge transaction fees that Lehman said were disconnected from actual replacement costs.
A standard promulgated by the International Swaps and Derivatives Association, the self-governing body for derivatives markets, days before Lehman's collapse says only that participants should act in a commercially reasonable manner when determining their damages, known as closeout amounts.