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Part I United States, 3 Lehman’s Derivative Portfolio: A Chapter 11 Perspective

Stephen J Lubben

From: Bank Failure: Lessons from Lehman Brothers

Edited By: Dennis Faber, Niels Vermunt

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved.date: 01 February 2023

Bank resolution and insolvency — Derivatives — Clearing operator — Settlement — International Swaps and Derivatives Association (ISDA) — Close-out netting

This chapter looks at the immediate cause of Lehman’s failure, which it argues was the repo market and the company’s inability to access funding for its operations at that time. Lehman’s derivatives were not the direct cause of its failure, but its derivatives, and the growth of the derivatives markets in general, led to the assumption of outsized risks and systemic weaknesses that facilitated the crisis. This chapter suggests that the continuation of the safe harbours ‘as is’ renders chapter 11 nonviable for larger financial institutions, and recent contractual attempts to work around the safe harbors are insufficient to solve the problem, while the increased role of clearinghouses in financial institution failures will force regulators to confront difficult choices. In short, the regulators will have to balance two competing systemic risks: the risk of an unruly resolution of the financial institution, balanced against increased risk to the clearinghouse.

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