At Lehman, What Bankruptcy?

This graph from Calculated Risk shows the deteriorating unemployment picture in the US. According to the year-over-year statistic, 2.6 million fewer Americans were working in December 2008 than December 2007. Still, many analysts predict these numbers will get worse before they get better. And yet...

In a remarkable story, the Wall Street Journal is reporting today that Lehman Brothers is actually hiring. The disgraced financial services firm has already recruited back more than 200 former employees, and is looking to add to its staff. On September 15, Lehman filed for Chapter 11 bankruptcy protection citing a bank debt of $613 billion, a bond debt of $155 billion, and net assets of only $639 billion. The event sent shock waves through the financial system, triggering the settlement of some $400 billion in Credit Default Swaps (CDS) and destabilizing the broader economy in the US and throughout the world.

As with the epicenter of any disaster, this collapse left plenty of debris. Indeed, Lehman's financial ruin will require a significant clean up effort. According to reports, Lehman still has 1,400 private investments valued at $12.3 billion and some 500,000 derivative contracts with 4,000 different trading partners worth about $24 billion. These obligations must be unwound in an orderly and timely fashion, if the firm is to dissolve within its stated goal of 18-24 months.

And so, Lehman is awash with resumes. The WSJ claims that many out-of-work Wall Street professionals are looking for any opportunity with a steady paycheck. Those who lost jobs at Citi, Bank of America, or other competitors, are now looking to join (albeit temporarily) the firm that accelerated the financial crisis. With so many derivatives and real-estate contracts still unsettled, it will take some time before Lehman can sell off all its remaining assets. In an embattled industry, it is a perverse form of job security.

Alvarez & Marshal, the New York restructuring firm that also worked with Arthur Anderson after the Enron collapse, is directing Lehman's clean-up. In an effort to raise cash, A&M have helped the firm sell its impressive contemporary artwork collection (reportedly for some $30 million) and part of its corporate jet fleet (more planes and a Sikorsky helicopter are still up for sale). Lehman also sold its glitzy 38-story office building in Midtown Manhattan as part of its desperation deal with Barclays. Lehman now has about $7 billion dollars, but needs to pay off $150 billion to its creditors. There is still a long road ahead.

The good news is that A&M has decided to manage some of Lehman's holdings rather than sell them into a depressed market. This move should provide some structure for the upcoming months of financial disentanglement and be more profitable than any sort of mark-t0-market scheme in the current environment. The bad news is that Lehman has a psychological effect on investors. The sooner the debris is cleared away, the sooner banks will begin their normal operations. Until Lehman's positions are settled and the entire bankruptcy experience has run its course, credit will remain tight and risk appetite will stay low. After all, no one wants to get caught in another CDS/bond trap.

For now, Lehman's hiring process will flummox (if not enrage) anyone living through this financial storm. But there is reason to believe that once these same jobs are lost, it will actually spell good news for the economy.