Lehman Brothers, a 158-year-old investment bank choked by the credit crisis and falling real estate values, filed for Chapter 11 bankruptcy protection from its creditors on Monday and said it was trying to sell off key business units.
The filing was made in the U.S. Bankruptcy Court in the Southern District of New York by Lehman Brothers Holdings Inc., the bank's holding company. The case had not yet been assigned to a judge.
Lehman's last hope of surviving outside of court protection faded Sunday after British bank Barclays PLC withdrew its bid to buy the investment bank.
Lehman learned at a last-minute meeting on Friday with federal officials that it would not be getting any emergency funding to give it the liquidity it needed, Chief Financial Officer Ian Lowitt said in an affidavit.
Lehman fell under the weight of $60 billion in soured real estate holdings and tighter a credit market that forced it to seek court protection.
As the company's financial health deteriorated over recent months, Lowitt said Lehman had "explored various options to restructure operations, reduce overall cost structure, and improve performance." He said executives took a two-pronged approach to saving the company: selling its investment management division and separating troubled real estate assets from the rest of the company.
"Management believed that divorcing the real estate assets from the rest of the company would relieve the pressure on the company," he said in the affidavit.
In an effort to calm the markets, Lehman announced its third-quarter results on Wednesday — a week earlier than planned — but Lowitt said that "did little to quell the rumors in the markets and the concerns about the viability of the company."
He said the uncertainty made it impossible for Lehman to continue outside of court protection.
The filing had been made so hastily that the company had not yet filed motions by Monday morning that are typically made on the first day, such as asking the court for permission to continue paying employees.
Many Lehman employees seen entering its headquarters in Midtown Manhattan tucked their chins down to avoid talking to the media and others who had lined up behind metal barriers in front of the building.
Some carried empty shopping, tote bags or gym bags in to the office. Some walked in with ties undone or wore more casual polo shirts than they may have otherwise.
Filing for Chapter 11 protection allows a company to restructure while creditor claims are held at bay. The company most likely chose to file under Chapter 11, rather than a Chapter 7 liquidation, so that it could retain more control over the selling off of assets, said Stephen Lubben, the Daniel J. Moore professor of law at Seton Hall Law School. In a Chapter 7 filing, the court would immediately appoint a trustee to take over the case.
"I'm sure they think they could conduct a better liquidation themselves, and that's probably true," Lubben said.
The investment bank had said earlier that none of its broker-dealer subsidiaries or other units would be included in the Chapter 11 filing. It says it is exploring the sale of its broker-dealer operations and is in "advanced discussions" to sell its investment management unit. That means customers of its broker-dealers will not be subject to claims by creditors in the bankruptcy case.
In its bankruptcy petition, Lehman listed Citigroup among its biggest unsecured creditors, with about $138 billion in bonds as of July 2. The Bank of New York Mellon Corp. was listed as holding about $17 billion in debt.
Lehman said that as of May 31, it had assets of $639 billion and debt of $613 billion.
