Lehman Brothers Workout Could Take Three to Five Years

Cleaning up the mess left by Lehman Brothers’ collapse and bankruptcy involves salvaging a national portfolio of 900 properties valued at $16 billion.  What the advisory firm overseeing Lehman’s bankruptcy achieves could be a framework for the strategies that big banks across the country use as they deal with their own troubled assets whose loans are maturing over the next 18 months.

According to Bryan Marsal, the head of Alvarez & Marsal, the advisory firm overseeing Lehman’s bankruptcy proceedings, “It’s not a great time to sell today.  We are not passively waiting for a better market.”  Marsal’s firm has 66 people overseeing the Lehman portfolio, as well as 250 outside contractors.  Describing the effort as the “biggest workout department in the U.S.,” Marsal estimates that it could take his team three to five years to complete the wind down of Lehman with its creditors and in federal bankruptcy court.

Lehman’s restructuring could provide a lesson for U.S. banks and thrifts holding more than $1.2 trillion in commercial mortgages backed by office buildings, hotels, shopping malls and apartments.  With falling property values and tight credit, commercial property lenders’ losses could total as much as $115 to $150 billion, according to a Deutsche Bank AG report.

The Lehman portfolio clearly demonstrates the depth of losses across the board.  One group of properties fell in value by an estimated $5.4 billion between the weekend of its bankruptcy filing and December 31.  This was due to a combination of a deteriorating market and unrealistically high valuations prior to the bankruptcy filing.