Lehman: margin calls on inaccessible assets

We don’t doubt the difficulty or complexity of the responsibilities of Steven Pearson, the PricewaterhouseCoopers partner overseeing the disposition of Lehman’s U.K. operations, but his insistence that hedge funds meet margin calls on positions to which they are denied access is unreasonable.

According to Tom Cahill’s report “Lehman’s Hedge Fund Clients Face Margin Calls on Frozen Assets” (Bloomberg), clients of Lehman’s U.K. prime brokerage operation “may have to pay more collateral on $65 billion of assets frozen when the investment bank went bankrupt a month ago.”

Pearson justifies this outrage by analogy to the mortgage market:

“If your bank fails, you still have to pay your mortgage,” Pearson, 43, said in an interview in Lehman’s Canary Wharf office. “Who is the holder of the risk of the securities? The hedge funds. If the value of the securities fell, they have to meet margin calls.”

Well, yes, Mr. Pearson, but the analogy fails on two counts.

First, if a mortgagee (lender) fails, the mortgagor (borrower) still has access to, and use of, his home. You are not allowing Lehman’s clients access to or use of their securities.

Second, if the mortgagee is unable to pay the mortgage or concerned his home may decline in value, he is free to sell the property in order to obtain relief. You are denying Lehman’s clients that alternative.

The only reasonable justification for freezing these assets is to protect the interests of those with a putative, senior claim on them. If these assets are being set aside for the prospective benefit of others, then those others should bear the risk of receiving the benefit. Otherwise, the trustee is putting senior claimants in a position of having and eating their cake at once, which is untenable and constitutes a taking from the hedge funds who are forced to bear the expense.