Bankruptcy

Was it just by chance? Could this be Kismet?

By Stephen Lubben

Somehow you always knew these two would get together.  AIG and Lehman are in a dispute about credit default swaps. A whole bunch of credit default swaps to be precise.

It seems AIG and Lehman sold 125 CDS contracts to each other under a single master agreement, with Lehman as buyer on 97 of the transactions, and durations out until 2014. As things stand now, AIG owes Lehman $12.5 million for "credit events" associated with General Motors, Washington Mutual, etc.

Lehman has filed a motion with the bankruptcy court to compel AIG to pay up. AIG's answer states that they would be happy to pay, but first they want Lehman to pay (or allow them to net) the $3.7 million in premiums that Lehman "forgot" to pay during its chapter 11 case. AIG also wants adequate assurance of Lehman's ability to perform on the swaps it sold to AIG.

That last bit may be jumping the gun a bit -- Lehman is not currently looking to assume or assign the swaps, so I don't know that they have a right to adequate assurance. Wouldn't most counterparties, on all types of contracts, like to get that? But AIG is certainly right that Lehman has an obligation to perform, at least to the extent of the actual value of the contract to the estate, if it wants to receive the benefits of the swaps during the pendency of the case -- I seem to recall a case from my days in law school . . . AIG seems to remember it too.

UPDATE:  A reader points out that Lehman has conceded its obligation to AIG, partially.  The real problem seems to be that Lehman has continued to not pay (even after filing its motion), thus raising AIG's cross claims to about $4.1 million (vs. the $3.7 million I show above).  Obviously AIG wants to drive home its Bildisco argument (debtor has to perform while making up its mind) before forking over the net $8.4 million to Lehman.

Full post as published by Credit Slips on October 06, 2009 (boomark / email).