Why It Took $642 Million In Fees To Dismantle Lehman

Lehman’s bankruptcy is believed to be the largest in US history.  Now, Bloomberg has reported that a new regulatory filing revealed that various consulting and legal firms and other lucky advisors that became part of the process which dismantled Lehman Brothers were paid a total of $642 million. The primary beneficiaries of this largess were Alvarez & Marsal LLC which provided a rent-a-CEO and management for which it received $233 million and law firm Weil Gotshal which was paid $150 million.

The public and politicians in Washington will be outraged by the number and will use it as another example of the richest firms in American getting richer as millions of people look for jobs. The idea that $642 million could be paid to law firms and consultants violates any reasonable sense of justice and fairness about how much profit should be made on the collapse of a firm that was an integral part of the events that created the recession. But, bankers and attorneys will dispute that logic and arguethat the amount of effort and complexity of the task to dismantle a global financial firm is unimaginable to the regular person. That is true. An individual with a liberal arts degree from a good college could not preside over or be any real part of the actions needed to disassemble a firm of Lehman’s size and complexity.
The odd part about the process is that no one from the government or Lehman’s bondholders put up much of a fight over the fees, at least in public. There was no outcry when the money was actually in the process of being spent. The anger at this cost is only showing up now as the details are disclosed.
The firms that profited from work on the Lehman bankruptcy benefited because the investment bank’s demise happened early in the collapse of the banking system. Lehman’s death occurred overnight and was followed by a series of calamities that the US government could barely keep in check. Just as Lehman went under there were realistic concerns about Merrill Lynch, Citigroup, Morgan Stanley, and several of the large money center banks. Lehman became a footnote, albeit a very big one. The credit system was in the midst of early stages of failure when the decisions about Lehman’s management, legal work, and accounting needs were made.

So, Lehman happened early and that was great good luck for Alvarez & Marsal and Weil Gotshal. There was no pay czar and there was no TARP. The Office of the Inspector General for the Troubled Asset Relief Program obviously did not exist and neither did the Congressional Oversight Panel which keeps watch over the Treasury’s work with TARP and the consequences that work has on the larger financial system. As a matter of fact, when Lehman failed it was still many weeks before grandstanders like Congressmen Barney Frank, who runs the House Financial Services Committee, or Senator Christopher Dodd, who runs the Senate Banking Committee, had the opportunity to evaluate what had happened to the financial industry. Lehman’s collapse was months before the real hearings and debate about bank legislation, financial firm compensations, and increased regulatory oversight of the credit system began.
Lehman’s handlers got lucky in a way that comes when good timing delivers luck. The $642 million has already been paid to the companies that worked on this bankruptcy. No authority existed to evaluate their fees. There may be some suggestion that Congress should review these extraordinary costs. The debate about what should be done with overall bank regulation now is too important to allow politicians to turn their attention to events that occurred one-and-a-half years ago.  This was a lifetime ago, at least in the way that time has been marked during the recession.

Douglas A. McIntyre