The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
Regional & Community Outreach connects the Bank to Main Street via structured dialogues and two-way conversations on small business, mortgages, and household credit.
Economic Education improves public knowledge about the Federal Reserve System, monetary policy implementation, and promoting financial stability through the Museum and programs for K-16 students and educators, and the community.
We examine the resolution of Lehman Brothers Holdings Inc. in the U.S. Bankruptcy Court in order to understand the sources of complexity in its resolution and inform the debate on appropriate resolution mechanisms for financial institutions. We focus on the settlement of Lehman’s creditor and counterparty claims, especially those relating to over-the-counter derivatives, where much of the complexity of Lehman’s bankruptcy resolution was rooted. We find that creditors’ recovery rate was 21 percent, below historical averages for firms comparable to Lehman. Losses were exacerbated by poor bankruptcy planning and mitigated by timely funding from the Fed. The settlement of OTC derivatives was a long and complex process, occurring on different tracks for different groups of derivatives creditors. Consequently, the resolution process was less predictable than expected, and it was difficult to obtain an informed view of the process.