Lehman: the day the financial world changed

A year ago today lawyers across the globe were coming to terms with the fact that the world as they knew it had almost come to an end. After an agonising weekend, Lehman Brothers finally collapsed on 15 September 2008, followed in quick succession by the sales of Merrill Lynch, Wachovia and Washington Mutual, as well as the bailout of insurance giant AIG. In the weeks and months that followed RBS had to be rescued by the UK Government, LloydsTSB’s takeover of HBOS was rushed through and Bradford & Bingley was broken up and part nationalised.

It hardly seemed possible that a little over a year before, Northern Rock’s troubles had seemed like a big deal.

Clearly, there was plenty of legal work to come out of crisis, but the general feeling exactly a year ago was one of disbelief and fear.

Linklaters partner Tony Bugg, who was called in to act for Lehman’s UK administrator Tony Lomas at PricewaterhouseCoopers (PwC), recalls how surreal it was when the bank’s fate was finally sealed.

“We had a meeting at 5.30am on Monday that went on until 7.30am,” he says. “A judge came in and we put Lehman into administration at 7.56am. It was clearly a very different kind of proceeding in the UK to the US. We were all sat in meeting room 207, in jeans with a judge deciding the fate of Lehman. It felt very odd to be doing all of this at One Silk Street.”

For those working at Canary Wharf, the enormity of the situation was all too visible, with streams of Lehman staff filing out of the bank’s building over the course of the day.

“Walking to work past Lehman’s offices early that morning,  ranks of TV crews and journalists were already building up, expecting drama – never a good sign,” says a Clifford Chance associate. “Like my colleagues, I spent most of Monday following developments on the news, but also seeing the human effects of the collapse from my window.

“Throughout the day, bankers steadily drifted out, dodging journalists and the growing number of bystanders. Some were carrying boxes and leaving forever, some were giving up and heading to bars in Canary Wharf; others were just leaving the building to reflect but were determined to carry on.

“In the days after, the chatter in the City was about nothing else. But as the dust settled my thoughts were with the younger guys at Lehman. Just starting their careers like me – how would we fare in the new post-Lehman world?”

While Linklaters was one of the first firms to have direct involvement in the fallout from Lehman, lawyers on both sides of the Atlantic were panicking about what the day’s events would mean in the longer term.

“Lehman failing was never really contemplated by anyone seriously. Now, the unthinkable has become thinkable,” says Allen & Overy’s US head Kevin O’Shea.

Ashurst corporate head Stephen Lloyd recalls visiting Lehman’s Canary Wharf offices days after the collapse after the firm was instructed by the investment banking team that later joined Nomura.

“Arriving at Lehman’s swanky Docklands offices on the following Saturday, a colleague found himself unable to get into the building for the meetings,” says Lloyd. “He eventually had to call the mobile of the lead PwC liquidator, who personally descended 20 floors and let him into the building (the security staff had all been dismissed) but not before advising my colleague to bring his own coffee and snacks with him.  The vending machines had all been switched off, and the departing staff had emptied them as they left.”

Although lawyers at all levels of the market were justifiably concerned about the impact Lehman would have on all global markets, in the immediate aftermath of the bank’s collapse there was plenty of work up for grabs.

Aside from the Lehman instructions, which saw Weil Gotshal & Manges partner Harvey Miller advise on the bank’s Chapter 11 bankruptcy filing, Fannie Mae and Freddie Mac were both nationalised, Morgan Stanley and Goldman Sachs were converted from investment banks into bank holding companies, and Bank of America (BoA) acquired Merrill. And that was just the beginning.

Throughout the crisis, while firms such as Cravath Swaine & Moore, Davis Polk & Wardwell, Linklaters and Shearman & Sterling appeared on numerous deals, three names in particular stood out for their ubiquity: Wachtell’s Herlihy, Simpson Thacher & Bartlett’s Lee Meyerson and, of course, Sullivan & Cromwell’s Rodge Cohen.

Cohen advised Fannie Mae when the US government took control of it and Freddie Mac. Cravath partner Robert Joffe advised Fannie Mae’s independent directors while Freddie Mac turned to Davis Polk partner Randall Guynn. Herlihy advised the US government.

Cohen was then retained by AIG, which needed guidance through a series of woes that ended up with the insurer being bailed out by the government. AIG also received advice from a Weil Gotshal team that included partners Marcia Goldstein and Michael Aiello, while the US Treasury and the New York Federal Bank turned to Davis Polk partners Bradley Smith and Marshall Huebner.

Cohen still found time to advise Goldman Sachs on its transformation from an investment bank into a holding company. Sullivan won another Goldman mandate when relationship partner John Mead gave the bank advice on a $5bn (£3.42bn) cash injection from veteran investor Warren Buffett, who turned to Munger Tolles & Olsen.

Further bank disasters saw Sullivan’s Cohen guide JPMorgan though its acquisition of Washington Mutual, which was advised by Simpson Thacher’s Meyerson, and he advised Wachovia on its own sale. Cohen also advised Japanese bank Mitsubishi UF J Financial Group when it injected billions of dollars into Morgan Stanley, which turned to Wachtell’s Herlihy.

Aside from Lehman, whose global reach meant UK as well as US firms were handed leading instructions, the first flurry of credit-crunch related deals went mainly to New York-based firms.

BoA’s takeover of Merrill gifted a role to Linklaters, though, with corporate partner Olivia McKendrick advising the former on the non-US aspects of the deal. Shearman partner John Madden led a team advising on the US side of the transaction while Herlihy was on the team acting for BoA.

When the crisis got to the stage that the US government had to step in, Simpson Thacher’s Meyerson won a beauty parade to advise on the $700bn (£478.39bn) financial markets bailout package.

In the UK a similar scheme saw the Government’s trusted adviser Slaughter and May step up to the plate, with partner Nigel Boardman and Nilufer von Bismarck leading the advice. Davis Polk, a member of Slaughters’ best-friends network, advised the Government on the US aspects of the bailout. Davis Polk London partner Jeffrey Oakes and New York partner Arthur Long led the advice.

The Government’s £50bn bank rescue scheme gifted roles to a raft of City firms, with Linklaters banking head, Robert Elliott, advising Royal Bank of Scotland (RBS) and relationship partner Jeremy Parr acting for Lloyds TSB in relation to the scheme.

HBOS called on Allen & Overy (A&O) head of financial institutions Alistair Asher. He and Parr were both instructed when Lloyds began merger talks with HBOS in September 2008, with the two banks expected at that time to be the main recipients of the £50bn fund. In reality, take-up of the scheme was limited and the Government had to part nationalise RBS and Bradford & Bingley (B&B).

Freshfields Bruckhaus Deringer advised the Bank of England on the bailout plan, led by corporate partners Michael Raffan and Karen Fountain, and also acted for the bank on a separate liquidity scheme that would see the Government offer short-term loans of up to a total of £200bn in a bid to encourage banks to start lending to each other.

When it was B&B’s turn to be rescued in September, Ashurst, Herbert Smith and Slaughters won the key mandates. After a weekend of emergency talks, it was decided that Spanish bank Santander would take over B&B’s savings business and branches, while the £50bn lending business was nationalised. Herbert Smith corporate head Michael Walter advised B&B, with corporate partners Will Pearce and Adam Levitt and restructuring partners Kevin Pullen and Laurence Elliott. Santander called on Ashurst senior partner Charlie Geffen along with corporate partner James Perry and commercial partner Clive Tucker. Slaughters partner Charles Randell advised the Government.

In January 2009 Slaughters’ Randell again took the lead role advising the Treasury on the Government’s bailout of RBS and establishment of the £50bn asset protection programme.

Freshfields acted for the Bank of England with financial services partner Michael Raffan leading a team for the firm. Senior partner Guy Morton, head of finance Alan Newton, antitrust partner Andrew Renshaw and corporate partner Mac Mackenzie were also involved.