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Unprecedented Changes on Wall Street: What You Need to Know

Financial Services Alert

Authors: Richard P. Eckman, Michael H. Friedman, Robert S. Hertzberg and David B. Stratton

9/18/2008

This week the face of Wall Street changed dramatically:

  • Merrill Lynch announced its sale to Bank of America at a “quick sale” price of $50 billion.
  • In an effort to avoid filing for bankruptcy, AIG can receive up to an $85 billion loan from the Fed in return for the right of the Fed to purchase 79 percent of its stock.
  • Lehman Brothers Holdings Inc., the parent company of Lehman Brothers Inc. filed for bankruptcy protection in the Southern District of New York.
  • Amid a dramatic decline in its stock price, reports circulated that Morgan Stanley is in talks with one or more financial institutions to either be acquired or to receive a substantial capital infusion.

All this occurred on the heels of the Treasury Department and the Federal Housing Finance Agency announcing the federal takeover of Fannie Mae and Freddie Mac, and the recent federal bailout of Bear Stearns and its acquisition by JP Morgan Chase earlier this year.

The events that have occurred over the past several weeks are unprecedented and continue to unfold on a daily basis. On Tuesday, Barclays PLC announced it would purchase substantially all of Lehman’s U.S. investment banking and capital markets business. On Wednesday, a federal bankruptcy judge gave initial approval to the Barclay’s takeover, although there is still the possibility of a competing bid. Lehman is expected to seek final court approval on Friday, September 19. Notably, news sources also have reported that Moody’s placed Barclay’s bank debt and deposit ratings under review, along with its financial strength rating. It also placed some of the bank’s subsidiaries’ ratings under review, saying that they might be cut. Moody’s is reviewing how Barclay’s ratings might be affected in view of a consummated deal.

What this means to you:

If you have a business relationship with Lehman or any of the other affected financial institutions, these events could have an immediate and direct impact on that relationship. We have been advising clients on a number of fronts including:

  • advising clients who have entered into swap and hedging contracts, or which are the beneficiaries of letters of credit or other guaranty instruments issued or backed by these institutions, as to their rights and how to preserve them
  • advising clients on the implications of the filings on Lehman’s large mortgage servicing business and the ability of clients to enforce their rights under mortgage purchase agreements and servicing contracts (Note that the only domestic Lehman entity to file for bankruptcy protection was the parent holding company; none of the U.S. operating subsidiaries filed)
  • advising clients on their rights in connection with investment banking and advisory relationships
  • advising clients where one of these financial institutions serves as a lender or agent in a credit facility
  • advising clients about the implications of the purchase of all or a portion of the ongoing business of one of these financial institutions by another institution.

Pepper Hamilton’s Credit Crisis Group, established more than six months ago, has been monitoring the credit markets in general—and the Lehman Brothers situation in particular—very carefully to help clients weather these difficult times and to take the steps necessary to protect their rights. We will continue to update clients on these matters as they develop.

Should you have any questions about Lehman, AIG or the other financial institutions and/or any of your relationships with these companies, or if you have other questions about the current credit crisis, please do not hesitate to contact one of our lawyers listed.

Michael H. Friedman, Richard P. Eckman, Robert S. Hertzberg and David B. Stratton

The material in this publication is based on laws, court decisions, administrative rulings and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.