Hedge Funds Face Margin Calls On Frozen Lehman Assets

Oct 15 2008 | 6:00am ET

Adding insult to injury, hedge funds with frozen assets at Lehman Brothers’ London prime brokerage may have to meet new margin calls on those assets.

PricewaterhouseCoopers, which is administering the Wall Street bank’s bankruptcy and liquidation, said it may demand additional collateral on some US$65 billion in frozen assets. Even though they can’t touch those assets, PwC will make margin calls if the value of the securities falls.

“If your bank fails, you still have to pay your mortgage,” Steven Pearson, who is leading PwC’s liquidation of the London prime brokerage, told Bloomberg News. “Who is the holder of the risk of the securities? The hedge funds. If the value of the securities fell, they have to meet margin calls.”

“The biggest losers will be those who had the most assets rehypothecated because they’re gone,” Pearson said, referring to collateral Lehman loaned to other clients.

Worse still for Lehman’s 3,500 hedge fund clients, Pearson warns it could take years to figure out which assets clients are entitled to and which they are not.

“It’s going to be many months and maybe beyond many months,” he said. “It could take years to unravel.”

Pearson also defended his firm’s handling of the Lehman bankruptcy, rejecting the criticism of hedge fund managers such as EIM’s Arpad Busson, who argued that the PwC is taking too much time to free up the hedge fund assets.

“Throwing more bodies at this doesn’t solve the problem,” Pearson said.

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