Group Loops From Hell

Having had a little too much first hand exposure to the world's biggest bankruptcy, we were delighted to peruse the alternative Lehman bankruptcy plan proposed by the likes of Fir Tree, Calpers, Owl Creek, Taconic and of course, Paulson & Co, who now own $9.4 billion in Unsecured Claims against the monster that is LBHI. Why monster? The graphic below, which could just as easily come from a Richard Feynman lecture on quantum chromodynamics, explains it all. While we will present a far more detailed summary of what is contained in the Paulson Plan as we affectionately call it, which if effected will likely result in about a $1 billion pay day to the ad hocs due to the materially higher GUC recovery should the sought substantive consolidation be enacted, the chart below which summarizes the labyrinth of simply intercompany claims between the various filed entities, demonstrates just how deranged an even modestly simple bank hold co looks like when undressed to its bare bones. And this is the kind of structure that Paulson (Hank) et al believed could be contained when they decided to cede to Goldman's purported demand to let Dick's baby fold... Instead of focusing on removing precisely the kind of complexity interwoven within financial organizations, created for the sole purpose of fooling regulators and shareholders that a given firm is in better financial shape than it truly is, or to afford it to take on exponentially more debt than legally allowed, Dodd Frank has done absolutely nothing to mitigate that one key problem that continues to reside at the heart of the American financial system: unprecedented and irreconcilable complexity, where the parts take on a life of their own, and fall out consequences are completely and utterly unpredictable. We may have a resolution mechanism, but this chart demonstrates why we will never use it.