Cold Snap: What’s a “frozen” hedge fund asset really worth?

frozenIn spite of the obvious analogies between the current frigid weather in the US Northeast, we at have long been intrigued by how one puts a dollar figure on a frozen asset.

Indeed, one thing no one has seemingly ever figured out (and conveyed publicly, to our knowledge) is what the assets frozen by Lehman Brothers’ 2008 bankruptcy might have been worth had hedge funds and others actually been able to take them out and sell them.

In a global market where everyone was tripping over each other for the exits, what would securities that on the books might have been worth something before September 15, 2008 were, at the time of Lehman’s failing, basically worth nothing?

Intrigued by this, we spent a bit of our down-time over the holidays trying to get information on how Lehman’s administrator, PricewaterhouseCoopers (PwC), came up with its valuation methodologies as part of its plan to return US$11 billion (£6.9 billion) to its former investors.

Back in October 2008, the Managed Funds Association (MFA), which represents many of the largest hedge funds, called on the Bank of England to intervene to release an estimated $40-$70 billion held with the European arm of Lehman Brothers (You can read the MFA’s letter by clicking here). But on paper, the actual valuation of those assets has still to our knowledge never been fully disclosed.

In others words, on paper, the assets weren’t technically worth anything unless someone was willing to buy them.

In reality, the global financial market recovery that took place last year helped those assets recover in value significantly. Even Lehman Brothers Holdings Inc. shares, shown in the chart below, reflect investor expectations that the end result of the game – that the sum of its parts will be greater once all is said and done – suggest an outlook that at least isn’t worse than it was during the summer.

LBH Chart

Source: Reuters UK

In its announcement last week, PwC said that more than 90% of affected clients had agreed to a Claim Resolution Agreement (CRA) that will give them back their assets at agreed-upon market values.

But the question of what those “agreed-upon” market values are how they are calculated and how they compare / contrast with what they might have been on September 15, 2008 and today are still pretty fuzzy.

Since September 15, 2008, PwC has held onto the assets of the bank’s clients – worth an estimated $32 billion, according to PwC. Some $13.3 billion has already been returned to creditors, which are predominantly investment companies and hedge funds.

So what’s the remaining $19.7 billion under the receiver stewardship worth, what forms do those assets take and how are they being valued?

We’ll continue to look for the answer, though in this day and age we like many survivors subscribe to the view that something is clearly worth more than nothing. The adage that something is only “worth what someone else is willing to pay for it” still clearly applies.

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