The Divide: American Injustice in the Age of the Wealth Gap

by Matt Taibbi

  The use of the past tense was particularly ingenious since the letter had not actually been written yet. It was written, however, the following day. The key part of the letter was actually drafted by a different firm that Barclays hired, Sullivan & Cromwell, which added the following in paragraph 13 of the “clarification letter”:

  13. Barclays Repurchase Agreement. Effective at Closing, (i) all securities and other assets held by Purchaser under the September 18, 2008 repurchase arrangement among Purchaser and/or its Affiliates and LBI and/or its Affiliates and Bank of New York as collateral agent (the “Barclays Repurchase Agreement”) shall be deemed to constitute part of the Purchased Assets in accordance with Paragraph 1(a)(ii) above, (ii) Seller and Purchaser shall be deemed to have no further obligations to each other under the Barclays Repurchase Agreement (including, without limitation, any payment or delivery obligations), and (iii) the Barclays Repurchase Agreement shall terminate. Additionally, the Notice of Termination relating to the Barclays Repurchase Agreement dated September 19, 2008 is hereby deemed rescinded and void ab initio in all respects.

  Despite its extreme camouflaging dullness, this paragraph is the legal equivalent of a David Blaine act. What it says is that when we terminated the repo yesterday, well, that didn’t actually happen. But we are terminating the repo now, and we get to keep all the excess money.

  Essentially, paragraph 13 unterminated the terminated repo, then reterminated it on Barclays’s own terms. Ingeniously lunatic mind-loops like this are why one pays certain lawyers a thousand dollars an hour.

  The complicated maneuver allowed Barclays to avoid disclosing to the court ahead of the deal that the repo had been terminated and that it had kept the $5 billion. Even more amazingly, it did so without asking Judge Peck’s permission. When the judge had discharged them on the Friday night before, he had specifically instructed the lawyers on both sides that he was available to be reached all weekend, should something important come up.

  But this decision to unilaterally unterminate the repo and secretly pocket $5 billion apparently didn’t rise to the level of something worth calling the judge over.

  Former Lehman lawyer Oliver Budde, who had blown the whistle on Fuld’s tax-reporting issues to the SEC and been forced out of the firm long before this moment, put it to me this way: “Once it was in the clarification letter all lawyers involved had to know what a big deal it was to terminate a $50b repo contract, thereby gifting $5b to Barclays that the court would have expected to go to the Lehman estate. So the decision to not go back to the judge for approval seems to me to have been a very ballsy decision.”

  With paragraph 13, Barclays and its lawyers had their $5 billion. The only remaining problem was how to explain the missing money to the creditors.

  What to do there? Easy—just say that the markets moved, and that the stuff Barclays had “bought” from Lehman turned out to be worth $5 billion less than it had been worth the week before.

  The reality, the $5 billion negotiated discount, was in paragraph 13 of the clarification letter. The cover story, that the markets had just moved $5 billion in the wrong direction, was in the drawing that Michael Klein had sketched on that manila folder for Saul Burian in the early hours of that last Monday morning.

  A few hours after that manila folder incident, members of all sides went to court, and the sale was finalized. The creditors neither approved the sale nor disapproved it. That same Monday morning, the Barclays lawyers filed the “clarification letter” with the court, where, like Spielberg’s Lost Ark disappearing into a reverse-zoom panorama of a vast federal government warehouse, it became one of twelve thousand documents filed in the docket to the Lehman case.

  The quiet filing of that letter, with its inscrutable paragraph 13 buried in thousands of words of even more inscrutable legalese, was how Judge Peck was “informed” of the Barclays decision to keep the $5 billion from the repo.

  In later court hearings in the action filed by Lehman’s creditors, the principals essentially admitted to the entire scheme, in which one of the world’s biggest and most respected financial institutions snookered a long-serving federal judge into putting his name on an exquisitely polished fake takeover deal designed to cover up a secret robbery of billions. Perhaps no judge in the history of Wall Street had ever had his underwear pulled so completely over his head, in such an important case.

  But now, after the trial, this same judge would have a second chance to consider the same case. How would His Honor respond?

  The defense had everything going its way. No court had ever accepted a Rule 60 motion to reopen such a massive deal. Judge Peck was no boat rocker, either. He was a well-known Wall Street bankruptcy lawyer who had been a partner at the high-priced New York firm of Schulte Roth & Zabel when he was appointed to the bench. He even went to the same law school as Barclays’s famous defense lawyer, David Boies—NYU. Provided the judge adhered to convention, establishment opinion, and his own legal decision, Barclays was in the clear.

  The Barclays lawyers didn’t spend a whole lot of time contesting the basic facts of the case. They didn’t disagree about the size and timing of the bonuses, or the meaning of paragraph 13, and so on.

  What they mostly argued was that it was legally inappropriate to reopen the matter. The genie was out of the bottle, they told the judge. Finality is important in such transactions; Your Honor’s hands are tied. And then they listed about nine thousand excellent reasons—not for nothing does Boies have that great reputation—why Judge Peck should not go back in time and do something about the unseemly secret withdrawal.

  Then they added one more argument. This would be the sour grapes defense, the “our critics are just jealous and attacking us because we have assloads of money” argument. If you wait long enough, this line of defense emerges in almost every single Wall Street case that involves an aggrieved victim of a back-alley mugging asking for its money back.

  In this case, Boies whipped the jealousy argument out in his closing. What he said was that the creditor lawyers had known about the clarification letter from the get-go and then had sat on it, waiting to see if Barclays would prosper after the deal, at which point they would pounce and try to sue Barclays for the crime of being successful:

  I guarantee you, Your Honor, that if the markets are crashed, if this transaction had been a failure, if Barclays had lost billions of dollars, they wouldn’t be coming back in here and saying “let’s redo the transaction.”

  Their argument is that if they see something that they think was not adequately disclosed to the Court, they can put it in their pocket, wait until they see whether this turns out to be a good deal or a bad deal … and if it turns out that the enormous risk that Barclays took turns out to be successful, they can come in and take it out of their pocket and say this is a basis for undoing that Sale Order and taking another, they say today, $13 billion from Barclays.

  The whole of Boies’s argument was based upon the idea that the clarification letter had, in fact, been adequately disclosed, not just to the creditors’ lawyers but to Peck himself. “There was no dispute about the existence of the Clarification Letter or the terms or that this Court had approved it,” Boies said breezily at the start of his closing, at which point Peck suddenly and uncharacteristically balked.

  “Let me be clear about something, Mr. Boies,” Peck said. “I never approved the Clarification Letter.”

  Boies, taken aback, tried to retreat. “Okay, Your Honor,” he said. “I would never—”

  “It was filed in the docket of this case,” Peck went on, to Boies’s dismay. “There are now well over twelve thousand docket entries. I do not know everything that is contained in every docket entry.” He frowned, then added: “No proceedings took place before this Court to approve the Clarification Letter per se.”

  Boies, unbelievably, refused to give up the subject. “Your Honor, I won’t address that part of it anymore if the Court wishes me not to,” he said. Then summoning his world-renowned ston
es, he added a “but.”

  “But,” he began, “I think that—”

  “I’m just letting you know that that’s an aspect of your argument that I reject,” said Peck sharply.

  The creditor lawyers glanced at one another. Was there hope? The judge had dropped hints throughout the case that he understood that there were major disclosure issues with the sale. The Jones Day lawyers, incidentally, had made an important strategic decision at the outset, not calling the transaction an outright fraud, but simply one beset with mistakes, some of them innocent. And in truth, the vast majority of the people who worked on the deal, particularly on the Lehman side, had no idea of what was going on in secret. The creditor attorneys argued, somewhat plausibly, that they were victims just like the others, kept from important details, in particular the secret discount.

  The creditors therefore asked for relief due to “mistake, inadvertence or excusable neglect” or due to “misrepresentation (either innocent or intentional).”

  This left Judge Peck with an out. He wouldn’t have to accuse Barclays and its lawyers of fraud in order to give money back to the Lehman creditors. He could say it had all been an accident and pitch the pair of transactions—the original sale and the later relief—as a matched set of rational decisions, one sale approved under great duress and in the midst of an international crisis, and the second made under the cold light of day, reasonably correcting past wrongs. That would be a perfectly appropriate and understandable way to approach the case.

  It didn’t happen. On February 22, 2011, Judge Peck sent down his ruling on the Barclays-Lehman case. The 103-page ruling is, to put it kindly, a hilarious cop-out from a legal standpoint. Peck flatly denied all relief to the Lehman creditors. His reasoning was based entirely on the idea that nothing would have been different if all these ugly facts had been disclosed. He wrote:

  Having dwelled at some length on this question, the Court concludes that nothing in the current record, if presented at the Sale Hearing, would have changed the outcome of that hearing. The Court still would have entered the very same Sale Order because there was no better alternative and, perhaps most importantly, because the sale to Barclays was the means both to avoid a potentially disastrous piecemeal liquidation and to save thousands of jobs in the troubled financial services industry.

  This was the civil litigation version of Collateral Consequences. Let’s not focus on what happened, let’s focus on the larger picture, on the jobs that would have been lost!

  Peck’s point was that since Barclays was the only known buyer at the time, if in September 2008 it needed to make $13 billion on the deal to pull the trigger and buy the Lehman assets, it would always need $13 billion to do the deal—therefore its method of securing that $13 billion should not be reinvestigated.

  But this is wrong on its face. What might or might not have happened if all that information had come out is completely unknowable, even to someone as close to God as a federal judge. Nobody else was willing to buy Lehman at the “official” sale price, but are we really to believe that no other company would have been willing to do the deal with a $12 billion discount? That no other firm would have been willing to take on a first-day $5 billion gain?

  True, Peck admitted in his opinion that there was “a glaring problem of flawed disclosure.” He conceded that “movants have proven that some very significant information was left out of the record,” and he seemed particularly miffed about being duped with regard to the clarification letter.

  He railed against the characterization of the letter as something less than it was, as a document that merely “purports to change and ‘clarify’ some fundamental terms,” when it was in fact a “vital side letter,” one that “makes major changes to the structure of the acquisition and that affects property rights of entities that quite obviously are subject to the Court’s jurisdiction.”

  Even after admitting this, however, he decided to bless the validity of the clarification letter. “Despite the lack of explicit bankruptcy court approval and in recognition of the conduct of the parties in relying on the Clarification Letter as a controlling document,” he wrote, “the Court has decided to treat the document as having been approved by virtue of the combination of references made to the Clarification Letter in the Sale Order and the conduct of the parties demonstrating unequivocal reliance on the document.”

  You will never see a starker example of legal buck-passing. Peck elected here not to rule on whether the clarification letter, with its insidious paragraph 13, should have been approved. Instead, he pirouetted away from the whole issue, saying that he would decide to “treat the document as having been approved” essentially because it had been in use since 2008. In AA, people say, “Fake it till you make it.” In this case, Barclays faked having court approval for the vital side letter, and in the end Judge Peck decided to help Barclays make it, agreeing to “act as if” (to use another popular self-help catchphrase) the letter had been approved.

  As for the problems with the sale, the details of the secret side deals and massive discounts that came out at the trial, those didn’t bother Peck. None of it, he said, represented “fraud, misrepresentation or misconduct.” Moreover, if anything was missed, it was nobody’s fault—certainly not his. After all, there was a simple explanation:

  The Court has coined the term the “fog” of Lehman to characterize the confusion, ambiguity and uncertainty that prevailed during Lehman Week, something akin to the classic expression the “fog of war.” … The disclosure problems are real, but they are due to the “fog” of Lehman and an emergency of a magnitude unlike any that has ever occurred in any sale hearing.

  Thus the Lehman robbery was disappeared from public view, obscured by the “fog of war.” As in real wars, Peck ruled, things happen. And it’s not our job to judge those things.

  So in the end, after hundreds of thousands of pages of motions and depositions, after all that harried effort scouring emails and documents in search of evidence, and after the long hearing in which it was all formally presented, this was the final excuse that all those expensive minds collectively used to wash away the Lehman case:

  Shit happens!

  Years after the collapse of Lehman Brothers, many of the company’s creditors were still feeling the sting. The city of Long Beach, for instance, has been enacting sweeping budget cuts ever since the crash. In the first year after Lehman’s collapse, the Long Beach school system cut summer school classes and bus routes for one thousand students. The city announced plans to lay off thirty-four policemen and close at least one fire station. The mayor asked the city council to cut all funding for the Long Beach Museum of Art. And the city continues to be way behind the financial eight ball. In fact, its projected deficit for 2013 almost exactly matches the Lehman shortfall—$20.3 million.

  “It’s impossible to quantify, but in this tight economy, that kind of money is very significant,” says Robert Shannon, the Long Beach city attorney, of the loss. “And it certainly contributed to the problems we’re having.”

  There are 76,000 stories like Shannon’s. Not all of them involve towns or orphanages. Some involve other banks or other rich individuals. But in more than a few cases, you can draw a straight line from a cop being laid off or a union worker having his or her pension slashed back to the week of 2008 when a handful of Lehman executives took a payoff to mark down their own inventory.

  A few years after that deal, investigators in four different countries—the United States, Canada, Great Britain, and Japan—began investigating a series of banks, including Barclays, for manipulating the London Interbank Offered Rate, also known as LIBOR. As the benchmark rate that measures how much banks charge to lend to one another, LIBOR is the basis for almost every adjustable-rate investment vehicle on earth.

  Investigators later found emails from Barclays traders who discussed manipulating LIBOR so that they could make more money on a trade. In one particularly enlightening exchange, the Barclays LIBOR reporter, in cheerily br
omantic language, tells the trader that he’s happy to oblige.

  For you … anything.… Always happy to help, leave it with me, Sir.

  Later, he added:

  Done … for you big boy.

  The trader wrote back, offering to party with some fine champagne.

  Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.

  When it came out that Barclays had been engaged in LIBOR manipulations since at least 2005, and that Bob Diamond himself had at times okayed these manipulations, a major scandal erupted in the U.K. The Bank of England fined Barclays $453 million and essentially demanded that Diamond resign, which he did, in the spring of 2012. On his way out, Diamond released emails and other documents suggesting that the Bank of England not only knew about these manipulations but had actually encouraged them during the fall of 2008, right around the time of the Lehman bankruptcy. The ostensible justification for the BOE wanting banks to suppress LIBOR at that time is that it made banks look healthier and prevented a worldwide panic. But there was no excuse at all for the manipulations that Barclays had engaged in prior to 2008, the “bottle of Bollinger” manipulations, which were done purely to make more money for Barclays and its traders.

  It also came out during this investigation that Timothy Geithner himself knew about some of the LIBOR shenanigans, as far back as 2008. But he did nothing about it other than send a letter to the Bank of England with some recommendations for how to prevent future manipulations. When asked why he didn’t contact the Department of Justice to help it begin a criminal investigation, Geithner essentially said that the DOJ had access to the information from media reports and didn’t need his help. The primary banking regulator in America didn’t contact the Justice Department because he said it could read about the case in the newspapers!