Lehman Creditors Face Complex Unwind

Updated from 5 a.m. EDT

With Lehman Brothers' ( LEH) bankruptcy filing Monday, the global financial system has entered into uncharted territory, and the potential repercussions are difficult to measure.

Lehman Brothers had $639 billion worth of assets at the time of its Chapter 11 filing, making it the largest bankruptcy in history. The previous holder of that dubious title, WorldCom, had $107 billion worth of assets.

Moreover, Lehman, with subsidiaries and offices around the globe, is such a central player in financial markets that sorting through the various claims of its creditors and trading partners is a daunting task to say the least.

" Enron is the most complex bankruptcy we've ever worked on, but it's possible that the bankruptcy of Lehman Brothers may involve even more convoluted financial issues and relationships," says Jeff Werbalowsky, CEO of Houlihan Lokey, the investment bank that also advised the official unsecured creditors committee for bankruptcy cases involving WorldCom, Conseco and Refco.

In addition to creditor-related issues, the Lehman Brothers default will present a historic challenge to the credit default swaps industry -- a multi-trillion dollar private market in which large institutions insure themselves against the risk of default by their debtors.

Lehman Brothers is one of the largest participants in the credit default swaps market in the world, and it was the fear of what would happen in this market if a major player defaulted that led the Federal Reserve to backstop $29 billion in Bear Stearns securities in orchestrating the firm's fire sale to JPMorgan Chase ( JPM) in March. Now, the appetite for government bailouts has diminished, taking this option off the table for Lehman.

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