FEATURE - Seeing a way out of the Lehman abyss

*Thousands of funds have yet to file claims vs. Lehman

*Alvarez & Marsal hopes to restructure Lehman by 2010

*Prices for Lehman claims traded have spiked recently

By Tom Freke and Emily Chasan

LONDON/NEW YORK, Sept 8 (Reuters) - On five floors of New York City's Time-Life building, just steps away from Lehman Brothers' former Times Square headquarters, some 600 financial professionals are still employed in the arduous task of unwinding what was the fourth-largest U.S. investment bank.

For months, the staff and consultants have sorted through a maze of derivatives contracts, real estate and other assets that were left in chaos on the morning of Sept. 15, 2008, when the 158-year-old Wall Street firm sought bankruptcy protection and helped trigger a near-collapse of the global financial system.

Even a year after Lehman LEHMQ.PK filed the largest and most complex bankruptcy in U.S. history, thousands of funds with investments locked up by the bankruptcy have yet to file their claims, and former customers, counterparties, clients, and vendors are still wading through piles of documents.

Those working at the bank now are trying to maximize value for the bank's creditors or at least give them an idea of what their claims might be worth.

Tony Lomas, chairman of PricwaterhouseCoopers' [PWC.UL] Business Recovery Services unit in Europe, and once the administrator of Enron's European arm, is joint administrator of Lehman Brothers in Europe, and is quick to draw diagrams when words fail to explain the former investment bank's complex assets and liabilities.

"Of the six thousand or so of Lehman's client funds, more than half have not told us what they think we have got that belongs to them," said Lomas who, with his counterparts in New York, advisory firm Alvarez & Marsal, are seeking to wind down the failed firm.

"While I might have nearly $9.0 billion of cash to distribute to creditors, I need to know the universe of creditors I have to share it with," said Lomas. "Who knows whether there's $1.0 billion of them or $200 billion?"

The problems are similar in New York, where creditors owed money from Lehman's derivatives contracts are not due to file their claims until later this month, and additional information on those claims will not arrive until October.

To compound problems, Lehman's empire, which stretches across 16 countries and ranges from Japan to the Cayman Islands, is running 76 separate administration proceedings worldwide.

To complete its bankruptcy, Lehman will have to settle debts between jurisdictions, work out how to value notes issued in one country but drawn up in another, and decide which accounting dates to use when valuing claims, as some of Lehman's 4,000 different units failed well after Lehman first filed for bankruptcy.

CLAIMS: FROZEN OR TRADING?

Still, Alvarez & Marsal hopes by the end of 2010 the bulk of their involvement in Lehman's restructuring will be complete.

"We are focusing on getting all the pieces into shape and our plan is to get most of the reorganising of the assets done by the end of next year," said Alvarez's Ann Cairns in London.

Lehman today has significantly more liquidity than when it first filed for bankruptcy protection. The $3.5 billion in cash that the firm had a year ago, rose above $12 billion by the end of June and Lehman's loan portfolio has seen "improved market value", according to Alvarez & Marsal.

Creditors of the bank are also starting to organize themselves and push for more specific results. An "Ad Hoc Group of Lehman Brothers Creditors" led by investment funds, Paulson & Co Inc, Elliott Management Corp, and King Street Capital Management has grown more involved since June, saying they have accumulated about $12.5 billion in claims against Lehman.

The value of Lehman claims has actually soared in recent months, according to SecondMarket, which operates an exchange for creditors of bankrupt companies to trade their claims. When Lehman's holding company first filed for bankruptcy its claims traded below 10 cents on the dollar, but now they are trading closer to 20 cents on the dollar.

Claims in Lehman Brothers Special Financing, which holds many of the Lehman derivatives, and Lehman Brothers Commodity Services, which holds many of Lehman's commodity trades, took off in April and are now trading for about 40 cents on the dollar, according to SecondMarket.

In Europe, however, claims are still more complicated as many of Lehman's client funds were involved in complex trades with the bank that would now be considered "out of the money" or worthless. Under rules set by the industry trade body ISDA, many of those funds do not have to close the trade yet and may not want to because it would force them to take a loss. Such "hung trades" make it difficult for Lehman to quantify the size of the claim between the bank and that counterparty, Lomas said.

INDUSTRY OF ITS OWN

The tremendous effort to unwind Lehman underscores the magnitude of the decision made by U.S. policymakers not to bail out the investment bank during a weekend of crisis meetings on Sept. 12 through 14, despite having sponsored rescues of peer Bear Stearns and mortgage lenders Freddie Mac and Fannie Mae.

Lomas was quoted in the Sunday Times newspaper last month as saying the Lehman case had "become an industry in itself" and would generate more than $4.0 billion in fees for the 2,000 people around the world who are working on its wind-down.

Cairns and Lomas say regulators are keeping a close eye on how the work out of Lehman Brothers is progressing, seeking to learn lessons on how to prevent a repeat of such a failure.

One response could be to require banks to draw up a "living will" and effectively plan for their own demise.

"Banks have pretty big contingency plans for the back office, but they don't have so many plans for ... what they would do in a Lehman-type situation," Cairns said.

But for Lehman, and its former employees, the more interesting question may still be whether they can ultimately find anyone responsible for the bank's collapse.

Former Lehman employees, many of whom are among those re-hired to help reconcile Lehman's assets, look at this summer's federally-funded automaker bailouts with pangs of jealousy still asking, "Where was our bailout?". Some reforms and money that could have helped Lehman in its final hours, were only made available to banks after its demise.

Anton Valukas, a court-appointed examiner has sought out dozens of banks and former Lehman executives to determine whether anyone lied, mismanaged the firm, or committed a fraud linked to Lehman's collapse. He is likely to report his findings early next year.

The task again is mammoth as Lehman had more than $600 billion in debts when it filed for bankruptcy and nearly every big bank on Wall Street is still entangled in litigation stemming from its collapse, including Bank of America (BAC.N), Citigroup (C.N) and JPMorgan Chase & Co (JPM.N).

Lehman even has a forensic group reconstructing the actions of Lehman's clearing banks, the Depository Trust Company, and the Federal Reserve, around the time of its bankruptcy, to see if there would be potential for lawsuits.

The bank received approval in June to probe whether Barclays (BARC.L) got "too good of a deal" when it bought Lehman's brokerage business, as the British bank was able to quickly book a $4.2 billion gain on its $1.75 billion purchase. Barclays said at the time that it did not expect the probe to result in any additional claims. (Reporting by Tom Freke in London and Emiy Chasan in New York, Editing by Kirstin Ridley)