Credibility seen key issue in a Lehman bankruptcy

By Emily Chasan - Analysis

NEW YORK (Reuters) - As potential suitors walked away from a deal to rescue Lehman Brothers Holdings Inc LEH.N on Sunday, it became increasingly likely that the only place the troubled investment bank has to turn is a bankruptcy court.

However, filing for bankruptcy protection is an unwelcome scenario for the 158-year old firm, as the courts have special restrictions on brokerages, and investors, counterparties, clients and workers stand to lose even more confidence in the firm.

"Bankruptcy will give it an opportunity to try to slow down the hemorrhaging, but its market value will continue to dissipate," said Jack Williams, Resident Scholar at the American Bankruptcy Institute, and a professor at Georgia State College of Law.

"Much of (Lehman's) asset value at the end of the day is tied up in its credibility, and that takes a significant hit early in a bankruptcy case."

So Lehman, once the fourth-largest U.S. investment bank by market capitalization, is likely to liquidate, experts say.

"If they file...they have the potential to lose most of their clients," said Christopher Whalen, managing director of financial research and data firm, Institutional Risk Analytics.

On Sunday, The New York Times reported that Lehman intended to put its parent company, Lehman Brothers Holdings, into bankruptcy protection, while keeping its subsidiaries solvent, citing people familiar with the matter.

The move would allow it to avoid forced liquidation of its brokerage unit, since Chapter 11 reorganization is not available to brokers under U.S. bankruptcy laws.

But unwinding the firm is still likely to be a complicated endeavor, said Mark Scarberry, a bankruptcy law professor at Pepperdine University School of Law.

"You're going to have issues with what to do with some of their international assets and assets held offshore," Scarberry said.

Additionally, he added that since many of its assets are longer-term obligations, it could there may be some positions the firm will have trouble closing.

Major players in the $455 trillion global derivatives market met in a rare emergency trading session on Sunday in an attempt to scale back exposure to Lehman and prevent toxic assets from spilling into global markets.

But regardless of the steps taken to offset risks, markets are still likely to be wary of what is ahead. Bankruptcy is a long, complex process where almost everything is done out in the open, as opposed to the veil of secrecy Wall Street is used to using to conduct deals.

The last time a major U.S. investment bank failed was in 1990, when Drexel Burnham Lambert filed for bankruptcy protection amid a collapse in the junk bond market.

"This isn't a manufacturer or retailer... so we don't have a very rich track record about how the issues will be addressed, and the classic signposts just aren't there," Williams said.