Swaps Interest Rate Cases: FHLBNY Settles With Lehman Brothers for $70M & Banco Santander and Portugal Come to An Agreement

The Federal Home Loan Bank of New York will pay Lehman Brothers and its Special Financing unit a $70M settlement in an interest-rate swaps case. The plaintiffs sued FHLBNY two years ago seeking over $150M that they claim they were owed related to their position on more than 350 swaps and options transactions.

Lehman filed for Chapter 11 bankruptcy protection in 2008. The move froze the markets while spurring the end of millions of derivative transactions in which it was involved. A few days later, when FHlBNY ended its swaps with Lehman, it did so with a $16.5B notional amount.

According to Lehman, due to interest rate fluctuations after its bankruptcy filing, FHLBNY returned and “cherry picked” other end dates. As a result, claims the plaintiff, the latter “massively understate” how much it owed Lehman.

At first, FHLBNY said that Lehman owed it approximately $74 million. It later amended that figure to $44.9 million, claiming it was not possible to properly asses the swaps’ values in the days following Lehman’s demise. FHLBNY went into replacement swaps with other counterparties after Lehman filed for bankruptcy.

FHLBNY used its swaps with Lehman to hedge against growing interest rates. The bank paid a fixed rate to Lehman, while the latter paid a floating rate. Should rates plummet, this was supposed to put Lehman in the money on the swaps, which it claims it was when it filed for bankruptcy protection.

At the time of its bankruptcy filing, Lehman was involved in or had guaranteed over 10,000 derivative contracts that represented over 1.7M transactions. Although its collapse was nine year ago, derivatives teams are still dealing with creditors regarding billions of dollars in claims. Among its creditors are small investors and bigger ones, including Goldman Sachs Group Inc. (GS), Paulson & Co. and Elliot Management, and Silver Point Capital.

Lehman Brothers Holdings Inc. officially exited Chapter 11 bankruptcy protection in 2012.

Banco Santander and Portugal Settle Their Interest Rate Swap Case
In another interest rate swap case, Banco Santander (SAN) and the country of Portugal have arrived at their own settlement regarding the bank’s involvement in selling interest rate swaps in the wake of the 2008 financial crisis.

Before the crisis, Portuguese firms bought swaps contracts so companies could hedge against higher interest rates. It was Santander that underwrote and sold the securities to the firms. At some point, however, the Portuguese government decided that Santander was selling “toxic” swaps to enterprises that the state owned and it filed a lawsuit. Santander denied the allegations.

In England’s High Court, a ruling was reached in Santander’s favor. This settlement places an end to future swaps cases over this matter. As part of the agreement, the Spanish bank will receive $1.8B while Portugal’s government will get €2.3 billion pound in return for “favorable” interest rates.

Interest Rate Swap Cases
If you believe that your investment losses involving interest rate swaps are due to fraud, negligence, or carelessness by a firm or financial representative, please contact our securities fraud law firm today. One of our experienced interest rate swaps fraud lawyers can help you determined whether you have grounds for filing a case. At The SSEK Partners Group, we work with high net worth individual investors and institutional investors in trying to recoup their losses.

Federal Home Loan Bank Settles Lehman Lawsuit for $70 Million, The Wall Street Journal, April 13, 2017

Federal Home Loan Bank of New York

Santander, Portugal Reach Swaps Settlement, Investopedia, April 12, 2017