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By Ronald Fink
The Treasury and Federal Reserve may have decided to let Lehman Brothers fail, but the government might still have to pay its creditors millions of dollars.
In its bankruptcy proceedings, Lehman's creditors are claiming that AIG owes them $12.5 million for credit default swaps the bank bought from the insurance company, which has received $182.5 billion in taxpayer funds after the government decided to bail it out late last year. The swaps cover four companies that have defaulted on their debt, including General Motors, Washington Mutual, Abitibi-Consolidated and Station Casinos.
While Lehman failed to pay more than $4 million in premiums due on the swaps, its creditors are seeking the full amount. Like other buyers of such swaps, Lehman chose to "ride the market" when they were so far out of the money that the unpaid premiums didn't seem to matter. But the swaps are now in the money.
AIG, which was effectively acquired by the Federal Reserve in Sept. 2008, contends the amount of unpaid premiums should be subtracted from the value of the swaps. The government-owned insurer also claims it should have some assurance that Lehman could, in turn, make good on swaps it sold the insurer.
Observers believe AIG won't be able to avoid paying most of the claims. "I don't know that they have a right to adequate assurance," wrote Rutgers law professor Stephen Lubben Tuesday on the website Credit Slips.
http://www.creditslips.org/creditslips/
"Wouldn't most counterparties, on all types of contracts, like to get that? But AIG is certainly right that Lehman has an obligation to perform."
The amounts in question pale in comparison with those the Fed has extended to AIG to make other banks whole on swaps the insurer could not pay. But some analysts think that continued problems at other banks could result in additional claims against AIG down the road.
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