Morgan Stanley (MS) sold a claim on $1.2 billion of Lehman Brothers‘ (LEHMQ) liquidation to about 10 different investors this week. The claim was connected to approximately 10,000 derivative transactions for which Lehman was the counterparty. The sales price was 38.5% of the face value or $462 million.

Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection in September 2008. This was the high water mark of the credit market turmoil. After this big fall, some counterparties suffered huge losses, which are now looking to claim.

Some investors have the capability of recovering more on the claims than what the original sellers of the claims expect. As a result, demand for buying and selling those claims has increased significantly. Furthermore, with signs of recovery, the recent market stability boosted the trading opportunities in these claims as their value increased over the last six months.

One of the first big blocks of claims was traded by Deutsche Bank (DB) in June. Deutsche traded more than €500 million in the liquidation of Lehman’s European operating company, Lehman Brothers International Europe.

Last month, hedge fund Citadel Investment Group sold a claim on $423 million of Lehman Brothers’ assets to Credit Suisse Group (CS), according to a filing at New York Bankruptcy Court.

Though cyclical headwinds and market turmoil are expected to persist for a while, we believe that the management of Morgan Stanley is staying the course to emerge from the downturn and building a strong competitive position. However, the current backdrop remains challenging, given the weak housing market and increasing unemployment.

Morgan Stanley’s second quarter results experienced continued improvement in credit default spreads and it was among the first banks to repay the bailout money. Given the continued momentum in its core institutional securities franchise and cost containment measures, we expect Morgan Stanley to deliver strong results in the near future.

Zacks Investment Research
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