Citigroup Drags Barclays To Court Over Lehman Loses

by Trefis Team
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Its nearly five years since Lehman Brothers went belly up in late 2008 to become the largest bankruptcy in American history. But the impact of its collapse on the current financial system is still far from over with the shell holding company of what was once a top-rated investment bank fighting legal battles against almost every major global banking institution as part of its bankruptcy proceedings to this day. To make matters worse, Lehman’s failure has also spurred several lawsuits by these banks against one another over the years.

The latest addition to this list of legal face-offs between banks is a $142 million lawsuit filed by Citigroup (NYSE:C) against U.K.-based Barclays (NYSE:BCS). [1] Both banks have themselves faced more than their fair share of litigation from Lehman – more for Barclays as it purchased Lehman’s North American business in a fire-sale at the peak of the recession, to make windfall profits on the deal (see SEC Sides With Lehman in $3 Billion Barclays Lawsuit). Citigroup settled all its differences with Lehman last November with a $360 million payout. (see Lehman Wants Citi To Cough Up $2.5 Billion) [2]

See our full analysis for Citigroup | Barclays

After Lehman Brothers filed for Chapter 11 bankruptcy on September 15, 2008, Citigroup was reluctant to clear any of its foreign exchange transactions as that would have meant taking on undue additional risks for Citi. But Barclays stood to lose if the trades were blocked as it was finalizing talks to acquire Lehman’s North American brokerage business. Citigroup ultimately did not go ahead with clearing the trades.

As a result, Barclays convinced Citigroup to extend Lehman additional credit and clear the trades allegedly pledging to make up for any resulting losses. Between September 17 to 19, 2008, Citigroup cleared the trades and reportedly lost $91 million in the process. [3] These losses along with interest and other legal expenses comes to the final figure of $142 million quoted in the recently filed lawsuit that Citigroup wants Barclays to cover. It must be mentioned here that Citigroup initially pegged its losses from the foreign exchange clearances at $580 million, but reduced this figure to less than a sixth in the lawsuit.

Although the lawsuit does not really represent a major financial downside for Barclays, it goes against the British bank’s already battered image in the aftermath of the LIBOR fixing scandal. Barclays will, no doubt, be looking to settle the issue at the earliest – something that will likely result in a one-time charge in the near future. The negligible impact of such a charge on the bank’s value can be understood by making changes to the chart below.

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Notes:
  1. Citigroup Sues Barclays Over Crisis-Era Currency Trade Clearing, The Wall Street Journal, May 7 2013 []
  2. Citi to pay $360 million to end Lehman dispute, Reuters, Nov 19 2012 []
  3. Citigroup sues Barclays over losses tied to Lehman, Reuters, May 7 2013 []
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