Derivatives Lehman Brothers purchased to guard against defaults on the subprime-mortgage bonds that fueled the 2008 crisis could deliver a big pay-out more than 10 years after the bank’s collapse, Bloomberg News reported. Lehman Brothers International Europe, or LBIE, a London-based subsidiary of the defunct bank, is taking bond-insurance firm Assured Guaranty Ltd. to court over decade-old claims that a swath of credit-default swaps it had bought were incorrectly settled in 2009. A trial to resolve the matter started in New York state court on Monday, with Justice Melissa Crane presiding over a virtual hearing. LBIE claims it’s owed more than $500 million because Assured failed to use market prices when it closed out a series of swaps, tallying them up instead through a method its lawyer said defied “the laws of financial physics” in court on Monday. Assured relied on stale data, flouted market norms and acted in bad faith when it settled the trades, Andrew J. Rossman of Quinn Emanuel Urquhart & Sullivan in New York said on behalf of LBIE. For its part, Assured says it followed the contracts to the letter when settling them, and the results show that it was actually Lehman on the hook — owing the bond insurer a $20.7 million termination fee after the bank folded. Rather than a head-spinning skirmish over obscure financial instruments, “at its core, it’s a simple contract dispute, and a simple case,” Lev Dassin of Cleary Gottlieb Steen & Hamilton said on behalf of Assured.
