Jeremy Warner: Lehman is a gravy train for lawyers

Outlook In today's globalised economy, banking regulators and supervisors are meant to act in an even-handed way that protects the interests of creditors worldwide, right? Wrong. Somewhat naively, you might think, the Financial Services Authority relied on this assumption, which is enshrined in European law and is a generally accepted international convention, in the run-up to the Lehman Brothers collapse.

American regulators – the SEC and the Federal Reserve – have proved altogether less gentlemanly, having refused to give back the roughly £8bn of liquidity that was swept from the books of the London end of Lehman Brothers and carted off back to the parent company in New York days before the investment bank went bust. This is likely to leave many London-based clients of Lehman's seriously out of pocket as creditors. As it turns out, the technicalities of the way Lehman Brothers is organised may mean the London end of Lehman's still owes New York more than New York owes London, yet the principle is still the same. The liquidity pool intended to underpin London trading was raided and is now being used to defray the claims of American creditors back in New York.

Understandably, the FSA is hopping mad about this breakdown in the rules of play. The London operations of US banks were allowed to operate with less day-to-day liquidity than if they were stand-alone organisations, on the understanding that liquidity would be managed globally in the best interests of the whole group. But when push came to shove, the SEC reverted to type and ring-fenced the US interdealer broker. US clients have been protected before all others, helping to make the fallout from the Lehman's collapse far worse in Europe than it has been in the US. Why didn't the FSA see this coming? After all, it is not the first time this has happened. Something similar occurred with the collapse of Drex-el Burnham Lambert 18 years ago. When there is a crisis, the US reins in, protects its own and sod the rest.

In the run-up to the Lehman insolvency, the FSA knew there was a risk, but took the view that if it was to freeze the liquidity pool in London it would bring the bank down at a time when there was still some possibility of it being rescued by Bank of America or Barclays. The Americans ended up playing a fast one on British regulators. It seems to be too late for distressed clients of Lehman's in London, but it won't happen again. The FSA is moving to require all foreign banks to hold more liquidity locally. As for my suggestion in yesterday's column that there was no authorisation for the "rehypothication" of some client assets caught in the administration, the FSA suggests aggrieved parties get in touch. If this did occur, then it would indeed have been a form of fraud. The Lehman's administration is turning into a terrible mess as everyone fights over the carcass. The only certainty is that it will be another veritable gravy train for the lawyers.