By: Larry MacDonald

Lehman Brothers paid out bonuses of $5.7 billion (U.S.) to its employees in 2007. Nine months later, the Wall Street investment dealer goes bankrupt. There is something wrong with this picture.

An article recently proposed clawing back the bonuses that imprudent Wall Street executives awarded themselves during the era of frenzied growth. After all, it would be one step toward addressing the moral-hazard problem. And it would seem rather unfair to expect taxpayers to foot a multibillion-dollar bill for cleaning up the mess while the executives got to keep the spoils from creating it. It seems only fitting that a first stop in collecting funds should be at the doorsteps of those who helped perpetuate it – the amounts can be rather significant as Lehman’s example illustrates.

I was thinking the return of the bonuses could be compelled through legislation — but creditors might beat the government to it, at least in the case of Lehman. Adam Levitin, an associate professor of law at Harvard University, notes that the bonuses might be recoverable as fraudulent transfers if a creditor succeeds in demonstrating the firm was already insolvent in 2007.

However, the actual amount recoverable would be less than $5.7 billion. A substantial portion of that figure represents stock grants that vest over time (and those vesting after Sept. 15 are now worthless).