Lehman Brothers Holdings Inc
In a suit filed with a New York bankruptcy court last week, Lehman alleges that AIG is using the bank's failure as an excuse not to make payments, and that this violates U.S. bankruptcy law.
AIG had the option to terminate the CDSs, which used to insure against a borrower defaulting on its debt, when Lehman failed in September 2008, Lehman said in the filing.
The company failed to do so in order to avoid paying Lehman the $50 million it would have been owed at the time, Lehman said. The insurer appears to be refusing to meet its obligations until the contracts mature or the value of the contracts swings in AIG's favor, the bank said.
A spokesperson for AIG was not immediately available to comment.
Lehman bought protection from AIG on AbitibiBowater
Lehman said it has spent $5 million to purchase debt needed to settle the contracts with AIG and is exposed to the risk that the debt will deteriorate in value.
When a borrower defaults on debt, the seller of protection typically pays the buyer the full value of the CDS, in return for the defaulted bonds backing the contract.
AIG bought protection from Lehman on three firms, Fannie Mae, Freddie Mac and Washington Mutual, Lehman said. The insurer has voided its right to collect on these contracts, however, because it failed to give notice to Lehman to settle the contracts within the 30-day deadline, Lehman said.
Payments on Fannie Mae
The case is scheduled to be heard in the United States Bankruptcy Court for the Southern District of New York on October 14.
(Reporting by Karen Brettell; Editing by Dan Grebler)