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Abstract

Lehman Brothers' failure and bankruptcy deepened the 2008 financial crisis whose negative effect on the United States' economy lasted for several years. Yet, while Congress reformed financial regulation in hopes of avoiding another crisis, bankruptcy rules such as those that governed Lehman's failure, have persisted unchanged. When Lehman failed, it lost considerable further value when its contracting counterparties terminated their financial contracts with Lehman. These broad terminations degraded Lehman's overall value to its creditors beyond the immediate losses that caused its downfall. Lehman's financial portfolio was thought to be running a paper profit of over $20 billion when it filed, and is said to have lost up to $75 billion as a result of the post-filing liquidation by Lehman's counterparties of their deals with Lehman. How such a vast value loss can occur and how bankruptcy can ameliorate the problem are the subjects of this Article.

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