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Less than six months before Lehman Brothers Holdings Inc.'s fall in September 2008, executives from Bermuda affiliate Lehman Re met with a reinsurance retrocession provider to discuss ongoing operations and the future of their relationship.
The April 22, 2008, meeting, requested by Bermuda retrocessionaire Pulsar Re Ltd., would have been routine but for one revelation: For the first time, according to a complaint filed Jan. 26 in a federal bankruptcy court in New York, representatives of Pulsar learned that roughly $450 million of cash that had been posted in a segregated account as part of a quota share retrocessional transaction had been transferred by Lehman Re to its commercial money market dealer in exchange for real estate and other less liquid assets. Overall, Lehman ceded approximately $1 billion in reinsurance risk to Pulsar through a series of agreements.
The cash collateral was...