Twp readers, Steve and Julian e-mailed us about the Bloomberg story below, that the Fed repaid JP Morgan for an advance made to Lehman after its bankruptcy filing:
Lehman Brothers Holdings Inc., the securities firm that filed the biggest bankruptcy in history yesterday, was advanced $138 billion this week by JPMorgan Chase & Co. to settle Lehman trades and keep financial markets stable, according to a court filing.
One advance of $87 billion was made on Sept. 15 after the pre-dawn filing, and another of $51 billion was made the following day, according to a bankruptcy court documents posted today. Both were made to settle securities transactions with customers of Lehman and its clearance parties, the filings said.
The advances were necessary “to avoid a disruption of the financial markets,” Lehman said in the filing.
The first advance was repaid by the Federal Reserve Bank of New York, Lehman said. The bank didn’t say if the second amount was repaid. Both advances were “guaranteed by Lehman” through collateral of the firm’s holding company, the filing said. The advances were made at the request of Lehman and the Federal Reserve, according to the filing.
Lehman disclosed the advances in a motion seeking court permission to give JPMorgan’s claims special status in its attempts to recover any advances. Lehman said that if that status isn’t granted, JPMorgan may not be able to make future advances needed to clear and settle trades.
“The granting of the relief requested is in the best interests of the estate and its stakeholders and the public markets,” Lehman said, adding the advances would be “essential to Lehman’s customers.”
JPMorgan may make future advances at its sole discretion, all of which would be guaranteed by Lehman under its agreement to pledge collateral, Lehman said.
JPMorgan said in a statement in court documents that it has had a clearing agreement with Lehman since June 2000, and had pledged its collateral under an Aug. 26 guarantee.
This was reader Julian’s comment:
I assume that the cash has been advanced to set up accounts with JPM enabling counterparties to settle outstanding trades. Although I’m puzzled as to why the Fed didn’t just set up their own accounts (that’s what the BoE did back in 1990 for Drexel). Perhaps its just an issue of the volume of trades and the ability of systems to cope?
I hate to confess, but clearing and settlement are not areas of expertise of mine. Any reader comments here appreciated.