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Tuesday, September 16, 2008

$138 Billion Post-Bankruptcy JP Morgan Advance to Lehman; At Least $87 B Repaid by Fed

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.

Topics: Banking industry, Credit markets, Federal Reserve, Investment banks

Email This Post Email This Post Posted by Yves Smith at 3:13 pm

16 Comments » Links to this post

16 Comments:

  • MATT DUBUQUE says:
    September 16, 2008 at 3:29 pm

    MATT DUBUQUE

    Likely related to settlement issues.

    Remember the BK of Lehman is also serious loss of a primary dealer (and it’s capacity to funnel transactions with the Fed), which caused clearing to back up.

    That backup was a substantial factor in spike in Fed funds yesterday.

    MATT DUBUQUE

  • doc holiday says:
    September 16, 2008 at 4:04 pm

    Re: “JPM enabling counterparties”

    When I first read that, I thought it said, “embezzling counterparties” …

  • Anonymous says:
    September 16, 2008 at 4:04 pm

    i’m speechless. this should be blasting on every media. am i the only one who sees how f’ed up this is? 2 guys, geithner and dimon play with billions are not theirs. ’so how much ya need, jimmie? $80bln will do, timmie. ok but promise you pay me back tomorow? sure buddy, you know me”

    unbelievable where this has brought us.

  • Hu Flung Pu says:
    September 16, 2008 at 5:05 pm

    This article is saying the Fed nor any other part of the Federal Government has the legal authority to put AIG into conservatorship:

    http://www.reuters.com/article/ousivMolt/idUSWBT00972920080916

    To quote my financial advisor, Scooby Doo:
    “Ruh Roh”

  • Anonymous says:
    September 16, 2008 at 5:37 pm

    As Lehman is petitioning the bankruptcy court to allow JP Morgan to recover these advances, this must mean that Lehman was not able to repay JP Morgan the advanced billions. And as the Fed has reimbursed JP morgan for $87 billion of the advance, has Lehman paid back the Fed? If not, then contrary to Paulson’s bleatings, the taxpayer is in fact on the hook. Does anyone know if the advances have been repaid by Lehman, or is JP Morgan and the Fed now in line with all other claimants in bankruptcy court?

  • Anonymous says:
    September 16, 2008 at 5:46 pm

    MATT DUBUQUE said…
    MATT DUBUQUE

    Likely related to settlement issues.

    Remember the BK of Lehman is also serious loss of a primary dealer (and it’s capacity to funnel transactions with the Fed), which caused clearing to back up.

    That backup was a substantial factor in spike in Fed funds yesterday.
    **********
    Matt,
    Is this the rationale for the selective naked short crackdown? Was the Government concerned that they would lose the channels for selling their debt instruments?

  • Anonymous says:
    September 16, 2008 at 6:36 pm

    Guessing here but more than likely the advances went toward settling derivatives which the house of cards is built on and there is no clearing house for them as they are just over the counter transactions costing trillions. Without a lawsuit with its discovery, you’ll never know what’s going on behind the scenes.

  • Rexlexsolutus says:
    September 16, 2008 at 6:55 pm

    Law?

    –Bank deposits and investment subsidiaries
    – Loans to AIG
    – Lending and repaying to an institution under bankruptcy protection
    – making up new “instruments” ad libitum

    How can anyone discuss the significance, or meaning ,of what’s going on when the players (not the rule makers) keep on changing the rules.

    If the NFL was run like this there’d be a revolution, there certainly wouldn’t be any discussion about what this all means for the playoffs.

  • Sing Expat says:
    September 16, 2008 at 7:43 pm

    Paulson, Bush, Cheney and the Thieves of Wall Street are all good buddies. Under the guise of protecting the financial system, they are looting the treasury to pay off trillions in bonuses and dividends which have been paid out over the past ten years.

    It is obvious to me that the system is corrupt and broken, but it is this system which makes the powers that be very rich, so they are fighting to save it. You cannot convince me that letting Lehman and AIG fail is catastrophic.

    If they are too big to fail, then they should not have been allowed to grow so big. Clinton, Bush, Greenspan, and Bernanke are all guilty of high crimes and treason for allowing, encouraging and fostering the greed, corruption and excesses of Wall Street. They should be in Gitmo being tortured, not some schmuck driver from Nowheresville, Afghanistan.

  • Anonymous says:
    September 16, 2008 at 7:58 pm

    Settling trades works just like any money wire at the end of the day. Stocks for example, settle T+3. That means three days after a trade occurs in the market, cash has to be exchanged between the respective buyer and seller. As Lehman had confirmed but unsettled trades, someone had to post cash to pay for those trades where stocks, bonds etc. had been bought. The securities for which the cash was paid are the collateral and so presumably JPM/the fed has rights over those securities via the guarantee offered by Lehman. I don’t think this is a loan to pay off Dick Fuld.

  • Anonymous says:
    September 16, 2008 at 10:02 pm

    The securities for which the cash was paid are the collateral and so presumably JPM/the fed has rights over those securities via the guarantee offered by Lehman. I don’t think this is a loan to pay off Dick Fuld.
    ************
    Yes, but as Lehman is petitioning the bankruptcy court to ensure that the lenders of the advance be given priority according to the Bloomberg story, then it appears that the Fed and JP Morgan have not been repaid. Once banruptcy has been declared, all creditors get in line, do they not? And if true, than Paulson has lied blatantly again, and the taxpayer is on the hook for Lehman. And shouldn’t Paulson be in jail for peddling bad paper anyway?

  • Anonymous says:
    September 17, 2008 at 4:45 pm

    “Sure, we’ll bail you out, let me just switch on the printer…..”

  • Anonymous says:
    September 17, 2008 at 6:14 pm

    For God’s sake don’t let them find out they are all slaves and our ‘economic system’ keeps them there.

  • Anonymous says:
    September 17, 2008 at 8:21 pm

    Lehman is owned by GE which is a warmongering, warprofiteering Energy Giant that We the People grossly enrich. The government rigs the economy trapping us by allowing monopolies by GE-type companies.

    The government also allowed companies that deal GM cars to force and trick customers into buying invisible goods like a clear paint, factory applied at a cost of 1,000 US dollars. In this environment of corruption salesmen tried to get some of the riches for themselves and were willing to kill dealership owners to get a piece of the invisible pie. See Fargo to learn how fascist temptation trickled down to the salesman of the automobile. GE taking a huge piece of the pie by stealing oil in the middle east and manipulating gasoline prices with the help of so-called leaders. GE leaders of industry, right! Leaders of fascism is more like it.

    GE owns NBC which hired Ben Silverman the Jew who sells women like whores to you over your television set. Don’t expect truth to come out of NBC. It’s run by warmongering egomaniacal mass murderers, genocidical fascist thieves. They will entertain you with images of death, lewd sexual acts and do anything to assault your sense of morality while blocking the truth, blocking enlightenement.

    We must teach eachother. We must enlighten those who believe in invisible men and who unwittingly collude with the fascist via silence and ignorance as they wait for the invisible men, Allah, Yahweigh and Jesus to reach out and touch and bless them with riches and happiness. Meanwhile the fascist continue to pool our money into the Federal Reserve Bank and use it to buy guns to threaten us with. They buy armies to keep us from taking back what’s ours, what’s not theirs to take: our merited wealth, our rights and freedoms.

    The jig is up. Let’s organize. Spread the word.

  • Anonymous says:
    September 18, 2008 at 4:18 am

    doc holliday is right: enabling their counterparties. GE ownership:what other wall street banks does ge own? Lehman owns stock in Fed;Rothchilds own majority of Fed stock;do Rothchilds own GE? All of this has been manipulated by Rothchilds.

  • Anonymous says:
    September 19, 2008 at 5:37 pm

    That is why they had GE build nukes; to shut you all up once and for all.

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