Lehman Creditors Allege JP Morgan Role in Bank’s Failure

Oh, this could get ugly. The Wall Street Journal reports that Lehman’s unsecured creditors are calling on the bankruptcy court to examine why the investment bank ran out of funds. The suit argues that JP Morgan abused its role as clearing bank, retaining $17 billion of excess collateral which Lehman could have used to stave off its collapse.

From the Wall Street Journal:

Unsecured creditors of Lehman Brothers Holdings Inc. asked a court overseeing the securities firm’s bankruptcy proceedings for permission to investigate how Lehman ran out of money.

The creditors’ group alleges that J.P. Morgan Chase & Co., which acted as a financial middleman between Lehman and other lenders, helped spark a “liquidity crisis” at Lehman before the firm filed for Chapter 11 bankruptcy proceedings earlier this month…

According to the court filing, about $17 billion in Lehman cash and securities were being held at J.P. Morgan as collateral. In serving as a middleman, or so-called clearing bank, J.P. Morgan operates the bank plumbing that connects firms such as Lehman to third-party lenders. In that role, J.P. Morgan held collateral to ensure the lenders’ loans to Lehman can be repaid. In its claim, the creditors group alleges that J.P. Morgan “withheld $17 billion in excess assets” from Lehman Brothers “in the days just prior to the bankruptcy filing.”

In the claim, the creditors say that J.P. Morgan’s refusal to make the assets available to Lehman may then have contributed to Lehman’s cash strain.

The creditors group asked the court to authorize the collection of information from J.P. Morgan, as well as the deposition of a J.P. Morgan official.

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  1. donna

    Wouldn’t surprise me after the hassles of dealing with JP Morgan for over four years to settle my mom’s estate. Bunch of evil bastards.

  2. Anonymous

    Looks like the whole clearing system is breaking down.

    Saw where BAC is suing LEH for return of nearly $500 MM in collateral.

    I had always thought that collateral was sacroscant (at least remote from bankruptcy) — now that myth too seems to have been exploded.

  3. Paisano1

    JP Morgan was a criminal, and the old syndicate is just at it again.

    The Federal reserve is just like a big syndicate of crime families – they decided Lehman and Bear Stearns (and now Citi) were weak, so they are going to whack them and hundreds of other banks in a financial coup d’état, and the Treasury is backing them!


    Bush will institute martial law before congress comes back into session.

    October-Surprise: Hello Fascism!

  4. Richard Kline

    ‘Ibanks Preying on Their Weaker Peers.’ Nothing, but nothing that has occurred in actions by top tier financials in the past year would pass a decent criminal investigation, in my view. It begins with fraud and failure of fiduciary responsibility in-house, and only expands in ripples of sewage outward. —And these are the folks we are about to transfer the meat part of $700B++ to. . . . But an investigation “Would have taken too long to avert panic.” Which panic is in large part augmented, to use an undeservedly neutral term, by same parties/recipients. *yecchhhh*

    We really _have_ forgotten everything learned in investigating the Crash of 29, Thrash of 30, and Fraud of 31. But then, Americans much prefer mystery to history.

  5. eh

    There was plenty of material on-line at the time of the BSC collapse giving credibility to similar claims regarding BSC — as I recall, a NYT columnist wrote about how he received one of the phone calls in a ‘whispering campaign’ against BSC. Wall St is corrupt enough I don’t see why anyone would doubt it. Proving something like that in court is another matter.

  6. Matt Dubuque

    Nice potpourri of articles today Yves. Thanks. The extended and insightful discussion on China was most welcome.

    Although we have had some different perspectives on various matters, I wanted to thank you for your hard work.

    Your blog is one of my primary news sources each day.

    Matt Dubuque

  7. Independent Accountant

    I was thinking we need someone to run Paulson’s TARP who might be able to make it profitable. I wonder if we can bring Meyer Lansky back from the dead? I’m sure he could collect the loans easily. After all, he started out as a “starke”, a collector.

  8. Anonymous

    When JP Morgan gets the dagger out no one seems to notice. Thats why they call it the invisible hand! Seriously, folks, this does have the feel of an Agatha Christie novel. Class A Fed owners conspiring to consolidate their positions of power. The origins of the House of Morgan are , of course, British. When it comes to central banking the colonies are still quite naive.

  9. Anonymous

    guy over at bronte capital is tracing out some dirty fingerprints on the WaMu deal too.

    something about fed draining liquidity form slosh..

    I would not doubt people are ruthlessly plotting their dinner menu.

    the excessive fear mongering and amount of chorus they had to drum up on quick demand to get their baby of a bill passed..

    expect they made mistakes and didnt get to think all of their actions through. There will be places the roots will pop through teh surface. Just see how well they can bury them as people glimpse.

  10. bondinvestor

    jamie's involvement in WaMu was despicable.

    first, he spent 6 months trashing KK to investors after Kerry rejected his $3-5/share offer in favor of the TPG-led recap.

    at the same time, he was constantly on the phone to the folks in washington telling them he'd be happy to take WaMu off their hands at no cost to the taxpayer.

    along these lines, there was a rumor that was floating around the financial markets a full 2 weeks before the run started that dimon was teaming up with schumer to force the FDIC to hand over WaMu to JPM.

    then there is the fact that – according to folks inside of WaMu – the cumulative loss scenarios JPM used in their accretion/dilution analysis are exactly the same – down the decimal point – that the rating agencies used in their downgrade of WaMu. again, according to folks inside wamu, it was the rating agency downgrade that led to the $17B deposit outflow that was the justification for the seizure.

    i haven't talked to anyone who follows financials closely for a living who thinks that the line of BS the FDIC & JPM are feeding the public is the truth.

    most investors think that JPM teamed up with the FDIC & rating agencies to start a run on the bank that would provide grounds for the seizure of WaMu from its rightful owners.

    i'd also add along these lines that there are more than a few investment professionals who think that WFC had the highest bid for WB all along, and that the FDIC was trying to force the company into the arms of citi in order to strengthen the latter's balance sheet.

    these regulators are unbelievable. they are running roughshod over private property rights in an attempt to re-organize the financial system in the manner that they think is 'right'.

    if they are so concerned about the system being able to provide capital to support the economy, they should consider nationalizing all the money center and regional banks. that's a much more effective – and fairer – solution than the ad hoc social engineering these guys are attempting.

    pitiful. bernanke may emerge with his reputation intact, but paulson certainly won't.

  11. Edwardo

    Ben Bernanke is a mendacious academic fraud, and the Fed is a doomed institution. With regard to JPM and Goldman, as they are the most politically connected Wall Street players, so are they also the most corrupt. None of the crimes these institutions have committed will be addressed while the present brand of politics and mainstream media coverage is in place. That is going to change.

    As the economic depression, now in its infancy, takes firm hold, we will see a radical new paradigm emerge that will include the drive to fully expose the nefarious actions of the aforesaid, and to seek retributive justice. I kid you not when I say that many of the perpetrators of the gargantuan criminal heist(s) that have already taken place, and are ongoing will suffer one of three fates, they will be prosecuted and convicted, end up dead by assassination, or flee to places like Paraguay, where I understand the sitting President’s family has a very large estate on the largest underground aquifer in South America.

  12. FairEconomist

    More fishy stuff with JP Morgan and Lehman: shortly after the bankruptcy the Fed loaned Morgan $87 billion which was in turn lent to the corpse of Lehman. This was followed by another $51 billion (IIRC) the next day. This stuff was in the news and has gotten comparatively little comment, especially in view of the enormous sums – larger than the AIG bailout, even.

    The Fed has basically hired Morgan to clean up the Bear, Lehman, and Wamu messes. That’s sounding like a pretty cozy little relationship.

  13. Anonymous

    October 4, 2008

    Conspiracy 101 (i.e. Unpopular to the mainstream representation of facts.)

    My deep felt thanks to the commentators above. I was beginning to think that I was the only one who saw what was/is going on. I feel redeemed.

    Not so lonely on the beach,
    Santa Cruz, CA

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