More on the Charge That JP Morgan Withheld $17 Billion From Lehman, Triggering Collapse

Reader Saboor passed along the day’s updates on the case filed by Lehman creditors last week, alleging that JP Morgan, Lehman’s clearing bank, refused to give Lehman access to $17 billion of excess funds held at the bank, precipitating the firm’s failure.

I did not see an link to the case yet in a quick Google search, and I suspect Gretchen Morgenson will have her teeth into this one post haste. But the latest stories did provide more detail on the court filings.

One thing we need to stress: Lehman was a goner. Before it went under, many observers labored under the mistaken belief that if the firm, say, managed to sell Neuberger & Berman for $10 billion, or got a nice chunk of change form the Koreans, it could soldier on for a while, and in the unlikely event that the real estate and LBO paper quit deteriorating in value, the firm might pull through. But there was a reason none of the last-minute prospective buyers (Barclays and Bank of America) came forward with a bid. The firm had a gaping hole in its balance sheet, vastly bigger than what the public at large believed.

But that said, JP Morgan was not entitled to stick a knife in and twist, if that is what it effectively did.

From Times Online:

JP Morgan has been accused by its Wall Street rivals of dealing the final hammer blow that forced Lehman Brothers into collapse in a sensational claim that threatens to spark a colossal legal battle.

The giant American bank is alleged to have frozen $17 billion (£9.6 billion) of cash and securities belonging to Lehman on the Friday night before its failure.

According to Lehman’s biggest creditors, this was what precipitated the liquidity crisis that embroiled the firm, forcing it into Chapter 11 bankruptcy protection on the morning of Monday, September 15….

The funding lines provided to Lehman to finance its everyday operations amount to $188 billion, according to court filings.

The creditors are now demanding that JP Morgan open up its books to the bankruptcy court to allow the transactions to be assessed.

“The creditors’ committee understands that LBHI [Lehman Brothers Holding Inc] had at least $17 billion in excess assets which were held at JPMC [JP Morgan Chase] on the Friday going into the weekend before its bankruptcy filing,” the documents said.

“The creditors’ committee further understands that, on September 12, 2008, JPMC refused to allow LBHI access to its excess assets and instead ‘froze’ LBHI’s account. In freezing LBHI’s assets, JPMC was purportedly holding all of LBHI’s assets as a potential offset against any claims JPMC may have had against LBHI.”

I’m no securities lawyer, but if that is indeed what happened, that is unconscionable. A clearing bank is supposed to act in a custodial capacity. Freezing the assets is tantamount to seizing the assets. It’s self-dealing, pure and simple.
More from Bloomberg:

JPMorgan, the biggest U.S. bank by deposits, financed Lehman’s brokerage operations with daily advances, while money market funds and other short-term lenders provided overnight loans, according to bankruptcy court documents. When JPMorgan shut Lehman off from funds, Lehman “suffered an immediate liquidity crisis that could have been averted by any number of events, none of which transpired,” according to the filing….

Lehman seemed to have enough liquidity to meet its obligations on Sept. 12, the Friday before its bankruptcy filing, creditors said, referring to the cash and collateral at JPMorgan. In addition, the bank held “highly liquid” securities bought with secured financing amounting to $188 billion from banks and other lenders, they said.

The “freezing” of Lehman’s account meant it no longer had funds to support its operations, they said.

Explaining Lehman’s collapse to the judge after the bankruptcy filing, company executives and lawyers said the $188 billion pool of loans mostly financed the bank’s least liquid assets, subprime mortgages and structured financial instruments.

“Secured financing fell out of reach” because of the devaluation of assets securing the loans, forcing Lehman to deplete its cash to continue trading, said lawyer Shai Waisman of Weil Gotshal & Manges in a Sept. 16 court hearing. “This began the stranglehold on Lehman,” Waisman said.

JPMorgan is Lehman’s largest secured creditor, with an estimated claim of $23 billion, according to a Sept. 25 court filing. Unsecured creditors have claims on Lehman that might be worth 15 cents on the dollar or less, according to analysts including Peter Plaut of Imperial Capital LLC.

After Lehman’s filing, JPMorgan advanced the company $87 billion on Sept.15 and $51 billion the next day to pay short- term lenders and settle trades, according to court documents.

This Bloomberg story fails to note that at least $87 billion of those advances were repaid by the Fed. From an earlier Bloomberg report:

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.

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  1. EvilHenryPaulson

    What I find extremely weird is that Citigroup was announced as an unsecured creditor for exactly $138 billion. You can be sure that if Bank of NY Fed hadn’t channelled money through JPM to LEH and presumably at least in part to Citigroup, that Citigroup would have made some kind of major announcement in the 2-3 weeks since.

    It’s only a matter of time before that money must be returned to the NY Fed. The threat of Citigroup failing likely is what triggered the emergency bailout

  2. FairEconomist

    Pardon the tinfoil, but TPTB have to be covering up something disturbing in that $138 billion emergency loan. The need for the system to loan $138 bb to a bankrupt organization says something important about the weaknesses in the system. Even more so that it hasn’t been repaid and has been dumped in as one of the creditor interests in the Lehman bankruptcy. However, I haven’t heard a peep about what it is. I would think every financial reporter in New York would be dying to talk about this – who it was owed to, and why, and why it doesn’t seem to have been balanced out yet. But – silence.

  3. Anonymous

    “The firm [LEH]had a gaping hole in its balance sheet, vastly bigger than what the public at large believed.” Doesn’t this mean that the top management of Lehman will be subject to criminal charges?

  4. Matt Dubuque

    Matt Dubuque

    Without access to the legal documents, it seems entirely possible to me that JP Morgan used this paltry 17 billion as a setoff against sums to it owed by Lehman.

    It would seem highly likely that, during the Lehman endgame, ALL the sums advanced by JP Morgan would have been secured by assets of Lehman.

    I recall the howls of Bear Stearns that they were never bankrupt, but that they merely suffered a “liquidity” crisis. However, after their books were closely examined, they were in FAR worse shape than their public pronouncements at the end.

    It seems to be a similar situation with Lehman, in my view.

    I recall how Lehman was continually floating stories in the media that their crown jewel Neuberger unit was worth 10 billion alone. Last week it sold for 2 billion.

    Matt Dubuque

  5. Anonymous

    Were these orignally Bears Stearns assets that JPM withheld?

    I think JPM is rapidly become the shadow MLEC…

  6. omodes123

    if what you say about citi is true, then the winners and losers of this morass has been decided.

  7. Anonymous

    Yeah, I was going to say something but Dubuque beat me to it. That JPM refused to release the funds might’ve been wholly appropriate given whatever security interest was signed over. Hard to tell without seeing any of the legal documents.

  8. Kafka

    Could it be the Fed was complicit in massive fraud with JP Morgan which perhaps is or was insolvent prior to Fed intervention? I have heard Dimon is unhappy with the Bear Acquisition and estimates the true cost to be $106 per share as opposed to the $10 per share price paid. Of course, this would be the ultimate payback by the Fed, $138 Billion, notwithstanding that LEH had to be forced into bankruptcy by JP Morgan prior to the Fed giving JP Morgan $138 Billion ostensibly to fund liabilities which were substantively owed by LEH to JP Morgan. It seems the shell game is unending though the results are apparent.

    The advance was reportedly “to allow” Lehman to settle securities trades with clients. J.P. Morgan was then immediately reimbursed by the Federal Reserve for the same 138 billion.
    What was not originally reported, or likely not understood at the time due to the types of securities that Lehman did most of their business in [Credit Derivatives], it is a virtual certainty that J.P. Morgan [the largest derivatives player in the world with 8.1 Trillion in Credit Derivatives alone] was the “client” [the other side of the Lehman trades that needed to be settled].
    The critical piece of information that completes the daisy-chain: The world only learned about J.P. Morgan’s 138 billion advance from a bankruptcy court document, where Lehman was asking the court for the authority to give the settlement of claims of J.P. Morgan “special status.”
    It is highly likely [or a certainty on my planet] that J.P. Morgan was INSOLVENT and was “BAILED OUT” last Monday, September 15, to the tune of 138 billion dollars. This would explain why the Fed and Treasury dictated that Lehman fail – to disguise or otherwise obfuscate the recapitalization of or illicit transfer of 138 billion to A MUCH SICKER, TEETERING ENTITY, J.P. Morgan Chase.
    This makes sense. Investment banks are dropping like flies, owing to their involvement in credit derivatives – this is a fact.
    J. P. Morgan is – HANDS DOWN – the largest derivatives player in the world with a book of 90 Trillion in notional value on March 31, 2008 – with 9% of the book composed of Credit Derivatives. That amounts to a cool 8.1 Trillion worth of Credit Derivatives. We know this from the Office of the Comptroller of the Currency’s Quarterly Derivatives Report – pg. 24.

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