Lehman Bros.: JPMorgan caused its collapse

The bankruptcy estate for Lehman Bros. says JPMorgan illegally maneuvered to seized billions in assets.

By Charley Blaine May 26, 2010 8:02PM
Maybe it's what you call a frivolous lawsuit. But maybe the suit by bankruptcy estate of Lehman Bros. against JPMorgan Chase (JPM) will help shed a clear light on how the investment house collapsed and nearly dragged the global economy down with it.

The estate -- the legal entity charged with gathering in and distributing the remaining assets of Lehman Bros. -- thinks JPMorgan had a lot to do with Lehman's collapse.
The suit charges that the banking giant illegally siphoned billions of dollars from Lehman in the days before the investment bank filed the largest bankruptcy in U.S. history.

It alleges that JPMorgan CEO Jamie Dimon and other top executives used inside knowledge to take advantage of Lehman as its financial state worsened. JP Morgan coerced Lehman to turn over $8.6 billion in collateral in September 2008, triggering a liquidity squeeze that contributed to Lehman's collapse, the suit said.

The estate is hoping to recoup billions in collateral the bank demanded plus other damages.

The lawsuit, long expected, contains among the most-significant allegations to date about the interplay between Lehman and its one-time Wall Street brethren, The Wall Street noted.

JPMorgan shares were down 0.4% to $34.78 today and dropped an additional 0.2% to $38.71 after hours.

JPMorgan served as Lehman's main "clearing bank," meaning it acted as a middleman between Lehman and its lenders and investors. In this capacity, it knew more than most market players about Lehman's financial state, which was growing more dire in the summer and fall of 2008.

The lawsuit alleges JPMorgan used this advantage to squeeze billions of dollars out of Lehman by demanding more collateral to cover its risks, ensuring JPMorgan "would stand ahead of all other [Lehman] creditors—not just for its clearance exposure, but for all possible exposure that could result from [a Lehman] bankruptcy."

Lehman bowed to JPMorgan's demands, fearing that if JPMorgan ceased its clearing activities, it would have triggered the firm's immediate collapse, the suit said.

A JPMorgan spokesman said the lawsuit "is ill-conceived and meritless, and we will vigorously defend it."

JPMorgan's collateral calls amounted to coerced "fraudulent transfers" related to agreements that should be undone, Lehman said. Lehman said JPMorgan should return the $8.6 billion seized before the bank's collapse, along with billions in damages.

JPMorgan served as Lehman's main "clearing bank," meaning it acted as a middleman between Lehman and its lenders and investors. In this capacity, it knew more than most market players about Lehman's financial state, which was growing more dire in the summer and fall of 2008.

The lawsuit alleges JPMorgan used this advantage to squeeze billions of dollars out of Lehman by demanding more collateral to cover its risks, ensuring JPMorgan "would stand ahead of all other [Lehman] creditors—not just for its clearance exposure, but for all possible exposure that could result from [a Lehman] bankruptcy."

Lehman bowed to JPMorgan's demands, fearing that if JPMorgan ceased its clearing activities, it would have triggered the firm's immediate collapse, the suit said.

A JPMorgan spokesman said the lawsuit "is ill-conceived and meritless, and we will vigorously defend it."

JPMorgan's collateral calls amounted to coerced "fraudulent transfers" related to agreements that should be undone, Lehman said. Lehman said JPMorgan should return the $8.6 billion seized before the bank's collapse, along with billions in damages.
 

A bankruptcy-court examiner found in a recent report that Lehman could pursue a legal claim against JP Morgan for making "excessive collateral requests," though he labeled it "not a strong claim."


The examiner said Lehman could have a legal claim to claw back $6.9 billion of the $8.6 billion pledged to JP Morgan.


The bankruptcy-court examiner assailed Lehman for using accounting maneuvers to mask its leverage and mislead investors and traders before its collapse. Meantime, JP Morgan was among the only institutions to continue lending to Lehman before and after its bankruptcy.


The lawsuit alleges that Morgan started to squeeze Lehman after meeting with Lehman officials to discuss its upcoming third-quarter results. Lehman executives apparently thought the meetings were to help draft new financing agreements.


Instead, the suit says, JPMorgan used the results of the meetings to require Lehman to put up so much collateral in cash that the effective outcome was a liquidity crisis that ultimately caused the firm to crash.


The collapse set off the stock market crash of 2008 and turned a serious recession into something much worse.


JPMorgan spokesman Joe Evangelisti said the suit has the reality all wrong.

Lehman's management made "ill-advised decisions" to take on too much debt and add to its portfolio of subprime mortgages that sank the investment house.

It was "not any conduct by JPMorgan that led to Lehman's demise and the enormous losses to its various constituencies."


He added that there was "absolutely no inappropriate use of confidential information by any employee."


The lawsuit takes up a similar theme to that of shareholders of Washington Mutual, which collapsed in September 2008 in the nation's worst bank failure. The Federal Deposit Insurance Corp. immediately sold the banking business to JPMorgan.


This week, Wamu shareholders asked a federal judge for permission to investigate JPMorgan for its role in the Wamu failure.


The equity committee wants information that could lead to potential claims against JPMorgan if they can show that Morgan had a role in the bank's failure, the largest in U.S. history.

The shareholders are seeking to pick up where Washington Mutual left off. The holding company was locked in a battle for documents and depositions from JPMorgan when it reached a settlement now at the heart of the company's proposed reorganization.

The proposed plan leaves nothing for shareholders and distributes around $7 billion to creditors. It also provides a range of liability releases.

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