Lehman Cash Crunch Caused by Lender JPMorgan, Creditors Say
By Linda Sandler and Jeff St.Onge
Oct. 4 (Bloomberg) -- Lehman Brothers Holdings Inc.'s main lender and clearing agent, JPMorgan Chase & Co., caused the liquidity crisis that led to Lehman's collapse, creditors said.
JPMorgan had more than $17 billion of Lehman's cash and securities three days before the investment bank filed the biggest bankruptcy in history on Sept. 15, the creditors committee said in a filing Oct. 2 in bankruptcy court in Manhattan. Denying Lehman access to the assets on Sept. 12, the bank ``froze'' Lehman's account, the creditors claimed.
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.
The creditors asked the judge in charge of the case to let them interview a witness and request relevant documents from JPMorgan and to pursue possible legal claims. U.S. Bankruptcy Judge James M. Peck is scheduled to hold a hearing Oct. 16 on that request, the creditors said.
Harold Novikoff, a lawyer for JPMorgan at Wachtell Lipton Rosen & Katz, declined to comment, saying he didn't see the filing until midnight. He previously said in court hearings that the bank continued to finance Lehman's brokerage after its parent went into Chapter 11 bankruptcy proceedings.
$23 Billion Claim
Brian Marchiony, a spokesman for New York-based JPMorgan, declined to comment. Creditors' lawyers at Quinn Emanuel Urquhart Oliver & Hedges didn't return calls seeking comment.
Once the biggest U.S. underwriter of mortgage-backed securities, Lehman was stuck with the assets as their values fell and it searched unsuccessfully for a merger partner.
Lehman had surplus cash of $15 billion when it announced preliminary third-quarter results on Sept. 10, even after taking an estimated net loss of $3.9 billion and marking down assets by $7.8 billion, the creditors said in the filing.
The stock of the investment bank was increasingly targeted by short sellers after Moody's Corp. said that same day it might lower its ratings for Lehman unless it reached a ``strategic'' merger with a stronger partner, 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.
Funds Frozen
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.
$87 Billion Advance
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.
``There was a great amount of concern, and that concern was expressed as well to us by the Federal Reserve Bank of New York'' that ``we would be creating market havoc had we not made an advance at that time,'' JPMorgan lawyer Novikoff said in court Sept. 16 as he asked for ``comfort'' that the bank's post- bankruptcy loans would continue to be secured.
The bank's collateral was valued in court at $17 billion, including almost $7 billion in cash and a claim on the assets of Lehman's brokerage, by Weil Gotshal.
Lehman, once the fourth-largest U.S. investment bank, filed for bankruptcy with debt of $613 billion as of May 31.
The creditor panel, reconfigured yesterday, includes Bank of New York Mellon Corp. and Wilmington Trust Co. as trustees for bondholders owed about $127.6 billion, according to court papers. Vanguard Group Inc., Shinsei Bank Ltd., Mizuho Corporate Bank Ltd. and MetLife Inc. also are members of the committee, which acts for thousands of unsecured stakeholders in the bankrupt securities firm.
Lehman Brothers Commodity Services Inc., sued by Bank of America Corp. last month for failing to return collateral provided for derivative transactions, filed yesterday for bankruptcy in New York, along with affiliated units. Bank of America was seeking the return of $500 million from three of the units.
The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
