6th
Et tu, JP?
JP Morgan was Lehman Brothers’ primary clearing house, settling and processing daily, in-house transactions to the tune of about $190 billion. When the credit agencies threatened to yank Lehman’s sterling credit rating because of its huge critical mass of sub-prime mortgage securities and 75% fall in share price from the begining of 2008, Lehman reached out to its private banker, JP Morgan, to withdraw $17 billion of its own money that was being held, in order too forestall a liquidity crisis that would force it into bankruptcy.
JP Morgan refused.
Lehman Brothers declared Chapter 11 bankruptcy the next day.
Why did JP Morgan do this?
They were afraid that Lehman Brothers had bled out too much and its demise was innevitable. It was better, in their estimation, to basically deny Lehman its own money and be certain, by sheer possession of those funds, that they would be covered in case of any debts Lehman would owe JP Morgan in the bankruptcy settlements.
“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.”
The collapse of Lehman Brothers triggered a near-record 500 point implosion of the Dow Jones on September 15th, which led Treasury Secretary Paulson to craft the plan to buy up all that sub-prime kryptonite with the American taxpayers signature. Had JP Morgan provided Lehman Brothers its money, it may have been possible to manage a slower descent for the financial system, giving time for a smarter study of the situation and possible solutions. Then again, maybe the Machiavellian act of tossing Lehman on the third rail was JP Morgan’s way of getting the immunity idol and advancing to the next round of Survivor: Wall Street.
For extra ‘capitalgeek’ goodness, check out the Lehman Bankruptcy motion transcript at Scribd. Registration (very quick) required for PDF reading.
