Published October 6, 2008

Creditors blame JPMorgan for Lehman's liquidity crunch

It blocked US$17b just 3 days before bankruptcy filing

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(NEW YORK) 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 US$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 last Thursday 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 US 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. US Bankruptcy Judge James M Peck is scheduled to hold a hearing on Oct 16 on that request, the creditors said.



Once the biggest US underwriter of mortgagebacked securities, Lehman was stuck with the assets as their values fell and it searched unsuccessfully for a merger partner.

Lehman had surplus cash of US$15 billion when it announced preliminary third-quarter results on Sept 10, even after taking an estimated net loss of US$3.9 billion and marking down assets by US$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 US$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 US$188 billion pool of loans mostly financed the bank's least liquid assets, sub-prime 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,' Mr Waisman said.

JPMorgan is Lehman's largest secured creditor, with an estimated claim of US$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 US$87 billion on Sept 15 and US$51 billion the next day to pay short-term lenders and settle trades, according to court documents.