Morgan, Citigroup helped cause Lehman's collapse, examiner finds

By Linda Sandler and Don Jeffrey
Bloomberg News
Thursday, March 11, 2010

http://www.bloomberg.com/apps/news?pid=20601087&sid=aeMnMvXnUYHc&pos=1

NEW YORK -- JPMorgan Chase & Co. and Citigroup Inc. helped cause the illiquidity that led to the collapse of Lehman Brothers Holding Inc., the bankrupt bank's examiner said today in a report filed in Manhattan federal court.

Lehman tumbled into its $639 billion bankruptcy, the biggest in U.S. history, because it didn't have enough liquidity and lost the confidence of its counterparties, according to a 2,200-page report from Anton Valukas, the U.S. Trustee-appointed examiner.

By changing guarantee agreements and making new demands for collateral, JPMorgan and Citigroup helped to precipitate the liquidity crisis that doomed Lehman, Valukas said.

"The demands for collateral by Lehman's lenders had direct impact on Lehman's liquidity pool," he said. "Lehman's available liquidity is central to the question of why Lehman failed."

Lehman executives including former Chief Executive Officer Richard Fuld, former Chief Financial Officer Erin Callan, former executive vice president Ian Lowitt, and former managing director Christopher O'Meara certified misleading statements, the report said.

Commenting on Barclays Plc's purchase of Lehman's North American brokerage, Valukas said a "limited amount of assets" belonging to Lehman were "improperly transferred to Barclays."

Michael O'Looney, a Barclays spokesman in New York, didn't immediately respond to an e-mail seeking comment. Citigroup spokeswoman Danielle Romero-Apsilos and JPMorgan spokesman Brian Marchiony didn't immediately return messages seeking comment.

Valukas, 66, spent a year and $38 million producing the report on whether banks such as JPMorgan Chase triggered Lehman's bankruptcy or if Barclays improperly benefitted from it and what role was played by the U.S. Federal Reserve System. Valukas interviewed more than 100 people and scrutinized more than 10 million documents, plus 20 million pages of e-mails from Lehman, according to filings in U.S. Bankruptcy Court in New York.

"The Examiner has determined that there are a limited number of colorable claims for avoidance actions against JPMorgan and Citibank," Valukas said in the report. Valukas defined a colorable claim in the report as sufficient credible evidence to persuade a jury to award damages at trial.

The U.K.'s Barclays bought Lehman's brokerage for $1.54 billion. Lehman has sued Barclays for $5 billion or more, saying it made a "windfall" on the purchase, and Barclays responded that it is owed $3 billion. A bankruptcy-court trial is scheduled for April 26.

JPMorgan and Citigroup were two of New York-based Lehman's main short-term lenders. On Feb. 24, Lehman said it settled with JPMorgan over the last of $29 billion in claims the bank filed against Lehman.

Lehman Chief Executive Officer Bryan Marsal said in an e- mail the bankrupt investment bank would "carefully evaluate" Valukas' report to assess how it might help "ongoing efforts to advance creditor interests."

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

* * *

To contribute to GATA, please visit:

http://www.gata.org/node/16