JPMorgan, Citigroup Helped Cause Lehman’s Collapse
JPMorgan Chase & Co. and Citigroup Inc. helped cause the collapse of Lehman Brothers Holdings Inc. by demanding more collateral and changing guarantee agreements, a bankruptcy examiner said today in a report.
“The demands for collateral by Lehman’s lenders had direct impact on Lehman’s liquidity pool,” said Anton Valukas, the U.S. Trustee-appointed examiner, in a 2,200-page report filed in Manhattan federal court. “Lehman’s available liquidity is central to the question of why Lehman failed.”
Former Lehman 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. Fuld was “at least grossly negligent,” the report said. Lehman collapsed in September 2008 with $639 billion in assets, the biggest bankruptcy in U.S. history.
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.”
Kerrie Cohen, a Barclays spokeswoman in New York, and JPMorgan spokesman Brian Marchiony declined to comment. Citigroup spokeswoman Danielle Romero-Apsilos didn’t have an immediate comment. Lowitt, who is now at Barclays, didn’t immediately repond to an e-mail seeking comment. Barclays is Britain’s second-biggest bank. Citigroup is the third biggest U.S. bank, and JPMorgan is second.
Fuld was warned months before the bankruptcy by Treasury Secretary Henry Paulson that Lehman might fail if it continued to report losses without finding a buyer or putting in place a survival plan, according to the report.
Lehman’s chief was “at least grossly negligent in causing Lehman to file misleading periodic reports” while its risks were rising because of long-term assets financed with short-term debt, Valukas said in the report.
Lehman’s executives engaged in conduct ranging from “non- culpable errors of business judgment” to “actionable balance sheet manipulation,” as they used “accounting gimmicks” to move assets off the balance sheet without disclosing that to the government, rating agencies, investors or Lehman’s board.
Fuld’s lawyer, Patricia Hynes, disputed the examiner’s claim that the Lehman estate has a colorable claim against him relating to transactions called “Repo 105 transactions.”
“Mr. Fuld did not know what those transactions were — he didn’t structure or negotiate them, nor was he aware of their accounting treatment,” Hynes said in a statement. Hynes also said none of Lehman’s senior financial officers, lawyers or outside auditors raised concerns about the transactions with Fuld.
Valukas said in his report that Ernst & Young, Lehman’s auditing firm, failed to question inadequate disclosures by the Lehman executives.
Valukas said that Lehman’s directors are “immunized from personal liability” concerning the way the company handled risk because management hadn’t presented any “red flags” to them.
Valukas, 66, spent a year and $38 million producing the report on whether banks 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 including U.S. Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and former Securities and Exchange Commission Chairman Christopher Cox, 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.
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.
Citigroup, which handled currency trades for Lehman, received a new guarantee from Lehman when Lehman was already insolvent and didn’t give enough value in return, the report said.
“The Examiner concludes that a colorable claim exists to avoid the Amended Guaranty as constructively fraudulent,” Valukas’s report says.
Lehman Chief Executive Officer Bryan Marsal said in an e- mail the bankrupt investment bank would “carefully evaluate” Valukas’s report to assess how it might help “ongoing efforts to advance creditor interests.”