JPMorgan, Citi and the destruction of Lehman Brothers

March 12, 2010

JPMorgan and Citigroup helped cause the collapse 
of Lehman Brothers by demanding more collateral and changing guarantee agreements, the bankrupt bank’s examiner says.

The court-appointed examiner also said in a 2200-page report published overnight that Lehman used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008.

“The demands for collateral by Lehman’s lenders had direct impact on Lehman’s liquidity pool,” said Anton Valukas, the US Trustee-appointed examiner, in the report filed in Manhattan federal court. “Lehman’s available liquidity is central to the question of why Lehman failed.”

Former Lehman chief executive 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.

Mr Fuld was “at least grossly negligent,” the report said. Lehman collapsed with $US639 billion in assets, the biggest bankruptcy in US history.

Commenting on Barclays’ purchase of Lehman’s North American brokerage, Mr Valukas said a “limited amount of assets” belonging to Lehman were “improperly transferred to Barclays.”

The examiner said that while some of Lehman's management's decisions "can be questioned in retrospect" and the firm's valuation procedures for its assets "may have been wanting," those responsible for the firm had used their business judgment and were largely not liable for the firm's collapse.

He did not find that Lehman's directors had explicitly violated their fiduciary duty.

However, in the report the examiner also revealed explosive allegations about a gimmick, known as "Repo 105," that was used for the sole purpose of manipulating Lehman's books.

The examiner concluded that the gimmick, which dated back to 2001 and was used without telling investors or regulators, gave the appearance that Lehman was reducing its overall leverage levels in 2008 when in reality it was not, partially leading to its collapse.

The examiner said there was also sufficient evidence to support a possible claim that the firm's auditor Ernst & Young had been "negligent."

Barclays and JPMorgan declined to comment and a Citi representative had no immediate comment. A spokesman for Ernst & Young did not comment, saying the firm had not yet had time to review the findings.

The report was completed in February and was allowed to be unsealed by the bankruptcy judge overseeing the case earlier on Thursday.