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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

French investment bank that had already eliminated all activity with Lehman. JP
Morgan reported that large pension funds and some smaller Asian central banks
were reducing their exposures to Lehman, as well as to Merrill Lynch. And Citi-
group requested a  to  billion “comfort deposit” to cover its exposure to

Lehman, settling later for  billion. In an internal memo, Thomas Fontana, the
head of risk management in Citigroup’s global financial institutions group, wrote

that “loss of confidence [in Lehman] is huge at the moment.” Timothy Clark, sen-
ior adviser in the Federal Reserve’s banking supervision and regulation division, was
short and direct: “This is not sounding good at all.” 
On June , results from the regulators’ most recent stress test showed that
Lehman would need  billion more than the  billion in its liquidity pool to sur-
vive a loss of all unsecured borrowings and varying amounts of secured borrowings. 
Lehman’s borrowings in the overnight commercial paper market were increasing,
however, from  billion at the end of November  to  billion at the end of May
. And it was reliant on repo funding, particularly the portions that matured
overnight and were collateralized by illiquid assets.  As of mid-June,  of
Lehman’s liquidity was dependent on borrowing against nontraditional securities,
such as illiquid mortgage-related securities—which could not be financed with the
PDCF and of which investors were becoming increasingly wary. 
On July , Federated Investors—a large money market fund and one of Lehman’s
largest tri-party repo lenders—notified JP Morgan, Lehman’s clearing bank, that Fed-
erated would “no longer pursue additional business with Lehman,” because JP Mor-
gan was “unwilling to negotiate in good faith” and had “become increasingly

uncooperative” on repo terms. Dreyfus, another large money market fund and a
Lehman tri-party repo lender, also pulled its repo line from the firm. 

“SPOOK THE MARKET”
As the Fed considered the risks of the tri-party repo market, it also mulled over more
specific measures to help Lehman. The New York Fed and FDIC both rejected the
company’s proposal to convert to a bank holding company, a proposal which Geith-

ner told Fuld was “gimmicky” and “[could not] solve a liquidity/capital problem.” A
proposal by the Fed’s Dudley followed the Bear Stearns model:  billion of
Lehman’s assets would be held by a new special-purpose vehicle, financed by  bil-
lion of Lehman’s equity and a  billion loan from the Fed. This proposal would re-
move the illiquid assets from the market and potentially avert a fire sale that could

render Lehman insolvent. It didn’t go anywhere.
But when that idea was floated in July, the need for such action was still somewhat
speculative. Not so by August. In an August  email to colleagues at the Federal Re-
serve and Treasury, Patrick Parkinson, then the deputy director of the Federal Re-
serve Board’s Division of Research and Statistics, described a “game plan” that would
() identify activities of Lehman that could significantly harm financial markets and
the economy if it filed for chapter  bankruptcy protection, () gather information