Page 360 - untitled

SEPTEMBER : THE BANKRUPTCY OF LEHMAN 


they have apparently been taking to think we would do something like that.” The
Lehman bankruptcy estate has a different view. It alleges Black agreed to send a due
diligence team, following Dimon’s suggestion that his firm might be willing to pur-
chase Lehman preferred stock, but instead sent over senior risk managers to probe
Lehman’s confidential records and plans. 
The bankruptcy estate alleges that later that night, JP Morgan demanded that
Lehman execute amended agreements to its tri-party repo services before prean-
nouncing its third-quarter earnings at : the next morning. The amendments re-
quired Lehman to provide additional guarantees, increased Lehman’s potential

liability, and gave JP Morgan additional control over Lehman bank accounts. Again,
the Lehman bankruptcy estate argues that Lehman executed the agreements because
JP Morgan executives led Lehman to believe its bank would refuse to extend intraday
credit if Lehman did not do so. JP Morgan denies this. Black told the FCIC, “JPMC
never told Lehman that it would stop extending credit and clearing if the September
Agreements were not executed before the markets opened on [Wednesday,] Septem-
ber , .” 
Before the market opened on Wednesday, Lehman announced its . billion
third-quarter loss, including a . billion write-down. Four hours later, Matthew
Rutherford, an adviser to Treasury, emailed colleagues that several large money funds
had reduced their exposure to Lehman, although there was not yet “a wholesale pull
back of [repo] lines.” 
“Importantly, Fidelity, the largest fund complex, stressed that while they hadn’t
made any significant shifts yet today, they were still in the process of making deci-
sions and wanted to update me later in the day,” Rutherford wrote. By Friday, Fidelity
would have reduced its tri-party repo lending to Lehman to less than  billion from
over  billion the previous Friday; according to Fidelity’s response to an FCIC sur-
vey of market participants, in the week prior to Bear’s demise in March, Fidelity had
pulled its entire . billion repo line to that company.

“IMAGINATION HAT”

At the Federal Reserve, working groups were directed to “spend the next few hours
fleshing out how a Fed-assisted BofA acquisition transaction might look, how a pri-
vate consortium of preferred equity investors transaction might look, and how a Fed

takeout of tri-party repo lenders would look.” That day, New York Fed Senior Vice
President Patricia Mosser circulated her opinion on Dudley’s request for “thoughts
on how to resolve Lehman.” She laid out three options: () find a buyer at any price,
() wind down Lehman’s affairs, or () force it into bankruptcy. Regarding option ,
Mosser said it “should be done in a way that requires minimal temporary support. . . .
No more Maiden Lane LLCs and no equity position by [the] Fed. Moral hazard and
reputation cost is too high. If the Fed agrees to another equity investment, it signals
that everything [the Fed] did in March in terms of temporary liquidity backstops is
useless. Horrible precedent; in the long run MUCH worse than option .” Option ,
bankruptcy, would be “[a] mess on every level, but fixes the moral hazard problem.” 