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SEPTEMBER : THE BANKRUPTCY OF LEHMAN
At : P.M., Fed officials circulated the outline of a plan to create a “Lehman De-
fault Management Group,” a group of Lehman counterparties and creditors who
would make plans to cope with a Lehman bankruptcy. They would agree to hold off
on fully exercising their rights to close out their trades with Lehman; instead, they
would establish a process to “net down”—that is, reduce—all exposures using a com-
mon valuation method. A little before midnight on Thursday, Boesky notified col-
leagues that panicked hedge funds had called to say they were “expecting [a] full
blown recession” and that there was a “full expectation that Leh goes, wamu and then
ML [Merrill Lynch].” They were “ALL begging, pleading for a large scale solution
which spans beyond just LEH.” Boesky compared the level of panic to the failure of
Bear Stearns—“On a scale of to , where is Bear-Stearns-week-panic, I would
put sentiment today at a .”
At almost the same time, JP Morgan demanded that Lehman post another bil-
lion in cash “by the opening of business tomorrow in New York”; if it didn’t, JP Mor-
gan would “exercise our right to decline to extend credit to you.” JP Morgan CEO
Dimon, President Black, and CRO Zubrow had first made the demand in a phone
call earlier that evening to Lehman CEO Fuld, CFO Ian Lowitt, and Treasurer Paolo
Tonucci. Tonucci told the JP Morgan executives on the call that Lehman could not
meet the demand. Dimon said Lehman’s difficulties in coming up with the money
were not JP Morgan’s problem, Tonucci told the FCIC. “They just wanted the cash.
We made the point that it’s too much cash to mobilize. There was no give on that.
Again, they said ‘that’s not our problem, we just want the cash.’” When Tonucci
asked what would keep JP Morgan from asking for billion tomorrow, Dimon
replied, “Nothing, maybe we will.”
Under normal circumstances, Tonucci would not have tolerated this treatment,
but circumstances were far from normal. “JPM as ‘clearing bank’ continues to ask for
more cash collateral. If we don’t provide the cash, they refuse to clear, we fail,” was the
message circulated in an email to Lehman executives on Friday, September . So
Lehman “delivered the billion in cash only by pulling virtually every unencum-
bered asset it could deliver.”
JP Morgan’s Zubrow saw it differently. He told the FCIC that the previously
posted . billion of collateral by Lehman was “inappropriate” because it was “illiq-
uid” and “could not be reasonably valued.” Moreover, Zubrow said the potential col-
lateral shortfall was greater than billion. Lehman’s former CEO, Fuld, told the
FCIC that he agreed to post the billion because JP Morgan said it would be re-
turned to Lehman at the close of business the following day. The Lehman bank-
ruptcy estate made the same allegation. This dispute is now the subject of litigation;
the Lehman bankruptcy estate is suing JP Morgan to retrieve the billion—and the
original . billion.
“HEADS OF FAMILY”
Should Lehman be allowed to go bankrupt? Within the government, sentiments var-
ied. On Friday morning, as Secretary Paulson headed to New York to “sort through
