Financial Arson Watch IV

Robert Waldmann

Over at Firedoglake “Masaccio” has a very interesting report on a legal complaint by the estate of Lehman Brothers against J.P. Morgan.

on September 9, 2008, JPMorgan insisted that Lehman sign further agreements, under which Lehman guaranteed all obligations of its subsidiaries, including obligations under derivatives, and lost the ability to access its collateral overnight. That jeopardized the capital position of Lehman.

Then JPMorgan demanded even more collateral, finally winding up with some $8.6 billion in cash and liquid securities (paragraph 72) which made it wildly over-secured not only as to the minimal intra-day exposure, but even as to JPMorgan’s share of the unsecured line of credit and any reasonably estimated obligations with regard to derivatives.

On September 12, JPMorgan refused to give Lehman access to its collateral. Lehman collapsed into an uncontrolled bankruptcy, with little cash and less planning.

Why ?

The complaint says that JPMorgan admits that the additional collateral was not needed to cover exposures under existing agreements such as the unsecured loan agreement and the Clearance Agreement. It says that the purpose was to collect “… on the possibility of closing out derivatives contracts on favorable terms in the event of a [Lehman] bankruptcy.”

Mmm sure smells like financial arson to me.

Read the whole thing (Dimon is much more creative than me. The point of the bankruptcy appears to have been to prevent Lehman from paying premiums on CDSs it had bought from JP Morgan causing the contracts to terminate automatically).