4 August 2010
Neither a borrower nor a lender be
Just when you thought that there were enough moral hazards out there, the liquidators of Lehman Brothers are trying to create a new one. According to Money Marketing‘s Chris Salih, Lehman Brothers Holdings is suing JP Morgan Chase after claiming the US bank “siphoned off” billions of dollars ahead of the firm’s collapse in 2008.
“The lawsuit claims that JP Morgan used its “unparalleled access” to Lehman’s distressed debt to remove £5.9bn worth of collateral in the four business days ahead of the collapse. This included a £3.4bn withdrawal on the final day.
JP Morgan was Lehman’s short-term lender before the collapse. Lehman claims the withdrawal of contributing to the collapse by demanding the withdrawal at a time when credit markets were tightening.
According to the complaint, JP Morgan was aware of Lehman’s situation and threatened to deprive Lehman of critical clearing services unless it posted the capital.
“With this financial gun at Lehman’s head, JP Morgan was able to extract extraordinarily one-sided agreements from Lehman’s literally overnight,” the complaint said.
Lehman also claimed that JP Morgan officials decided to extract the collateral after learning from meetings with Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Henry Paulson that the government was not going to rescue Lehman’s from bankruptcy.”
In other words, the borrower (who went bankrupt) is suing the lender because the lender didn’t want to keep lending to the bankrupt borrower once it became clear that the borrower couldn’t actually pay back. Go figure!