Times UK: JP Morgan to face Lehman crash probe

Remember those days in September 2009 when Lehman Brothers went bankrupt and the hell broke loose?

After nearly a year and a half, Lehman creditors are still sorting things out in a bankruptcy court.

JP Morgan to face Lehman crash probe (2/7/2010 Times UK)

"A COURT-APPOINTED investigator is this week expected to shine fresh light on the role of JP Morgan and other financial institutions in the events running up to the collapse of Lehman Brothers, the American investment house.

"Anton Valukas, a whitecollar crime specialist who played a leading role in the Conrad Black fraud investigation, was recruited by a New York bankruptcy court. His long-awaited report, which is understood to run to more than 1,000 pages, should be published this week.

"It will focus on whether JP Morgan, Lehman’s main short-term lender, dealt a fatal blow to the bank by increasing collateral demands on loans in the days immediately before its demise.

"Valukas’s findings will be pored over by all those who lost money in Lehman’s collapse, and by the Lehman estate, which holds the bank’s residual assets and is charged with recovering money for creditors. According to one source, the estate, which represents the interests of all the bank’s creditors, is planning to launch a $17 billion (£11 billion) claim against JP Morgan.

"That would mirror a complaint lodged with the court by the bank’s creditor committee in the immediate aftermath of the bankruptcy filing. This claim, made in October 2008, cites the $17 billion figure as the amount of Lehman cash and securities that JP Morgan “froze” in its final days, precipitating the largest collapse in corporate history." [Emphasis is mine. The article continues.]

I can almost imagine the JPM's defense: the same as Goldman Sachs as it demanded a cash collateral from A.I.G. It's prudence, it's rigorous risk management.

Lehman Brothers was engaged heavily in highly complex financial assets (derivatives, CDOs, and other structured finance products). And as this blog posted in September 2009, the accountants at PriceWaterhouseCoopers in London were just beginning to attempt to unravel some of those complex deals then, with hardly any major counterparties having reconciled their positions with Lehman.

Just like there is way more to the Goldman's collateral demand from A.I.G. than meets the eye (like Goldman's active destruction of A.I.G, almost), I suspect that JP Morgan's risk management may have involved more than that.

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