Did JPM and Citi Cause Lehman’s Collapse?
“The demands for collateral by Lehman’s lenders had direct impact on Lehman’s liquidity. Lehman’s available liquidity is central to the question of why Lehman failed.”
-Anton Valukas, the bankruptcy examiner
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Not exactly. As is so often the case, determining the precise cause of death is an exercise in subtlety, something we Americans tend to do poorly — and the media does even worse.
Consider, for example, immune deficiency diseases. What typically causes the actual death is a pneumonia or some other opportunistic infection. But there was first an underlying disease that created the condition.
So what actually kills the patient — the disease that ravages the body, destroys its naturally ability to fight off invaders, and leaves it totally vulnerable? Or whichever random infection finally does them in?
In the case of Lehman Brothers, the disease that left them vulnerable was a mad embracing of risk, the excess use of leverage, an extensive exposure to mortgage and real estate, and the enormous usage of derivatives — concurrent with a lack of intelligent risk management.
Citi and JPM were merely the opportunistic infections that came along at when Lehman’s immune system was compromised. That is why you never want to allow yourself to become that vulnerable on Wall Street.
The WSJ does a better job than Bloomberg in identifying management as the causal factor in the collapse (Examiner: Lehman Torpedoed Lehman versus JPMorgan, Citigroup Helped Cause Lehman Collapse, Report Says).
Here’s the Journal:
“Lehman chose to “disregard or overrule the firm’s risk controls on a regular basis,” even as the credit and real-estate markets were showing signs of strain, the report said. In one instance from May 2008, a Lehman senior vice president alerted management to potential accounting irregularities, a warning the report says was ignored by Lehman auditors Ernst & Young and never raised with the firm’s board.
The allegations of accounting manipulation and risk-control abuses potentially could influence pending criminal and civil investigations into Lehman and its executives. The Manhattan and Brooklyn U.S. attorney’s offices are investigating, among other things, whether former Lehman executives misled investors about the firm’s financial picture before it filed for bankruptcy protection, and whether Lehman improperly valued its real-estate assets, people familiar with the matter have said.”
How unusual: The findings of the Bankruptcy court, may be what leads to criminal indictments for these C-level executives.
Bloomberg:
“Former Lehman Chief Executive Officer Richard Fuld, ex- Chief Financial Officer Erin Callan, former Executive Vice President Ian Lowitt and former Managing Director Christopher O’Meara certified misleading statements about the bank’s finances, according to the report. Fuld, 63, was “at least grossly negligent,” Valukas said. New York-based Lehman collapsed in September 2008 with $639 billion in assets . . .
Lehman’s executives engaged in conduct ranging from “non- culpable errors of business judgment” to “actionable balance sheet manipulation,” as they used “accounting gimmicks” to move assets off the balance sheet without disclosing that to the government, rating-agencies, investors or Lehman’s board.” (emphasis added)
Let the frog marching begin!
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Sources:
JPMorgan, Citigroup Helped Cause Lehman Collapse, Report Says
Linda Sandler, Bob Van Voris and Don Jeffrey
Bloomberg, March 12 2010
http://www.bloomberg.com/apps/news?pid=20601087&sid=ab1XUybpK4Vg
Examiner: Lehman Torpedoed Lehman
MIKE SPECTOR, SUSANNE CRAIG, PETER LATTMAN
WSJ, MARCH 11, 2010
http://online.wsj.com/article/SB10001424052748703625304575115963009594440.html
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March 12th, 2010 at 7:26 am
“JPMorgan Chase & Co. and Citigroup Inc. helped cause the failure of Lehman Brothers Holdings Inc. by demanding more collateral and changing guarantee agreements, according to a court-ordered report on the biggest bankruptcy in U.S. history.”
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Cause is not the right word. Perhaps promoted, contributed to or something similar. In a legal sense it may have been proximate cause. But as best I can decipher JPM and C were pursuing prudent risk management on their own behalf, as they should, and attempting to restore the risk:reward balance they had accepted at the outset. Their actions, however, may have been encouraged by a few sharks sensing fresh blood in the waters.
March 12th, 2010 at 7:32 am
Little Dickie Fuld is ultimately responsible for what happened to that firm.
The Big Jefes, are paid the half billion dollars to make sure the firms they run— AT THE VERY LEAST— survive their tenure otherwise why not hire a janitorial Temp for far less??
March 12th, 2010 at 9:21 am
Lack of oversight, lack of law enforcement, and corporatist cronyism between the banks and our government caused Lehman to crash.
March 12th, 2010 at 9:24 am
I hope somebody goes to jail , seems like deception and outright fraud was part and parcel of their culture.
March 12th, 2010 at 9:58 am
“That is why you never want to allow yourself to become that vulnerable on Wall Street.”
A slight alteration here, and it becomes equally applicable to the pooblic-at-large:
“That is why you never want to allow yourself to become that vulnerable to Wall Street.”
March 12th, 2010 at 10:09 am
Nice analogy, BR!
March 12th, 2010 at 10:11 am
Executives, including Herbert McDade, who was known internally as the firm’s “balance sheet czar,” seemed aware that repeatedly using Repo 105 was disguising the true health of the investment bank. “I am very aware … it is another drug we r on,” he wrote in an April 2008 e-mail cited by the examiner’s report. At other times, he is described as calling for a limit to the number of Repo 105 transactions…..
Black Bart in chains with the “Gorilla” Fuld….cut to the last scene in “Trading Places”.
Good things happen to good people.
March 12th, 2010 at 10:19 am
When you hire a pawn of a CFO with no accounting background, you are asking for trouble. While I tend to feel ever so slightly bad for Callan being thrown under the bus, she wasn’t qualified enough to be a sr. accountant (one with 3 years experience), much less a CFO.
March 12th, 2010 at 10:22 am
…and isn’t the Big Jefe, Dick Fuld at least in charge of hiring his own CFO?? Why would a CEO” hire a sr. acct. as CFO unless……
March 12th, 2010 at 10:47 am
What I take from this is that the fall of Lehman was caused by:
Massive leverage
Overconfidence in the geniuses running the firm
Risky investments in
Overpriced markets with
No risk management/control and a
Short sited mentality.
I.e MORONS
March 12th, 2010 at 11:19 am
Maybe Dick Fuld was right in that there was a short conspiracy against Lehman Brothers.
March 12th, 2010 at 11:56 am
[...] killed Lehman Brothers. They did all themselves. (Jeff Matthews, Big Picture, DJ Market Talk, [...]
March 12th, 2010 at 11:58 am
@Joseph M
So what? He was already in deep long before the fairly quick demise. “Lehman killed Lehman”. And he was Lehman to his core.
There was no reason to short Lehman if he had been doing his job with any competence whatsoever.
March 12th, 2010 at 12:03 pm
Dick’s got a few Texas units (100 millions) from former exploitable years of plenty and after this window opens to any more light I’d advise him to board the jet to Paraguay quicker than you can say Madoff and before he’s Kenny Lay’d.
March 12th, 2010 at 1:02 pm
Gary Kaminsky of Neuberger Berman suggests that DF was too busy growing the IB (and rejecting the nay-sayers) ther classic Kenny Lay defense. Anybody notice that Neugerger Berman had merged with Lehman and was cut loose after in the bankruptcy leaving this commentator an interested observer-apologist? No further questions from the talking babes.
March 12th, 2010 at 2:06 pm
But Tim Geithner at FRBNY said it was all good in the hood. And everyone knows little Timmy doesn’t make mistakes (at least I’ve never heard him admit to one). And besides, what’s condoning a little balance sheet fraud when you’re busy saving the world? Besides, Obama says you’re doing a heck of a job, Timmy.
March 12th, 2010 at 4:18 pm
[...] of derivatives — concurrent with a lack of intelligent risk management,” Barry Ritholtz writes. Citi and JPM merely made matters worse when Lehman’s “immune system was [...]
March 12th, 2010 at 7:18 pm
Every day it appears more and more, we need PECORA style, no nonsense investigation with full subpoena power to track and drag all the RATS still out thereto explain their fraudulent, dirty deeds!
Oh, forgot, I am just dreaming!!!!
With ‘business as usual’ administration nothing will be done, until there are riots in the streets!
March 13th, 2010 at 9:11 am
“How unusual: The findings of the Bankruptcy court, may be what leads to criminal indictments for these C-level executives…”–BR, above
Why do (you/we) think that most of these Firms(Operations) were ‘Bailed-Out’, in the first place?
If we think LEH’s affairs are ‘relevatory’, care to think what would be found behind AIG? BSC? ML? GM? C/Cerberus?
Instead, we get ~”Disclosure would be harmful to ‘Market Confidence’”
little wonder that most never get the ol’ adage: “Con, or get conned”
http://www.thefreedictionary.com/con
def. 2, then 4
March 14th, 2010 at 4:04 pm
[...] • No, JPM and Citi Did Not Cause Lehman’s Collapse. (TBP) [...]