Not Wolves: Cannibals
Posted in: Financial Crisis
The bankruptcy estate of Lehman Brothers Holding, Inc. filed suit against JPMorgan Chase last week, alleging that JPMorgan’s actions in the weeks preceding bankruptcy were wrongful. The claims arise from amendments and supplements to the Clearance Agreement between Lehman and JPMorgan in the weeks immediately preceding the bankruptcy.
The complaint says that JPMorgan used those amended agreements to demand that Lehman provide collateral to JPMorgan to secure its obligations. The amount demanded was substantially all the cash and liquid securities Lehman could pledge. Then JPMorgan refused to allow Lehman to use that collateral to support its business, which forced Lehman to file an unplanned and disorderly bankruptcy. That caused immense damage to the unsecured creditors of Lehman.
The complaint says that one reason JPMorgan did this was to terminate derivative transactions between it and Lehman. Lehman had an enormous net positive position, over a billion dollars. By forcing a bankruptcy, JPMorgan was able to terminate those swaps and demand termination fees, which it claimed were protected by that pile of collateral it had gathered. For more details, see this post.
But the complaint offers another equally filthy reason:
At all times, JPMorgan was aware that the failure of one of its key competitors would redound to JPMorgan’s benefit. And these benefits did materialize almost immediately following Lehman’s demise. As Dimon later boasted during JPMorgans’s earnings call for the fourth quarter of 2008, JPMorgan saw “exceptional” market share gains in trading and investment banking, including equity and debt capital markets, M&A, and corporate client coverage. Complaint, para. 77.
The complaint says that while JPMorgan was denying access to collateral, Jamie Dimon, the “savvy businessman” as President Obama calls him:
… was attending a meeting at the New York Federal Reserve with the heads of the other major United States financial institutions. The purpose of the meeting was ostensibly to discuss whether the attendees’ firms could formulate a plan to avoid the collapse of Lehman and the catastrophic impact such a failure would have on the global financial system. Such a plan never materialized. Para. 76.
Yes, that is savvy. You sit in on a meeting called to figure out a rescue plan for a competitor, one you have hog-tied with collateral demands, and one you owe at least $1 billion in bad bets on derivative transactions. If it fails, you get out of the derivatives, and maybe maybe make a pile of money. In any event, you figure you will inherit a goodly part of the business. And, amazingly, no plan emerges.
That is the very definition of “savvy” for a modern American banker. You can bet that some one got a huge bonus for this savvy behavior.
It isn’t fair to compare these guys to wolves. Wolves don’t eat their own. They’re cannibals.
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