statism watch

As Lehman Brothers Holdings Inc. tottered, the final blows came from another Wall Street firm, according to an explosive new lawsuit.

Lehman’s bankruptcy estate accused JPMorgan Chase & Co. Wednesday of unlawfully grabbing billions of dollars from the gravely wounded financial institution days before it collapsed.

JPMorgan abused its position as Lehman’s principal bank, the suit alleged, to extract $8.6-billion (U.S.) in collateral from the firm in September, 2008.

The effect was “devastating,” according to the complaint, accelerating Lehman’s demise and ruling out an orderly wind-up of the firm.

Lehman’s bankruptcy, the largest in U.S. history, set off a chain reaction that sent global financial markets into a terrifying tailspin.

The suit, filed in New York bankruptcy court, pits Lehman’s estate against a bank widely viewed as having weathered the financial crisis better than its peers. The bankruptcy estate is seeking to recover the billions of dollars Lehman paid as collateral to JPMorgan, together with damages.

At the heart of the suit are allegations that JPMorgan’s senior leadership, including CEO Jamie Dimon, gained inside knowledge of Lehman’s precarious condition. The firm then used its privileged role as Lehman’s main banker to hold “a financial gun to [Lehman’s] head,” the complaint said.

If Lehman didn’t agree to JPMorgan’s demands, it feared that the bank would stop performing clearing activities for Lehman, which would have provoked an instant collapse, the suit claimed.

The lawsuit invoked a historical contrast to frame its description of JPMorgan’s behaviour. “A century ago, John Pierpont Morgan used his position atop the world of finance to shore up a teetering firm and rescue the nation from the brink of financial collapse,” the lawsuit said, referring to the financial panic of 1907. “A century later, when the nation faced another epic financial crisis, Morgan’s namesake firm stripped a faltering Lehman Brothers of desperately needed cash.”

The suit is “ill-conceived and meritless, and we will vigorously defend it,” a JPMorgan spokesman told The Wall Street Journal.

As the financial crisis intensified in August, 2008, JPMorgan approached Lehman to alter the terms of the agreement that guided their long-standing banking relationship.

Meanwhile, Lehman’s financial health continued to deteriorate. In early September, Mr. Dimon suggested to Richard Fuld, Lehman’s CEO, that his bank would consider injecting funds into the ailing firm, the lawsuit said.

Following up on that conversation, Steve Black, a senior JPMorgan executive, sent a team to perform due diligence at Lehman. But the team included senior risk managers, whose purpose was “to probe into Lehman’s confidential records and plans,” according to the complaint.

The group reported back to Mr. Black that Lehman was seeking help. He replied that evening in an e-mail, asking what “drugs they have apparently been taking to think we would do something like that.”

That same evening, JPMorgan presented Lehman with another set of alterations to the legal agreements guiding their relationship, demanding that they be signed before Lehman’s earnings call the next morning.

During the last week of Lehman’s life, JPMorgan then used the terms of those agreements to siphon off billions from the firm, the suit said.

Internal e-mails allegedly show that JPMorgan knew it had demanded an excessive amount of collateral from Lehman, according to the complaint. Such funds were “fraudulent transfers” and belong to the firm’s creditors, it said.

The bankruptcy estate is mounting an aggressive bid to recover cash on behalf of Lehman’s creditors. A court-appointed lawyer produced an exhaustive postmortem of the firm in March, which ran 2,200 pages.

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