Lehman's lenders 'aided its collapse'

JPMorgan Chase and Citigroup helped cause the collapse of Lehman Brothers by demanding more collateral and changing guarantee agreements, the bankrupt bank's examiner said yesterday in a report.

"The demands for collateral by Lehman's lenders had direct impact on Lehman's liquidity pool," said Anton Valukas, the US Trustee-appointed examiner, in a 2200-page report filed in Manhattan federal court. "Lehman's available liquidity is central to the question of why Lehman failed."

Former Lehman chief executive officer Richard Fuld, former chief financial officer Erin Callan, former executive vice-president Ian Lowitt and former managing director Christopher O'Meara certified misleading statements, the report said. Fuld was "at least grossly negligent", the report said.

Lehman collapsed in September 2008 with US$639 billion in assets, sparking a global market meltdown.

It was the biggest bankruptcy in US history. Commenting on Barclays' purchase of Lehman's North American brokerage, Valukas said a "limited amount of assets" belonging to Lehman were "improperly transferred to Barclays".

Kerrie Cohen, a Barclays spokeswoman in New York, declined to comment.

Citigroup spokeswoman Danielle Romero-Apsilos and JPMorgan spokesman Brian Marchiony didn't immediately return messages seeking comment. Barclays is Britain's second-biggest bank. Citigroup is the third biggest US bank, and JPMorgan is second.

Fuld was warned months before the bankruptcy by Treasury Secretary Henry Paulson that Lehman might fail if it continued to report losses without finding a buyer or putting in place a survival plan, according to the report.

Lehman's chief was "at least grossly negligent in causing Lehman to file misleading periodic reports" while its risks were rising because of long-term assets financed with short-term debt, Valukas said in the report.

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.

Valukas spent a year and US$38 million producing the report on whether banks triggered Lehman's bankruptcy or if Barclays improperly benefited from it and what role was played by the US Federal Reserve System.

Valukas interviewed more than 100 people including US Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and former Securities and Exchange Commission Chairman Christopher Cox, and scrutinised more than 10 million documents, plus 20 million pages of emails from Lehman, according to filings in the US.

"The Examiner has determined that there are a limited number of colourable claims for avoidance actions against JPMorgan and Citibank," Valukas said in the report. Valukas defined a colourable claim in the report as sufficient credible evidence to persuade a jury to award damages at trial.

Barclays bought Lehman's brokerage for US$1.54 billion. Lehman has sued Barclays for US$5 billion or more, saying it made a "windfall" on the purchase, and Barclays responded that it is owed US$3 billion.

A bankruptcy-court trial is scheduled for April 26.

- BLOOMBERG