In the months leading up to its September 2008 bankruptcy filing, Lehman Brothers repeatedly made inflated claims about the amount of liquidity it could access - failing to disclose to analysts or its own board that billions of dollars of assets in its liquidity pool were pledged as collateral to its clearing banks and other counterparties, according to a report published on March 11 by a bankruptcy court-appointed examiner.
The report concludes there is not enough evidence to support claims against Lehman's counterparties for demanding too much collateral - nor is there enough evidence to claim a fiduciary breach by Lehman executives.
Corporate governance expert Nell Minow believes the board should share the blame. "Lehman's board included an actress, a Broadway producer, and an admiral. It did not include anywhere close to adequate expertise. We knew they did not know the answers. But what's damning in this report is that it shows they did not even ask the right questions," she says.
On a September 10 third-quarter earnings conference call, Lehman's chief financial officer, Ian Lowitt, said the bank's liquidity position "remains very strong" and highlighted its $42 billion liquidity pool. However, he did not mention the liquidity pool contained $6.7 billion of cash, money-market funds and securitised loans that had been pledged to JP Morgan, plus a further sum of around $3.5 billion pledged to Citigroup, Bank of America and HSBC, the report notes.
On the evening before the conference call, Lehman's own liquidity analysis showed the bank had access to a pool of $40.6 billion - of which it would be easily able to sell only $25 billion.
The bank's liquidity position continued to deteriorate in the days that followed, with billions of dollars more being posted to JP Morgan - but Lehman's own board wasn't informed that a substantial portion of its liquidity cushion was locked up as collateral until a meeting on the evening of September 14.
The minutes of that meeting show that Lowitt informed the board Lehman "had a liquidity problem, with much of its liquidity tied up at clearing banks". Following an adjournment, Lowitt gave the board more details, including the revelation that $17 billion in assets had been posted to JP Morgan as collateral. At the end of the meeting, the board voted to make a Chapter 11 bankruptcy filing.
Lowitt, who was appointed chief financial officer in June 2008, told the examiner that he was "not... very attentive to what was in the liquidity pool" and did not know what the rationale was for including collateral in the pool at the time.
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