Bloomberg News

JPMorgan Defends Conduct in $18 Billion Lehman Securities Sale

November 17, 2011

Nov. 16 (Bloomberg) -- JPMorgan Chase & Co., fighting Lehman Brothers Holdings Inc. over $6 billion it says the defunct firm owes, defended its conduct in what it said may be the largest ever sale of collateral.

Lehman said in August that JPMorgan’s claims against the former investment bank and its brokerage are “significantly overstated.” The bank, a go-between for repurchase agreements with short-term investors after Lehman’s Sept. 15, 2008 bankruptcy, failed to sell collateral securing the loans in a “commercially reasonable manner,” it alleged.

The biggest U.S. bank answered Lehman in a court filing yesterday, saying it generated more than $18 billion of cash from the sale “in some of the most difficult markets in modern times,” garnering almost 90 percent of the securities valuations at the time and benefiting Lehman. It completed with professionalism, “what might well be the largest liquidation of securities collateral ever,” JPMorgan said in the filing.

“Following Lehman’s massive defaults in repaying JPMorgan’s clearing-related extensions of credit, JPMorgan was left with the monumental task of selling the securities collateral posted by Lehman,” it said. In the turbulent markets of the credit crisis, “JPMorgan tackled this daunting task with a high degree of professionalism, devoting enormous resources from its world-class securities trading operation.”

Lehman filed the biggest bankruptcy in U.S. history in 2008, listing $613 billion in debt.

Left Over Collateral

The collateral backing JPMorgan’s loans was left over after Barclays Plc bought Lehman’s North American operations, according to JPMorgan. The bank had to analyze more than 4,600 different securities, many of them highly illiquid, allocate them to the right trading desks for further analysis, and make sales that were “targeted, strategic and informed,” it said.

“JPMorgan’s traders sold what they could reasonably sell at favorable prices and protected the Lehman estates by not forcing a fire sale of the most illiquid securities,” it said, asking a judge to hold a hearing and rule on its claims.

Kimberly Macleod, a Lehman spokeswoman, didn’t immediately respond to an e-mail seeking comment.

In its objection to JPMorgan’s claim, Lehman said the sale of collateral was “without any limits or safeguards ensuring a fair price.” On the morning the Lehman brokerage went into liquidation, JPMorgan started to sell the securities, calling the plan “Project Tassimo,” after a coffee maker owned by a bank employee involved in the transactions, Lehman said.

Separately, JPMorgan is contesting an $8.6 billion lawsuit by Lehman, saying it was protected by so-called safe harbor law when it took collateral from the defunct firm in 2008. Congress created the law to protect banks lending to faltering companies, JPMorgan has said.

Fraud Allegations

JPMorgan, which lent $70 billion to Lehman’s brokerage around the time of the September 2008 bankruptcy, sued Lehman back, alleging it defrauded its lender into making the loan.

The brokerage, Lehman Brothers Inc., is being separately liquidated from its parent, Lehman Brothers Holdings Inc., after going into liquidation four days after its parent.

The main case is In re Lehman Brothers Holdings Inc., 08- 13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The lawsuit is Lehman Brothers Holdings Inc. v. JPMorgan Chase Bank NA, 10-03266, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--Editors: John Pickering

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.


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