Sunday, August 15, 2010

The Fed's Backup Plan(s) for Lehman

Here are the last of the documents from the Lehman Examiner's Report that I found interesting (or at least the last ones that I'm planning to post). The first is a list of the top 25 Lehman counterparties by exposure. (CCE is current credit exposure; MPE is maximum potential exposure.) The two counterparties with the highest exposure to Lehman? The Italian government, and Berkshire Hathaway (BH Finance LLC is a Berkshire sub).

Counterparties' Exposure to Lehman (May 31, 2008)

The next two documents are the two backup plans that the Fed had for dealing with a Lehman failure. The first plan is called "Managing a Loss of Confidence in a Major Tri-Party Repo Borrower," and is dated July 11, 2008. While it initially talks about primary dealers in general, it goes on to calculate the financial impact of the plan in the event of a Lehman failure, and was very clearly developed for Lehman. The second is a good bank/bad bank plan, and involves the Fed setting up a Bear Stearns-style SPV. Had the FSA allowed Barclays to buy Lehman, and had the Wall Street consortium been unwilling to fund the entire "bad bank" to facilitate the Barclays sale, it's quite likely that the Fed would have implemented this plan. But, of course, when the time came, BofA bailed on Lehman for Merrill, and the FSA refused to let Barclays purchase Lehman.

NY Fed - Backup Plan for Lehman (July 11, 2008)

NY Fed - Lehman SPV-Style Proposal (July 15, 2008)

Next is an email exchange between Fed Vice Chairman Don Kohn and Ben Bernanke on Lehman from June 2008. The whole thing is interesting, but the most interesting part is when Kohn says to Bernanke: "One of the hedge fund types on Cape Cod told me that his colleagues think Lehman can't survive—the question is when and how they go out of business not whether. He claimed this was a Widely shared view on the Street."

Fed - Kohn Email Exchange With Bernanke on Lehman (June 12-13, 2008)
Last but not least, here's an internal JPMorgan presentation detailing JPM's exposure to Lehman as of Sept. 5, 2008. This is just interesting from a data standpoint, especially because JPM was Lehman's main clearing bank. It also partly explains why JPM decided to make their infamous $5bn collateral call on the Thursday before Lehman failed — even before JPM marked down the value of Lehman's clearing bank collateral, they had a $3bn exposure to Lehman.
JPMorgan - Lehman Exposure Summary (Sept. 5, 2008)

24 comments:

GAR said...

Yes very interesting. Too bad this information is not more broadly available and public not more engaged (e.g. through the MSM).

The fact that FED, SEC, Treasury were all discussing these details in June 08 takes some of the "we had to act fast, emergency FRA 13(3)" wind out of the sails ... they must have been operating on the hope things would change (get better).

It is too bad that more insiders and banksters are not being held accountable ... bonus claw back, prosecutions, debarment from the industry.

There is also a major need to curtail lobbying from TBTF banks and a REAL mandate to close the revolving door between wall street and K-street / Gov't role. To much incest is making for a very ugly financial industry.

Kid Dynamite said...

awesome... question about the first file - the exposures... it says that the exposures are in ($mm)... but that can't be right - can it? ie, those numbers are gross numbers, not numbers of MILLIONS of dollars of exposures!

BH Finance's exposure must have been $1.45 Billion... not 1.45 billion MILLION.. ???

Greycap said...

KD: you can see from the hedging footnotes on p.1 that the column numbers are in plain dollars, not mm.

But I have to admit, the rationale for the table ordering escapes me.

GAR said...

Volume 3 -- Repo 105

wow, absolutely amazing the amount and degree of fraudulent activity that was embedded in LEH. All of the senior management engaged in deceptive and material misleading information - not only w.r.t. periodic 10K, 10Q filings but systematically spread throughout security offering documents, in management analyst, potential business partner and investor communications. There is high probability that 10b(5) violations occurred in all of the equity and capital raise activities in 2008.

This was not just a small infraction, LEH was a participant in a industry wide fraud game that destroyed $T's in value, stole dreams from millions of people and having a caustic effect on the economy for years to come.

These bad actors should have financial disgorgement and be spending time in jail !! Certainly debarred from any financial position or gov't role in finance.

It is outrageous that the named bad actors use the "i wasn't aware" or "repo 105 - what's that" defense, please don't insult our intelligence. This legal manipulation BS defense just turns gross negligence into Colossal Gross Negligence and should multiply the punitive damages.

LEH should be a Anderson (Enron) event for E&Y

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gw2 gold said...

Yes very interesting. Too bad this information is not more broadly available and public not more engaged (e.g. through the MSM).

The fact that FED, SEC, Treasury were all discussing these details in June 08 takes some of the "we had to act fast, emergency FRA 13(3)" wind out of the sails ... they must have been operating on the hope things would change (get better).

It is too bad that more insiders and banksters are not being held accountable ... bonus claw back, prosecutions, debarment from the industry.

There is also a major need to curtail lobbying from TBTF banks and a REAL mandate to close the revolving door between wall street and K-street / Gov't role. To much incest is making for a very ugly financial industry.

gw2 gold said...

awesome... question about the first file - the exposures... it says that the exposures are in ($mm)... but that can't be right - can it? ie, those numbers are gross numbers, not numbers of MILLIONS of dollars of exposures!

http://www.360gold.de/Game-ffxi_us.html

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