It’s going to be really interesting to see how this plays out …
Lehman Brothers Holdings Inc.’s estate sued J.P. Morgan Chase & Co., alleging J.P. Morgan illegally siphoned billions of dollars from Lehman in the days before the troubled investment bank filed for the largest bankruptcy in U.S. history.
The lawsuit alleges that J.P. Morgan Chief Executive James Dimon and other top executives used inside knowledge to take advantage of Lehman as its financial state worsened. J.P. Morgan, the suit alleged, coerced Lehman to turn over $8.6 billion in collateral in September 2008, triggering a liquidity squeeze that contributed to Lehman’s collapse. The estate is hoping to recoup billions in collateral the bank demanded, and billions in other damages.
I’ve been doing a lot of reading about the financial crisis in recent weeks, and a couple of the books delved fairly deeply into the inner workings and behind-the-scenes dealmaking that happened in the months and weeks leading up to the September onslaught.
One of the better reads is Andrew Ross Sorkin’s Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves. While Too Big To Fail doesn’t really spend a whole lot of time explaining why the crisis happened, it’s the best chronicle of who, what, where, when and how. As the trigger point of the crisis, the attempts to save and the ultimate collapse of Lehman Brothers is the most deeply developed story of the many events that occurred during those last fateful months.
For a deeper understanding of why, Roger Lowenstein’s The End of Wall Street and Scott Patterson’s The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It are more instructive reads. Both books do a good job of explaining how the derivatives market, primarily the manufacturing of CDOs (collateralized debt obligations) and the subsequent purchase and sale of CDSs (credit default swaps) by speculators snowballed out of control when the housing market collapsed starting in 2007, through the near total collapse of the entire financial industry in late 2008.
While many people lay much of the blame of the collapse on Goldman Sachs, especially in light of recent SEC investigations into the ABACUS deals, Sorkin’s book made me wonder how much J.P. Morgan’s actions hastened the crisis; not from their own risky trading, but in their role as banker to the banks … and specifically their ever increasing demands for collateral to back financing, and contributing significantly to many institutions liquidity crises.
Trust me … none of the reading is as dry as it sounds.