Financial Services academyrecruiting on 17 Oct 2008 12:00 pm
JPMorgan Chase’s role in burying Lehman and Merrill
For all the current discussion about just what’s caused the current problems in the financial markets, I really haven’t seen much about the exact, specific actions on specific dates that caused things to fall.
I just read two very interesting articles that are the exception to that and revolve around the same theme - the role of JPMorgan Chase in the failure of both Lehman Brothers and Merrill Lynch.
There’s a lot of speculation about the intent and exact nature of JPMorgan’s actions, but, in my opinion, what’s not in question is that in both cases those actions were the proverbial last straw and drove both Lehman and Merrill under.
The first article is a NY Times piece called “The Road to Lehman’s Failure Was Littered With Lost Chances“. It’s a really good outline of the timeline of the demise of Lehman, but what was most interesting to me was this part:
Lehman executives complain bitterly that any chance of keeping the firm alive began to dissipate rapidly just after Labor Day when JPMorgan Chase, which handled Lehman’s trades, came calling for more money. Lehman had put down securities it believed were worth $6 billion during the summer to assuage the bank’s concerns that its trades were risky. But JPMorgan thought those securities had deteriorated in value, and asked for $5 billion in cash or liquid assets on Sept. 4.
Over the course of the next week, JPMorgan requested more money from Lehman. However, executives at the two companies disagree over how much money was requested and whether the requests were reasonable. The dispute has become part of a legal claim filed by creditors of Lehman.
I’m surely not on the inside to know exactly what happened, but I think it’s pretty clear that JPMorgan basically called Lehman on the loans they had out with the result being that it was “the end of the line”.
The second article - “Was Merrill ‘Chase-d’ Into Its BofA Marriage?” - at CNBC refers to the Lehman situation and states that JPMorgan pulled the same move with Merrill they had with Lehman:
On Friday Sept. 12, Chase officially alerted Merrill it wanted an additional $5 billion in collateral. Merrill did not come up with the collateral.
Around that time, Merrill began negotiating with Bank of America. That Saturday Merrill’s chief of strategy, Peter Kraus, told Chase that Merrill wasn’t going to deliver the collateral — but not because of liquidity issues. Merrill was objecting to the principle of asking for additional collateral.
By Sunday night September 14, Bank of America purchased Merrill.
I’m not sure why I haven’t seen more discussion about this one, frankly, along with a lot more questions about JPMorgan Chase’s timing and logic behind calling both firms on their loans. It sure would be very educational to know the significance of the timing - just why did JPMorgan feel that they had to press the issue with both firms during the first two weeks of September? And who at JPMorgan made that call?
