Fed Planned to Wind Down Lehman Brokerage After Bankruptcy, Lawyer Says
The U.S. Federal Reserve planned to wind down Lehman Brothers Holdings Inc.’s brokerage business during the 2008 financial crisis, a Fed lawyer testified in Lehman’s lawsuit against Barclays Plc.
The Fed lent Lehman’s brokerage $45 billion for an “orderly wind-down” after the company filed for bankruptcy, Shari Leventhal, a lawyer for the Federal Reserve Bank of New York, said today in U.S. Bankruptcy Court in Manhattan.
Barclays, based in London, ended up buying the brokerage less than a week after Lehman’s bankruptcy filing in September 2008. New York-based Lehman, which claims the U.K. bank received an undisclosed windfall of $11 billion in the deal, is seeking to recover the money to pay creditors. Barclays has said the transaction was reviewed by both sides.
Leventhal, a senior vice president at the New York Fed who was involved in the Barclays deal, said she spoke in support of the acquisition in bankruptcy court in September 2008 because the Fed was concerned about the stability of the financial markets, which had been under stress since the near-collapse of Bear Stearns Cos. the previous March.
“We were concerned to restore stability any way we could,” she told U.S. Bankruptcy JudgeJames Peck today. For the Lehman brokerage, that meant “an orderly wind-down or acquisition,” she said. The latter was preferable because it would put Lehman’s brokerage accounts in safe hands and “there was an opportunity to save some jobs,” she said.
Fed Plan
Leventhal said she continues to believe the Fed’s support for the Barclays sale was well-founded.
Leventhal said the Fed’s initial plan was to try to facilitate a takeover of all of Lehman, not just its brokerage. The backup idea of winding down the brokerage took precedence when it became clear that neither Barclays nor any other bidder would buy the Lehman holding company, she said.
The Fed was “happy” when Barclays came back as a bidder for the brokerage for “public policy” reasons, including the transfer of Lehman’s customer accounts to the U.K. bank, she said.
Questioned by Lehman lawyer Robert Gaffey, Leventhal said the Fed didn’t pressure the Lehman parent to file for bankruptcy after bidders receded. Fed officials did call the company to make sure Lehman’s board “understood the urgency of the situation,” she said.
Barclays has said U.K. regulators balked at its move to buy all of Lehman, which reported debt of $613 billion in 2008. Barclays has said its major risk buying the brokerage was replacing the Fed’s $45 billion loan to Lehman and taking on collateral that was of uncertain value in the financial crisis.
‘Wasn’t Relevant’
Gaffey, who has accused Barclays of promising bonuses to former Lehman executives so they would help it buy the brokerage at a discount, tried to show the judge that the Fed had no knowledge of whether Barclays was acting in good faith when it made the purchase.
Leventhal said the $4 billion accounting gain that Barclays reported on the deal -- part of what Lehman is objecting to -- “wasn’t relevant to the Fed.”
“We assumed they entered into the deal expecting to do well,” she said. “They are a business concern and we assumed they had done due diligence.”
Gaffey tried to show the Fed supported Barclays even though there could have been other bidders for the brokerage.
‘No One Else’
“There was no one else to support,” Leventhal said. “Barclays was the only bidder. I don’t think it was any secret that the Fed was supporting the sale.”
Bank of America Corp. backed off from buying Lehman’s brokerage and bought Merrill Lynch & Co. instead, witnesses have testified.
Leventhal said the Fed required Barclays to take over the Fed loan to Lehman before the deal closed, promising about $49 billion of the defunct firm’s collateral to back the loan. The Fed wanted the prospective buyer, Barclays, rather than the Fed and taxpayers, to risk lending to Lehman, and lent Barclays money temporarily to help it complete the deal, she said.
Gaffey asked Leventhal about the Fed’s role in mediating a dispute between Barclays and JPMorgan Chase & Co., which refused to release $7 billion of Lehman’s collateral in case its loans to the brokerage were never paid back.
Leventhal said the Fed was asked by the two banks to intervene and “encouraged” JPMorgan to cooperate so that Barclays could complete the purchase. She said the Fed realized that “JPMorgan is going to do whatever it has to, to protect itself” from any liabilities arising from its dealings with the brokerage.
The matter was later resolved. A dispute between Lehman and JPMorgan over whether JPMorgan took too much collateral, triggering Lehman’s failure, is still being litigated. JPMorgan denies the allegation.
The cases are In re Lehman Brothers Holdings Inc., 08- 13555, and Giddens v. Barclays Capital Inc., 09-01732, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Linda Sandler in U.S. Bankruptcy Court in New York at +1- lsandler@bloomberg.net.
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