Lehman Borrowed $18 Billion From Undisclosed Fed Program During ’08 Crisis

Lehman Brothers Holdings Inc. (LEHMQ)’s brokerage borrowed as much as $18 billion in four separate loans from a previously secret program of the U.S. Federal Reserve in June 2008, three months before its parent filed the biggest bankruptcy in U.S. history.

The program, which peaked at $80 billion in loans outstanding, was known as the Fed’s single-tranche open-market operations, or ST OMO. It made 28-day loans to units of 19 banks from March 7, 2008, to Dec. 30, 2008. Bloomberg reported on ST OMO in May, after the Fed released incomplete records on the program. In response to a subsequent Freedom of Information Act request for details, the central bank disclosed borrower names, amounts borrowed and interest rates.

The Lehman brokerage, Lehman Brothers Inc., tapped the ST OMO program for as much as $5 billion in short term funding in March 2008, and lower amounts at other times during the month. It took as much as $10 billion in June as the credit crisis worsened, according to Fed data. The maximum outstanding for any period was $18 billion.

The brokerage agreed on Sept. 18, 2008, to pay outstanding loans that day, the Fed said. It went into liquidation on Sept. 19, four days after its parent.

Photographer: Jeremy Bales/Bloomberg

The Lehman brokerage, Lehman Brothers Inc., tapped the ST OMO program for as much as $5 billion in short term funding in March 2008. Close

The Lehman brokerage, Lehman Brothers Inc., tapped the ST OMO program for as much as $5... Read More

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Photographer: Jeremy Bales/Bloomberg

The Lehman brokerage, Lehman Brothers Inc., tapped the ST OMO program for as much as $5 billion in short term funding in March 2008.

Reports of Demise

Separately, the Lehman parent then run by Chief Executive Officer Richard Fuld had a $45 billion loan from the Fed’s so- called Primary Dealer Credit Facility around the time of its bankruptcy. An August 2009 article in a Federal Reserve Bank of New York publication said the Fed’s facility was expanded on Sept. 14, 2008, in response to reports that Lehman was “only days away” from bankruptcy, and might put other firms at risk.

The day before Lehman filed for bankruptcy, almost all of its $41 billion cash pool was tied up at bank lenders including JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp., according to a bankruptcy examiner’s report.

Expanding its facility to lend to Lehman, the Fed took previously unacceptable collateral for its loans, including non- investment grade securities and equities, according to the article, “The Federal Reserve’s Primary Dealer Credit Facility.”

Concerned about the safety of the loan, the Fed told Barclays Plc (BARC) to take over the loan when it bought the defunct investment bank’s North American business, according to court testimony. Barclays closed its purchase of Lehman’s business a week after Lehman’s Sept. 15, 2008 bankruptcy.

Barclays Capital

Separately, the U.K. bank’s Barclays Capital Inc. unit had peak loans from the ST OMO program of $21.4 billion, Fed data shows.

Kimberly Macleod, a Lehman spokeswoman, didn’t immediately respond to e-mails seeking comment yesterday. Michael O’Looney, a Barclays spokesman, declined to comment.

Lehman failed because of too much leverage, which it tried to hide, and risky real-estate lending, according to bankruptcy examiner Anton Valukas.

Goldman, Sachs & Co., a unit of the most profitable bank in Wall Street history, took $15 billion on Dec. 9, 2008, the biggest single loan from a lending program whose details have been secret until yesterday.

The Lehman bankruptcy main case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net

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

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