Lehman sues JPMorgan for billions in damages: REUTERS

Jonathan Stempel

NEW YORK
Wed May 26, 2010 7:56pm EDT

The JP Morgan and Chase headquarters is seen in New York in this January 30, 2008 file photo. REUTERS/Shannon Stapleton

NEW YORK (Reuters) – Lehman Brothers Holdings Inc (LEHMQ.PK) on Wednesday sued JPMorgan Chase & Co (JPM.N), accusing the second-largest U.S. bank of illegally siphoning billions of dollars of desperately-needed assets in the days leading up to its record bankruptcy.

Hot Stocks

The lawsuit filed in Manhattan bankruptcy court accused JPMorgan of using its “unparalleled access” to inside details of Lehman’s distress to extract $8.6 billion of collateral in the four business days ahead of Lehman’s September 15, 2008, bankruptcy, including $5 billion on the final business day.

JPMorgan was Lehman’s main “clearing” bank, in which it acts as a go-between in Lehman’s dealings with other parties.

According to the complaint, JPMorgan knew from this relationship that Lehman’s viability was fast weakening, and threatened to deprive Lehman of critical clearing services unless it posted an excessive amount of collateral.

“With this financial gun to Lehman’s head, JPMorgan was able to extract extraordinarily one-sided agreements from Lehman literally overnight,” the complaint said. “Those billions of dollars in collateral rightfully belong to the Lehman estate and its creditors.”

Lehman also said JPMorgan officials including Chief Executive Jamie Dimon decided to extract the collateral after learning from meetings with Federal Reserve Chairman Ben Bernanke and then-U.S. Treasury Secretary Henry Paulson that the government would not rescue Lehman from bankruptcy.

In the widely expected lawsuit, Lehman and its official committee of unsecured creditors are seeking $5 billion of damages, a return of the collateral and other remedies.

JPMorgan spokesman Joe Evangelisti called the lawsuit “meritless,” and said the bank will defend against it.

Any money recovered could increase the payout to creditors. Lehman has also sued Barclays Plc (BARC.L) to recover an $11.2 billion “windfall” from the takeover of U.S. assets.

In March, a bankruptcy judge approved an accord providing for JPMorgan to return several billion dollars of assets to Lehman’s estate, but giving Lehman a right to sue further.

Lehman collapsed after letting its balance sheet swell through exposure to commercial real estate, subprime mortgages and other risky sectors. With $639 billion of assets, Lehman was by far the largest U.S. company to go bankrupt.

EXAMINER REPORT

In his March report on Lehman’s bankruptcy, court-appointed examiner Anton Valukas said Lehman could raise a “colorable claim” against JPMorgan over the collateral demands.

He nevertheless said JPMorgan could raise “substantial defenses” under U.S. bankruptcy law.

Evangelisti contended that “as the examiner’s report makes clear, it was the ill-advised decisions of Lehman and its principals to take on perilous leverage and to double down on subprime mortgages and overpriced commercial real estate — and not conduct by our firm — that led to Lehman’s demise.”

Lehman, though, maintained that JPMorgan extracted the collateral to “catapult” itself ahead of other creditors.

“A century ago, John Pierpont Morgan used his position atop the world of finance to shore up a teetering firm and rescue the nation from the brink of financial collapse,” the complaint said, referring to the Panic of 1907.

“A century later, when the nation faced another epic financial crisis, Morgan’s namesake firm stripped a faltering Lehman Brothers of desperately needed cash,” it added.

The case is In re: Lehman Brothers Holdings Inc et al, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555.

(Reporting by Jonathan Stempel; Additional reporting by Matthew Goldstein; Editing by Phil Berlowitz, Bernard Orr,Gary Hill)

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HARVARD LAW AND ECONOMIC ISSUES IN SUBPRIME LITIGATION 2008

This in combination with A.K. Barnett-Hart’s Thesis make’s one hell of a Discovery.

 
LEGAL AND ECONOMIC ISSUES IN
SUBPRIME LITIGATION
Jennifer E. Bethel*
Allen Ferrell**
Gang Hu***
 

Discussion Paper No. 612

03/2008

Harvard Law School Cambridge, MA 02138

 

 ABSTRACT

This paper explores the economic and legal causes and consequences of recent difficulties in the subprime mortgage market. We provide basic descriptive statistics and institutional details on the mortgage origination process, mortgage-backed securities (MBS), and collateralized debt obligations (CDOs). We examine a number of aspects of these markets, including the identity of MBS and CDO sponsors, CDO trustees, CDO liquidations, MBS insured and registered amounts, the evolution of MBS tranche structure over time, mortgage originations, underwriting quality of mortgage originations, and write-downs of investment banks. In light of this discussion, the paper then addresses questions as to how these difficulties might have not been foreseen, and some of the main legal issues that will play an important role in the extensive subprime litigation (summarized in the paper) that is underway, including the Rule 10b-5 class actions that have already been filed against the investment banks, pending ERISA litigation, the causes-of-action available to MBS and CDO purchasers, and litigation against the rating agencies. In the course of this discussion, the paper highlights three distinctions that will likely prove central in the resolution of this litigation: The distinction between reasonable ex ante expectations and the occurrence of ex post losses; the distinction between the transparency of the quality of the underlying assets being securitized and the transparency as to which market participants are exposed to subprime losses; and, finally, the distinction between what investors and market participants knew versus what individual entities in the structured finance process knew, particularly as to macroeconomic issues such as the state of the national housing market. ex ante expectations and the occurrence of ex post losses; the distinction between the transparency of the quality of the underlying assets being securitized and the transparency as to which market participants are exposed to subprime losses; and, finally, the distinction between what investors and market participants knew versus what individual entities in the structured finance process knew, particularly as to macroeconomic issues such as the state of the national housing market. 

 continue reading the paper harvard-paper-diagrams

 
 

 

Michael Lewis’s ‘The Big Short’? Read the Harvard Thesis Instead! “The Story of the CDO Market Meltdown: An Empirical Analysis.”

March 15, 2010, 4:59 PM ET

Michael Lewis’s ‘The Big Short’? Read the Harvard Thesis Instead!

By Peter Lattman

Deal Journal has yet to read “The Big Short,” Michael Lewis’s yarn on the financial crisis that hit stores today. We did, however, read his acknowledgments, where Lewis praises “A.K. Barnett-Hart, a Harvard undergraduate who had just  written a thesis about the market for subprime mortgage-backed CDOs that remains more interesting than any single piece of Wall Street research on the subject.”

A.K. Barnett-Hart

While unsure if we can stomach yet another book on the crisis, a killer thesis on the topic? Now that piqued our curiosity. We tracked down Barnett-Hart, a 24-year-old financial analyst at a large New York investment bank. She met us for coffee last week to discuss her thesis, “The Story of the CDO Market Meltdown: An Empirical Analysis.” Handed in a year ago this week at the depths of the market collapse, the paper was awarded summa cum laude and won virtually every thesis honor, including the Harvard Hoopes Prize for outstanding scholarly work.

Last October, Barnett-Hart, already pulling all-nighters at the bank (we agreed to not name her employer), received a call from Lewis, who had heard about her thesis from a Harvard doctoral student. Lewis was blown away.

“It was a classic example of the innocent going to Wall Street and asking the right questions,” said Mr. Lewis, who in his 20s wrote “Liar’s Poker,” considered a defining book on Wall Street culture. “Her thesis shows there were ways to discover things that everyone should have wanted to know. That it took a 22-year-old Harvard student to find them out is just outrageous.”

Barnett-Hart says she wasn’t the most obvious candidate to produce such scholarship. She grew up in Boulder, Colo., the daughter of a physics professor and full-time homemaker. A gifted violinist, Barnett-Hart deferred admission at Harvard to attend Juilliard, where she was accepted into a program studying the violin under Itzhak Perlman. After a year, she headed to Cambridge, Mass., for a broader education. There, with vague designs on being pre-Med, she randomly took “Ec 10,” the legendary introductory economics course taught by Martin Feldstein.

“I thought maybe this would help me, like, learn to manage my money or something,” said Barnett-Hart, digging into a granola parfait at Le Pain Quotidien. She enjoyed how the subject mixed current events with history, got an A (natch) and declared economics her concentration.

Barnett-Hart’s interest in CDOs stemmed from a summer job at an investment bank in the summer of 2008 between junior and senior years. During a rotation on the mortgage securitization desk, she noticed everyone was in a complete panic. “These CDOs had contaminated everything,” she said. “The stock market was collapsing and these securities were affecting the broader economy. At that moment I became obsessed and decided I wanted to write about the financial crisis.”

Back at Harvard, against the backdrop of the financial system’s near-total collapse, Barnett-Hart approached professors with an idea of writing a thesis about CDOs and their role in the crisis. “Everyone discouraged me because they said I’d never be able to find the data,” she said. “I was urged to do something more narrow, more focused, more knowable. That made me more determined.”

She emailed scores of Harvard alumni. One pointed her toward LehmanLive, a comprehensive database on CDOs. She received scores of other data leads. She began putting together charts and visuals, holding off on analysis until she began to see patterns–how Merrill Lynch and Citigroup were the top originators, how collateral became heavily concentrated in subprime mortgages and other CDOs, how the credit ratings procedures were flawed, etc.

“If you just randomly start regressing everything, you can end up doing an unlimited amount of regressions,” she said, rolling her eyes. She says nearly all the work was in the research; once completed,  she jammed out the paper in a couple of weeks.

“It’s an incredibly impressive piece of work,” said Jeremy Stein, a Harvard economics professor who included the thesis on a reading list for a course he’s teaching this semester on the financial crisis. “She pulled together an enormous amount of information in a way that’s both intelligent and accessible.”

Barnett-Hart’s thesis is highly critical of Wall Street and “their irresponsible underwriting practices.” So how is it that she can work for the very institutions that helped create the notorious CDOs she wrote about?

“After writing my thesis, it became clear to me that the culture at these investment banks needed to change and that incentives needed to be realigned to reward more than just short-term profit seeking,” she wrote in an email. “And how would Wall Street ever change, I thought, if the people that work there do not change? What these banks needed is for outsiders to come in with a fresh perspective, question the way business was done, and bring a new appreciation for the true purpose of an investment bank – providing necessary financial services, not creating unnecessary products to bolster their own profits.”

Ah, the innocence of youth.

Here is a copy of the thesis: 2009-CDOmeltdown

Michael Lewis: How a Few Wall Street Outsiders Scored Shorting Real Estate Before the Collapse

This is worth the time to read and watch

By Damien Hoffman The Wall St. Cheat

Posted on March 14 2010

Michael Lewis’s new book, The Big Short: Inside the Doomsday Machine,is already #1 at Amazon. Tonight he had some very cool interviews on 60 Minutes discussing how a few Wall Street outsiders made billions shorting real estate, his thoughts on Wall Street bonuses, and more. These videos are highly recommended now that the NCAA brackets are out and the tournaments are over until Thursday:

Go HERE for the powerful videos