Interesting use of $138 billion From EWI of all places ... http://www.elliottwave.com/freeupdates/archives/2008/09/25/An-Update-on-the- It may seem like a long time ago, but it was only on Monday of last week (Sept. 15) that Lehman Brothers filed for bankruptcy; the equally big news was that the Federal Reserve declined to bail Lehman out. I've read several details regarding Lehman's demise and learned some interesting facts. The bankruptcy filing was "pre-dawn" on the 15th, according to Bloomberg. The filing document is available in PDF form on the internet: it names Lehman's largest unsecured creditors, and the dollar amounts of their claims. "Citibank, N.A., as indenture trustee" is listed as Lehman's largest unsecured creditor, with a claim of "Approximately $138 billion" in "Bond Debt." Following Lehman's filing, J.P. Morgan transferred $138 billion in two payments to Lehman Brothers -- $87 billion on Sept. 15th and $51 billion on Sept. 16th. Bloomberg reported that the transfer of funds was "to keep financial markets stable," and to settle Lehman's "securities transactions with customers...and clearance parties, according the [court] filing." After these transfers, also according to Bloomberg, the Federal Reserve Bank of New York made two subsequent payments to J.P. Morgan: $87 billion on Sept. 15th and $51 billion on Sept. 16th, for a total of $138 billion. Lehman's bankruptcy court filing said that J.P. Morgan's $138 billion transfer to Lehman was "At the request of... the Federal Reserve Bank of New York." I have not been able to find an explanation -- in media reports or from the Federal Reserve -- of why J.P. Morgan needed to be a party to the $138 billion that Lehman received, and that the Fed transferred. I'm also unable to find an announcement from the Fed that it was making the transfer. One could infer that J.P. Morgan was used as a third party in order to avoid the perception that, despite statements regarding not bailing out Lehman, the Fed was indeed assuming $138 billion in obligations that were in default upon Lehman's bankruptcy. Once could also infer that such an action by the Fed amounted to a $138 billion bailout of Citibank, which was the dollar value of the Lehman-issued bonds Citibank held. Citibank issued a Sept. 15 press release saying that its "role in this issue is administrative in nature and does represent exposure for Citi to Lehman." The statement did not identify who or what owned the $138 billion in bonds. I hope that more facts become available showing that the inferences are mistaken, and I invite journalists and others to bring any such relevant facts to light.
Updated...Agin from EWI http://www.elliottwave.com/freeupdates/archives/2008/09/25/An-Update-on-the-$138-Billion----and-the-Inferences.aspx Yesterday I discussed some of the events surrounding the bankruptcy filing on Sept. 15 by Lehman Brothers, including the roles of J.P. Morgan, Citibank and the Federal Reserve -- specifically, how one might look at the reported facts and infer that the Fed was assuming $138 billion in bond obligations which were in default upon Lehman's bankruptcy. (Read yesterday's article) That bankruptcy remains very much relevant to the proposed $700 billion bailout plan now under debate in Congress. In his testimony to the Joint Economic Committee of Congress on Sept. 24, Fed Chairman Bernanke said: "Government assistance should be given with the greatest of reluctance and only when the stability of the financial system, and, consequently, the health of the broader economy, is at risk." Then he described the recent instances of: 1) A large financial company that did receive government assistance, and 2) A large financial company that did not receive government assistance. "In the case of AIG, the Federal Reserve...provided an emergency credit line to facilitate an orderly resolution....The Federal Reserve took this action because it judged that, in light of the prevailing market conditions and the size and composition of AIG's obligations, a disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the U.S. economy." "In the case of Lehman Brothers...the Federal Reserve...declined to commit public funds to support the institution. The failure of Lehman posed risks. But the troubles at Lehman had been well known for some time, and investors clearly recognized--as evidenced, for example, by the high cost of insuring Lehman's debt in the market for credit default swaps--that the failure of the firm was a significant possibility. Thus, we judged that investors and counterparties had had time to take precautionary measures." To update yesterday's discussion: Other facts I've learned present even more questions and possible inferences. For example: Why did the Federal Reserve make no public statement regarding the reported $138 billion that Lehman received, and that the Fed transferred via J.P. Morgan? Its press releases from the 14th, 15th and 16th of September are silent on this. A separate press release on Sept. 16 explained the $85 billion bailout of AIG. Are Chairman Bernanke's statements quoted above consistent with the Federal Reserve's apparent assumption of $138 billion in defaulted bond obligations? One could infer that the statement is not consistent with undertaking such an obligation. Why was the dollar value of the unsecured asset claims against Lehman dated from July 2, 2008, some 10 weeks before the bankruptcy filing? One could infer that the bonds lost value during those 10 weeks, even as the cost of credit default insurance skyrocketed, as this chart from the Sept. 15 Wall Street Journal makes clear: Finally, Citibank's "indenture trustee" status likely means it was an unsecured creditor in name only regarding the $138 billion bond debt. Citi was administering the interest payments to the real -- but still unidentified -- bondholder(s). If so, one should not infer any bailout of Citibank. There's more to learn about this story, and I'll continue to post what I discover on this page. In the meantime, click here to read tomorrow's news today.