Fidelity is shrewd in the week prior to bears demise

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Unformatted text preview: lity reduced its repo lending to Lehman to less than 2 billion from over 12 billion the previous Friday. Fidelity is shrewd: in the week prior to Bear’s demise in March, Fidelity had pulled its entire 9.6 billion repo line from Bear. c N. M. Kiefer Economics 4230: Banks 10/ 40 Lehman FCIC: Lehman’s collapse demonstrated weaknesses that also contributed to the failures or near failures of the other four large investment banks: inadequate regulatory oversight, risky trading activities (including securitization and over-the-counter (OTC) derivatives dealing), enormous leverage, and reliance on short-term funding (repos and commercial paper). Discuss? c N. M. Kiefer Economics 4230: Banks 11/ 40 c N. M. Kiefer Economics 4230: Banks 12/ 40 Lehman: Examiner’s Report UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK: REPORT OF ANTON R. VALUKAS, EXAMINER Charge: ”file a statement of . . . any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor, or to a cause of action available to the estate.” The examiner did a thorough investigation with analysis. c N. M. Kiefer Economics 4230: Banks 13/ 40 Lehman: Examiner’s Report From the executive summary: Lehman failed because it was unable to retain the confidence of its lenders and counterparties and because it did not have sufficient liquidity to meet its current obligations. Lehman was unable to maintain confidence because [it had] heavy concentrations of illiquid assets with deteriorating values such as residential and commercial real estate. Confidence was further eroded when it became public that attempts to form strategic partnerships to bolster its stability had failed. And confidence plummeted on huge reported losses, $2.8 billion in second quarter 2008 and $3.9 billion in third quarter 2008, without news of any definitive survival plan. c N. M. Kiefer Economics 4230: Banks 14/ 40 Lehman: Examiner’s Findings The Examiner concludes that there is sufficient evidence to support a colorable claim that: (1) certain of Lehman’s officers breached their fiduciary duties by exposing Lehman to potential liability for filing materially misleading periodic reports and (2) Ernst & Young, the firm’s outside auditor, was professionally negligent in allowing those reports to go unchallenged. The Examiner concludes that colorable claims of breach of fiduciary duty exist against Richard Fuld, Chris O’Meara, Erin Callan, and Ian Lowitt, and that a colorable claim of professional malpractice exists against Ernst & Young. c N. M. Kiefer Economics 4230: Banks 15/ 40 Lehman: Examiner’s Findings The business decisions that brought Lehman to its crisis of confidence may have been in error but were largely within the business judgment rule. But the decision not to disclose th...
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