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3rd party hold securities and cash. Not uncommon. c N. M. Kiefer Economics 4230: Banks 6/ 40 Lehman
Problem for regulators: Investment banks disclosed the total
number of OTC derivative contracts they had, the total exposures
of the contracts, and their estimated market value, but not the
terms of the contracts or the counterparties. Thus, there was no
way to know who would be owed how much and when payments
would have to be made—information that would be critically
important to analyze the possible impact of a Lehman bankruptcy
on the ﬁnancial markets.
New York Fed oﬃcials were ”very reluctant” to request copies of
the master agreements that would shed light on the Lehman’s
derivatives counterparties, because such a request would send a
“huge negative signal.” c N. M. Kiefer Economics 4230: Banks 7/ 40 troubled assets into a separate entity. Secretary Paulson’s prediction turned out to be
right – it was not enough.
By the close of trading on September 12, 2008, Lehman’s stock price had declined
to $3.65 per share, a 94% drop from the $62.19 January 2, 2008 price.42
70.00 $62.19 60.00
Lehman Stock Price 40.00 $31.75 30.00 $27.50 20.00 $20.96
$7.79 10.00 $7.25 9-Sep-08 10-Sep-08 $3.65 0.00
2-Jan-08 17-Mar-08 10-Jun-08 1-Jul-08 12-Sep-08 Landmark Dates Over the weekend of September 12 14, an intensive series of meetings was
conducted by and among Treasury Secretary Paulson, FRBNY President Timothy F.
Geithner, SEC Chairman Christopher Cox, and the chief executives of leading financial
institutions.43 Secretary Paulson began the meetings by stating the Government was
there to do all it could – but that it could not fund a solution.44 The Government’s 42 Morningstar Document Research Co., LBHI Historic Stock Prices (Jan. 1, 2008 through Sept. 15, 2008)
[LBEX EXM 000001 14] (printed from www.10kwizard.com) (last visited on Feb. 3, 2010).
43 Examiner’s Interview of Henry M. Paulson, Jr., June 25, 2009, at p. 15; Examiner’s Interview of
Christopher Cox, Jan. 8, 2010, at pp. 15 17; Examiner’s Interview of Thomas C. Baxter, Jr., May 20, 2009 at
c N. M. Kiefer
Economics 4230: Banks
p. 9. 8/ 40 Lehman
On September 4, executives from Lehman Brothers apprised
executives at JP Morgan (Lehman’s tri-party repo clearing bank)
of the third-quarter results that it would announce two weeks later.
A 3.9 billion loss... . By 9/8 JP Morgan, Citigroup, and Bank of
America had all demanded more collateral from Lehman, with the
threat they might “cut oﬀ Lehman if they don’t receive it.”
Before the market opened on Wednesday, Lehman announced its
3.9 billion third-quarter loss c N. M. Kiefer Economics 4230: Banks 9/ 40 Lehman
Four hours after the loss was announced, Matthew Rutherford, an
adviser to Treasury, emailed colleagues that several large money
funds had reduced their exposure to Lehman, and “Importantly,
Fidelity, the largest fund complex, stressed that while they hadn’t
made any signiﬁcant shifts yet today, they were still in the process
of making decisions and wanted to update me later in the day,” By
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This note was uploaded on 01/27/2014 for the course ECONOMICS 103 taught by Professor Angie during the Spring '12 term at Columbia College.
- Spring '12