One hell of a deflationary bust: JP Morgan loses 93% of value of Lehman collateral that it holds.

This is an excellent real life example of how deflation works. As reported by Reuters JP Morgan was holding Lehman Brothers’ collateral back in 2008 as a way to protect itself against possible investment losses. Well, deflationary bust that was caused by rampant FED sponsored inflation prior to the Fall of 2008 crisis, has hit not only the investments but the collaterals as well.

When you have a 93% evaporation on the collateral which is supposedly only a fraction of the actual assets that it guarantees, you can safely say we are in the thick of it – the deflation.

Of course, the controlled press article says that JP Morgan “will reduce a $7.68 billion claim”. JP Morgan has no choice. The claim has already been reduced for it – by deflation.

Reuters. February 25, 2009.

Lehman settles collateral claims with JPMorgan.

NEW YORK/BANGALORE (Reuters) – Lehman Brothers Holdings Inc (LEHMQ.PK) agreed with JPMorgan Chase & Co (JPM.N) to settle a $7.68 billion claim stemming from collateral obligations after Lehman’s bankruptcy filing in 2008, court documents show.

Crisis in Credit

JPMorgan had provided various financial services to Lehman’s primary broker-dealer unit prior to Lehman’s bankruptcy filing in September 2008.

In the normal course of trading, banks collect collateral from counterparties as a way to hedge risks.

But as worries about Lehman’s financial condition deepened, some banks held on to collateral, leaving large blocks of the bankrupt investment bank’s assets in the control of other banks including JPMorgan.

As part of the proposed settlement, Lehman will make a one-time cash payment of $557 million to JPMorgan, and JPMorgan will reduce a $7.68 billion claim it had against Lehman to $557 million.

“The settlement allows Lehman to more efficiently manage those illiquid assets and thereby maximize returns for the benefit of creditors,” Lehman said in a statement.

Both JPMorgan and Lehman have reserved all rights to the claims they have against each other, and there could still be future litigation between the two.

As per the deal, JPMorgan will transfer the remaining illiquid collateral back to Lehman, according to the filing.

The collateral at issue relates to dealings in the summer of 2008, when JPMorgan asked Lehman Brothers to execute a guaranty dated August 26, 2008, and post collateral to cover that guaranty, according to court papers.

Although the collateral posted by Lehman had a face value in the billions of dollars, it consisted of illiquid securities whose actual value was difficult to ascertain, the court papers show.

Between September 9, and September 12, 2008, Lehman posted an estimated $8.57 billion in cash and money market funds as additional collateral security, the papers show.

Lehman said in court papers that recovering control of the assets would be more “conducive to enhancing their value.”

A court hearing on the proposed settlement is set for March 17.

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

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  1. Posted May 3, 2015 at 8:02 am | Permalink


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