Did JPM and Citi Cause Lehman’s Collapse?

“The demands for collateral by Lehman’s lenders had direct impact on Lehman’s liquidity. Lehman’s available liquidity is central to the question of why Lehman failed.”

-Anton Valukas, the bankruptcy examiner

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Not exactly. As is so often the case, determining the precise cause of death is an exercise in subtlety, something we Americans tend to do poorly  — and the media does even worse.

Consider, for example, immune deficiency diseases. What typically causes the actual death is a pneumonia or some other opportunistic infection. But there was first an underlying disease that created the condition.

So what actually kills the patient — the disease that ravages the body, destroys its naturally ability to fight off invaders, and leaves it totally vulnerable? Or whichever random infection finally does them in?

In the case of Lehman Brothers, the disease that left them vulnerable was a mad embracing of risk, the excess use of leverage, an extensive exposure to mortgage and real estate, and the enormous usage of derivatives — concurrent with a lack of intelligent risk management.

Citi and JPM were merely the opportunistic infections that came along at when Lehman’s immune system was compromised. That is why you never want to allow yourself to become that vulnerable on Wall Street.

The WSJ does a better job than Bloomberg in identifying management as the causal factor in the collapse (Examiner: Lehman Torpedoed Lehman versus JPMorgan, Citigroup Helped Cause Lehman Collapse, Report Says).

Here’s the Journal:

“Lehman chose to “disregard or overrule the firm’s risk controls on a regular basis,” even as the credit and real-estate markets were showing signs of strain, the report said. In one instance from May 2008, a Lehman senior vice president alerted management to potential accounting irregularities, a warning the report says was ignored by Lehman auditors Ernst & Young and never raised with the firm’s board.

The allegations of accounting manipulation and risk-control abuses potentially could influence pending criminal and civil investigations into Lehman and its executives. The Manhattan and Brooklyn U.S. attorney’s offices are investigating, among other things, whether former Lehman executives misled investors about the firm’s financial picture before it filed for bankruptcy protection, and whether Lehman improperly valued its real-estate assets, people familiar with the matter have said.”

How unusual: The findings of the Bankruptcy court, may be what leads to criminal indictments for these C-level executives.

Bloomberg:

“Former Lehman Chief Executive Officer Richard Fuld, ex- Chief Financial Officer Erin Callan, former Executive Vice President Ian Lowitt and former Managing Director Christopher O’Meara certified misleading statements about the bank’s finances, according to the report. Fuld, 63, was “at least grossly negligent,” Valukas said. New York-based Lehman collapsed in September 2008 with $639 billion in assets . . .

Lehman’s executives engaged in conduct ranging from “non- culpable errors of business judgment” to “actionable balance sheet manipulation,” as they used “accounting gimmicks” to move assets off the balance sheet without disclosing that to the government, rating-agencies, investors or Lehman’s board.” (emphasis added)

Let the frog marching begin!

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Sources:
JPMorgan, Citigroup Helped Cause Lehman Collapse, Report Says
Linda Sandler, Bob Van Voris and Don Jeffrey
Bloomberg, March 12 2010
http://www.bloomberg.com/apps/news?pid=20601087&sid=ab1XUybpK4Vg

Examiner: Lehman Torpedoed Lehman
MIKE SPECTOR, SUSANNE CRAIG, PETER LATTMAN
WSJ, MARCH 11, 2010
http://online.wsj.com/article/SB10001424052748703625304575115963009594440.html