lehman brothers examiner's report, vol.1

8/14/2019 Lehman Brothers Examiner's Report, Vol.1

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UNITEDSTATESBANKRUPTCYCOURTSOUTHERNDISTRICTOFNEWYORK

x

Inre

LEHMANBROTHERSHOLDINGSINC.,

etal.,Debtors.

:

:

:

:

:

:

:

Chapter11CaseNo.

0813555(JMP)

(JointlyAdministered)

x

REPORTOFANTONR.VALUKAS,EXAMINER

March11,2010

Jenner&BlockLLP

353N.ClarkStreet

Chicago,IL

60654

3456

3122229350

919ThirdAvenue

37thFloor

NewYork,NY 100223908

2128911600

CounseltotheExaminer

VOLUME1OF9SectionsI&II: Introduction,ExecutiveSummary&ProceduralBackground

SectionIII.A.1: Risk


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i

EXAMINERSREPORTTABLEOFCONTENTS

VOLUME1Introduction,SectionsI&II: ExecutiveSummary&ProceduralBackground

Introduction ...................................................................................................................................2

I. ExecutiveSummaryofTheExaminersConclusions......................................................15

A. WhyDidLehmanFail? AreThereColorableCausesofActionThatArise

FromItsFinancialConditionandFailure?..................................................................15

B. AreThereAdministrativeClaimsorColorableClaimsForPreferencesor

VoidableTransfers? ........................................................................................................24

C.

DoColorable

Claims

Arise

From

Transfers

of

LBHI

Affiliate

Assets

to

Barclays,orFromtheLehmanALITransaction?.......................................................26

II. ProceduralBackgroundandNatureoftheExamination................................................28

A. TheExaminersAuthority .............................................................................................28

B. DocumentCollectionandReview................................................................................30

C. SystemsAccess................................................................................................................33

D. WitnessInterviewProcess.............................................................................................35

E. CooperationandCoordinationWiththeGovernmentandParties ........................37

SectionIII.A.1: RiskIII.ExaminersConclusions.......................................................................................................43

A. WhyDidLehmanFail? AreThereColorableCausesofActionThatArise

FromItsFinancialConditionandFailure?..................................................................43

1. BusinessandRiskManagement .............................................................................43

a) ExecutiveSummary............................................................................................43

(1)TheExaminerDoesNotFindColorableClaimsThatLehmans

SeniorOfficers

Breached

Their

Fiduciary

Duty

of

Care

by

FailingtoObserveLehmansRiskManagementPoliciesand

Procedures......................................................................................................47


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ii


SeniorOfficersBreachedTheirFiduciaryDutytoInformthe

BoardofDirectorsConcerningTheLevelofRiskLehmanHad

Assumed.........................................................................................................52

(3)

The

Examiner

Does

Not

Find

Colorable

Claims

That

Lehmans

DirectorsBreachedTheirFiduciaryDutybyFailingtoMonitor

LehmansRiskTakingActivities................................................................54

b) Facts.......................................................................................................................58

(1)FromMovingtoStorage: LehmanExpandsItsPrincipal

Investments....................................................................................................58

(a)LehmansChangedBusinessStrategy .................................................59

(b)TheIncreasedRiskFromLehmansChangedBusiness

Strategy.....................................................................................................62

(c)Application

of

Risk

Controls

to

Changed

Business

Strategy ...........65

(i) StressTestingExclusions................................................................66

(ii) RiskAppetiteLimitIncreaseForFiscal2007...............................70

(iii)DecisionNotToEnforceSingleTransactionLimit.....................73

(d)TheBoardsApprovalofLehmansGrowthStrategy.......................76

(2)LehmanDoublesDown:LehmanContinuesItsGrowthStrategy

DespitetheOnsetoftheSubprimeCrisis..................................................78

(a)LehmansResidentialMortgageBusiness...........................................82

(i)

LehmanDecides

to

Curtail

Subprime

Originations

but

ContinuestoPursueAltAOriginations..................................82

(ii) TheMarch20,2007BoardMeeting...............................................90

(b)TheExplosioninLehmansLeveragedLoanBusiness .....................95

(i) RelaxationofRiskControlstoAccommodateGrowthof

LehmansLeveragedLoansBusiness ...........................................97

(c) InternalOppositiontoGrowthofLeveragedLoansBusiness.......100

(d)GrowthofLehmansCommercialRealEstateBusinessatthe

Start

of

the

Subprime

Crisis.................................................................103

(i) RelaxationofRiskControlstoAccommodateGrowthof

LehmansCommercialRealEstateBusiness..............................105

(ii) InternalOppositiontoGrowthofCommercialReal

EstateBusiness ...............................................................................107

(iii)Archstone ........................................................................................108


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iii

a. LehmansCommitment............................................................108

b. RiskManagementofLehmansArchstone

Commitment..............................................................................112

(e)NagioffsReplacementofGelbandasHeadofFID.........................114

(f)

TheBoard

of

Directors

Awareness

of

Lehmans

Increasing

RiskProfile.............................................................................................116

(3)EarlyWarnings:RiskLimitOverages,FundingConcerns,and

theDeepeningSubprimeCrisis ................................................................117

(a)NagioffandKirkTrytoLimitLehmansHighYieldBusiness......119

(b)JulyAugust2007ConcernsRegardingLehmansAbilityto

FundItsCommitments ........................................................................123

(c) LehmanDelaystheArchstoneClosing .............................................128

(d)

Lehman

Increases

the

Risk

Appetite

Limit

to

Accommodate

theAdditionalRiskAttributabletotheArchstone

Transaction.............................................................................................131

(e)CashCapitalConcerns .........................................................................134

(f) LehmansTerminationofItsResidentialMortgage

Originations ...........................................................................................138

(g)September,October,andNovember2007MeetingsofBoard

ofDirectors.............................................................................................139

(i) RiskAppetiteDisclosures.............................................................139

(ii)

LeveragedLoan

Disclosures ........................................................144

(iii)LeverageRatiosandBalanceSheetDisclosures........................147

(iv)LiquidityandCapitalDisclosures...............................................148

(4)LateReactions: LehmanSlowlyExitsItsIlliquidRealEstate

Investments..................................................................................................150

(a)Fiscal2008RiskAppetiteLimitIncrease...........................................152

(b)January2008MeetingofBoardofDirectors.....................................154

(c) ExecutiveTurnover...............................................................................156

(d)Commercial

Real

Estate

Sell

Off:

Too

Little,

Too

Late ...................157

(e)LehmansCompensationPractices.....................................................161


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iv

c) Analysis ..............................................................................................................163


SeniorOfficersBreachedTheirFiduciaryDutyofCareby

FailingtoObserveLehmansRiskManagementPoliciesand

Procedures....................................................................................................164

(a)LegalStandard.......................................................................................164

(b)Background............................................................................................166

(i) CountercyclicalGrowthStrategywithRespectto

ResidentialMortgageOrigination...............................................171

(ii) LehmansConcentrationofRiskinItsCommercialReal

EstateBusiness ...............................................................................172

(iii)ConcentratedInvestmentsinLeveragedLoans........................175

(iv)FirmWideRiskAppetiteExcesses..............................................179

(v) FirmWideBalanceSheetLimits .................................................181

(vi)StressTesting..................................................................................181

(vii)Summary: OfficersDutyofCare..............................................182


SeniorOfficersBreachedTheirFiduciaryDutytoInformthe

BoardofDirectorsConcerningtheLevelofRiskLehmanHad

Assumed.......................................................................................................183


DirectorsBreached

Their

Fiduciary

Duty

by

Failing

to

Monitor

LehmansRiskTakingActivities..............................................................188

(a)LehmansDirectorsareProtectedFromDutyofCare

LiabilitybytheExculpatoryClauseandtheBusiness

JudgmentRule.......................................................................................188

(b)LehmansDirectorsDidNotViolateTheirDutyofLoyalty ..........190

(c) LehmansDirectorsDidNotViolateTheirDutytoMonitor .........191

(i) ApplicationofCaremarktoRiskOversight:InreCitigroupInc. ....................................................................................................191

(ii)

Applicationof

Caremark

and

Citigroup

to

Lehmans

Directors..........................................................................................193


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v

VOLUME2SectionIII.A.2: Valuation2. Valuation ..................................................................................................................203

a)

Executive

Summary..........................................................................................203

(1)ScopeofExamination .................................................................................210

(2)SummaryofApplicableLegalStandards................................................212

(3)SummaryofFindingsandConclusions...................................................214

b) OverviewofValuationofLehmansCommercialRealEstate

Portfolio..............................................................................................................215

(1)OverviewofLehmansCREPortfolio......................................................217

(a)SummaryofPortfolio ...........................................................................217

(b)

Overview

of

Valuation

of

CRE

Portfolio...........................................220

(i) GREGLeaders ................................................................................220

(ii) ParticipantsintheValuationProcess .........................................220

(c) ChangesintheCREPortfoliofrom2006through2008...................223

(d)PerfectStormImpactonCREValuationin2008..........................227

(2)OutsideReviewofLehmansCREValuationProcess...........................232

(a)SEC ..........................................................................................................233

(b)Ernst&Young .......................................................................................237

c)

Senior

Managements

Involvement

in

Valuation.........................................241

(1)SeniorManagementsGeneralRoleWithRespecttoCRE

Valuation ......................................................................................................243

(2)SeniorManagementsInvolvementinValuationintheSecond

Quarterof2008............................................................................................245

(3)SeniorManagementsInvolvementinValuationintheThird

Quarterof2008............................................................................................247

(a)SeniorManagementsAccount ...........................................................248

(b)PaulHughsonsAccount .....................................................................253

(c)Other

Accounts......................................................................................254

(4)ExaminersFindingsandConclusionsWithRespecttoSenior

ManagementsInvolvementinCREValuation......................................265

d) ExaminersAnalysisoftheValuationofLehmansCommercial

Book ....................................................................................................................266

(1)ExecutiveSummary....................................................................................266


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vi

(2)LehmansValuationProcessforitsCommercialBook .........................270

(3)ExaminersFindingsandConclusionsastotheReasonableness

ofLehmansValuationofItsCommercialBook.....................................274

(a)AsoftheSecondQuarterof2008 .......................................................274

(b)As

of

the

Third

Quarter

of

2008 ..........................................................282

e) ExaminersAnalysisoftheValuationofLehmansPrincipal

TransactionsGroup ..........................................................................................285


(2)OverviewofLehmansPTGPortfolio......................................................292

(3)EvolutionofLehmansPTGPortfolioFrom2005Through2008.........296

(4)LehmansValuationProcessforItsPTGPortfolio.................................303

(a)TheRoleofTriMontintheValuationProcessforLehmans

PTGPortfolio.........................................................................................306

(i) LehmansIssueswithTriMontsData ........................................311

(ii) LehmanChangedItsValuationMethodologyforItsPTG

PortfolioinLate2007.....................................................................312

(b)TheRoleofLehmansPTGBusinessDeskintheValuation

ProcessforLehmansPTGPortfolio ..................................................319

(c) TheRoleofLehmansProductControlGroupinPrice

TestingtheValuationofLehmansPTGPortfolio ...........................321

(d)TheInfluenceofLehmansPTGBusinessDeskuponthe

PriceTesting

Function

of

Lehmans

Product

Control

Group.........326

(5)TheExaminersFindingsandConclusionsastothe

ReasonablenessofLehmansValuationofPTGPortfolio.....................329

(a)LehmanDidNotMarkPTGAssetstoMarketBasedYield...........331

(b)TheEffectofNotMarkingtoMarketBasedYield...........................337

(i) EffectofCap*105NotMarkingtoMarketBasedYield .........337

(ii) EffectofIRRModelsNotMarkingtoMarketBased

Yield.................................................................................................342

(iii)Effect

of

Product

Control

Price

Testing

Not

Marking

to

MarketBasedYield .......................................................................349

(iv)EffectofModifyingTriMontsDataintheThirdQuarter

of2008..............................................................................................351

(c) ExaminersFindingsandConclusionsastotheEffectofNot

MarkingLehmansPTGPortfoliotoMarketBasedYield..............353


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vii

f) ExaminersAnalysisoftheValuationofLehmansArchstone

Positions .............................................................................................................356


(2)LehmansAcquisitionofArchstone.........................................................364

(a)Background

on

Archstone ...................................................................364

(b)AcquisitionofArchstone .....................................................................365

(i) AnalystReaction ............................................................................367

(ii) LehmansSyndicationEfforts......................................................370

(iii)BridgeandPermanentEquityatClosing...................................374

(iv)CapitalStructureatClosing .........................................................375

(v) PriceFlex .........................................................................................377

(vi)Standard&PoorsCreditRating.................................................380

(3)Lehmans

Valuation

of

Archstone............................................................382

(a)ValuationBetweenCommitmentandClosing.................................386

(b)ValuationasoftheClosingDate ........................................................388

(c) ValuationasoftheFourthQuarterof2007.......................................390

(d)ValuationIssuesDuringtheFirstQuarterof2008...........................391

(i) BarronsArticle ..............................................................................391

a. ArchstonesResponsetotheBarronsArticle.......................392

b. LehmansResponsetotheBarronsArticle ..........................394

(ii)January

2008

Archstone

Update..................................................396

(iii)ValuationasofFebruary29,2008................................................399

(iv)FirstQuarter2008EarningsCallandLenders

DiscussionRegardingModifyingtheArchstoneStrategy ......401

(e)ValuationIssuesDuringtheSecondQuarterof2008......................402

(i) March2008ArchstoneUpdate ....................................................402

(ii) March2008Valuation ...................................................................404

(iii)April2008DowngradebyS&P....................................................407

(iv)Einhorn

Speech

in

April

2008.......................................................407

(v) May2008Valuation.......................................................................408

(vi)SecondQuarter2008EarningsConferenceCall........................411

a. PreparationandLehmansMethodsofAnalyzing

ReasonablenessofValuationsPriortotheCall....................411


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viii

b. DiscussionDuringtheSecondQuarter2008Earnings

Call ..............................................................................................412

(vii)LehmansRevisedPlantoSellArchstonePositions................414

(f) ValuationIssuesDuringtheThirdQuarterof2008.........................416

(i)

DiscussionAmong

Lenders

in

July

2008....................................417

(ii) August2008Valuation..................................................................417

(g)ProductControlsReviewofArchstoneValuations........................418

(4)ExaminersAnalysisofLehmansValuationProcessforits

ArchstonePositions ....................................................................................419

(a)DiscountedCashFlowValuationMethod........................................421

(i) RentGrowth ...................................................................................422

a. NetOperatingIncome..............................................................426

b.

SensitivityAnalysis...................................................................429

(ii)ExitCapitalizationRate..................................................................431

(iii)ExitPlatformValue .......................................................................433

(iv)DiscountRate..................................................................................436

(b)SumofthePartsMethod .....................................................................438

(c) ComparableCompanyMethod ..........................................................440

(i) PotentialOvervaluationBasedonPrimaryComparable

Companies ......................................................................................445

(5)Examiners

Analysis

of

the

Reasonableness

of

Lehmans

ValuationofitsArchstonePositionsonaQuarterlyBasis ...................446

(a)ReasonablenessasoftheFourthQuarterof2007.............................446

(b)ReasonablenessasoftheFirstQuarterof2008.................................449

(i) BarronsArticle ..............................................................................450

(ii) DiscussionsAmongArchstone,TishmanandLenders ...........458

(iii)LehmansValuationDuringtheFirstQuarterof2008.............459

(iv)SumoftheParts .............................................................................460

(v)

DCF

Method ....................................................................................464

(vi)ExaminersFindingsandConclusionsastothe

ReasonablenessofLehmansArchstoneValuationasof

theEndoftheFirstQuarterof2008 ............................................466

(c) ReasonablenessasoftheSecondQuarterof2008............................468

(i)SecondQuarterEarningsCall ........................................................469


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(ii)SumoftheParts ..............................................................................476

(iii)DCFModel......................................................................................477

(iv)RentGrowth ...................................................................................478

(v)ExitCapitalizationRate..................................................................479

(vi)Quantification

of

Changes

in

Assumptions...............................480

(vii)ExaminersFindingsandConclusionsastothe


theEndoftheSecondQuarterof2008 .......................................481

(d)ReasonablenessasoftheThirdQuarterof2008...............................484

(i)SumoftheParts................................................................................487

(ii)DCFModel.......................................................................................488

(iii)RentGrowth ...................................................................................489

(iv)Exit

Capitalization

Rate.................................................................490

(v)QuantificationofChangesinAssumptions ................................491

(vi)ExaminersFindingsandConclusionsastothe


theEndoftheThirdQuarterof2008..........................................492

g) ExaminersAnalysisoftheValuationofLehmansResidential

WholeLoansPortfolio......................................................................................494

(1)ResidentialWholeLoansOverview.........................................................494

(2)LehmansU.S.ResidentialWholeLoansin2008 ...................................497

(3)LehmansValuationProcessforitsResidentialWholeLoans..............501

(a)LehmansMay2008PriceTesting ......................................................504

(b)LehmansAugust2008PriceTesting.................................................515

(4)ExaminersIndependentValuationofLehmansResidential

WholeLoansPortfolio................................................................................520

(5)ExaminersFindingsandConclusionsWithRespecttothe

ReasonablenessofLehmansValuationofItsResidentialWhole

LoansPortfolio ............................................................................................525

(h)Examiners

Analysis

of

the

Valuation

of

Lehmans

RMBS

Portfolio ........527

(i) ExaminersAnalysisoftheValuationofLehmansCDOs .........................538

(1)LehmansPriceTestingProcessforCDOs ..............................................543

(2)PriceTestingResultsfortheSecondandThirdQuarters2008............551

(a)LehmansPriceTestingofitsCeagoCDOs.......................................553


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(3)ExaminersReviewofLehmansLargestU.S.ABS/CRECDO

Positions .......................................................................................................562


ReasonablenessofLehmansValuationofitsCDOs.............................567

(j)

ExaminersAnalysis

of

the

Valuation

of

Lehmans

Derivatives

Positions .............................................................................................................568

(1)OverviewofLehmansDerivativesPositions.........................................568

(2)LehmansUseofCreditSupportAnnexestoMitigate

DerivativesRisk ..........................................................................................574

(3)LehmansPriceTestingofitsDerivativesPositions ..............................578

(k)ExaminersAnalysisoftheValuationofLehmansCorporateDebt

Positions .............................................................................................................583

(1)OverviewofLehmansCorporateDebtPositions .................................583

(2)LehmansPriceTestingofitsCorporateDebtPositions.......................585


ValuationofLehmansCorporateDebtPositions..................................589

(a)RelianceonNonTrades.......................................................................590

(b)QualityControlErrorsMismatchedCompanies ..........................591

(c)NoTestingofInternalCreditRating..................................................592

(l) ExaminersAnalysisoftheValuationofLehmansCorporate

EquitiesPositions..............................................................................................594

(1)Overview

of

Lehmans

Corporate

Equities

Positions............................594

(2)LehmansValuationProcessforitsCorporateEquitiesPositions.......596


ValuationofLehmansCorporateEquitiesPositions............................599

(a)ImpairedDebtwithNoEquityMarkDown.....................................601

(b)StaticMarks............................................................................................603

VOLUME2(CONT.)SectionIII.A.3: Survival3. LehmansSurvivalStrategiesandEfforts ...........................................................609

a) IntroductiontoLehmansSurvivalStrategiesandEfforts..........................609

(1)ExaminersConclusions.............................................................................609

(2)IntroductiontoLehmansSurvivalStrategies ........................................612


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b) LehmansActionsin2008PriortotheNearCollapseofBearStearns......622

(1)RejectionofCapitalInvestmentInquiries ...............................................623

(a)KIAOffer................................................................................................624

(b)KDBMakesItsInitialApproach.........................................................625

(c)ICDs

Initial

Approach .........................................................................626

(2)DivergentViews..........................................................................................627

(a)CompetitorsRaiseCapital ...................................................................627

(b)InternalWarningsRegardingCapital................................................629

c) ActionsandEffortsFollowingtheNearCollapseofBearStearns ............631

(1)LehmansAttempttoIncreaseLiquidity.................................................633

(2)LehmansAttempttoReduceitsBalanceSheet .....................................634

(3)LehmanSellsStocktoPrivateandPublicInvestors..............................638

(4)SpinCo ..........................................................................................................640

(a)EvolutionofSpinCo..............................................................................642

(b)ExecutionIssues ....................................................................................644

(i) EquityHole.....................................................................................645

(ii) OutsideFinancingforSpinCo......................................................649

(iii)SECIssues .......................................................................................653

a. AuditingandAccountingIssues ............................................653

b. TaxFreeStatus ..........................................................................658

(iv)Valuation

of

Assets........................................................................659

(c) BarclaysSpinCo ...............................................................................661

(5)PotentialStrategicPartners........................................................................662

(a)BuffettandBerkshireHathaway ........................................................664

(i) March2008......................................................................................664

(ii) LastDitchEffortwithBuffett.......................................................667

(b)KDB .........................................................................................................668

(i) DiscussionsBegin ..........................................................................668

(ii) DiscussionsResume:SecondRoundofTalksbetweenKDBandLehman...........................................................................673

(iii)ThirdRoundofTalksbetweenKDBandLehman....................677

(iv)KDBsSeptember9,2008Announcement..................................681

(c) MetLife....................................................................................................687

(d)ICD ..........................................................................................................691


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(e)BankofAmerica....................................................................................694

(i) InitialDiscussionsintheSummerof2008 .................................694

(ii) TalksResumeinSeptember .........................................................696

(f) Barclays...................................................................................................703

(6)Government

Communications..................................................................711

(a)TreasuryDinner ....................................................................................712

(b)ShortSales ..............................................................................................713

(c) PossibilityofFederalAssistance.........................................................716

(7)LehmansBankruptcy ................................................................................718

VOLUME3SectionIII.A.4: Repo1054. Repo105 ...................................................................................................................732

a) Repo105ExecutiveSummary......................................................................732

b) Introduction .......................................................................................................750

c) WhytheExaminerInvestigatedLehmansUseofRepo105

Transactions.......................................................................................................764

d) ATypicalRepo105Transaction .....................................................................765

(1)TheGenesisofLehmansRepo105Programin2001............................765

(2)Repo105TransactionsVersusOrdinaryRepoTransactions ...............766

(a)LehmansAccountingTreatmentofRepo105Transactions

VersusOrdinaryRepoTransactions ..................................................768

(b)LehmansAccountingPolicyforRepo105Transactions................775

(c) TheAccountingPurposeoftheLargerHaircut ...............................777

(d)LehmanDidNotRecordaCashBorrowingbutRecordeda

DerivativeAssetinaRepo105Transaction......................................781

(3)AnatomyofRepo105TransactionsandtheLinklatersTrueSale

OpinionLetter .............................................................................................782

(4)Types

of

Securities

Used

in

Repo

105

Transactions...............................793

(5)ProductControllersManuallyBookedRepo105Transactions ...........797

e) ManagingBalanceSheetandLeverage .........................................................800

(1)LehmanManagementsFocusinLate2007onReducingthe

FirmsReportedLeverage..........................................................................802

(a)LehmansCalculationofNetLeverage .............................................804


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(2)ByJanuary2008,LehmanDecidedtoCutitsNetLeveragein

HalftoWinBacktheConfidenceoftheMarket,Lendersand

Investors .......................................................................................................805

(a)BartMcDade,asNewlyAppointedBalanceSheetCzar,

Advised

the

Executive

Committee

in

March

2008

to

Cap

LehmansUseofRepo105Transactions ...........................................809

(b)McDadeBecamePresidentandCOOonJune12,2008and

AuthorizedtheReductionofRepo105Usage..................................819

(3)TheMarketsIncreasedScrutinyoftheLeverageofInvestment

Banks.............................................................................................................822

(a)TheCostofDeleveraging ....................................................................825

(4)StickyInventoryandFIDsBalanceSheetBreachesHampered

LehmansAbilitytoManageItsNetLeverage.......................................828

(5)Deleveraging

Resulted

in

Intense

Pressure

at

Quarter

End

to

MeetBalanceSheetTargetsforReportingPurposes.............................843

(6)LehmansEarningsCallsandPressReleaseStatements

RegardingLeverage....................................................................................845

(a)AnalystsStatementsRegardingLehmansLeverage .....................850

f) ThePurposeofLehmansRepo105ProgramWastoReverse

EngineerPubliclyReportedFinancialResults..............................................853

(1)LehmanDidNotDiscloseItsAccountingTreatmentFororUse

ofRepo105TransactionsinItsForms10Kand10Q...........................853

(a)LehmansOutsideDisclosureCounselWasUnawareof

LehmansRepo105Program ..............................................................855

(2)LehmansRepo105PracticeImprovedtheFirmsPublicBalance

SheetProfileatQuarterEnd .....................................................................856

(a)ContemporaneousDocumentsConfirmThatLehman

UndertookRepo105TransactionstoReduceItsBalance

SheetandReverseEngineerItsLeverage..........................................859

(b)WitnessStatementstotheExaminerRegardingtheTrue

Purposeof

Lehmans

Repo

105

Practice............................................867

(3)QuarterEndSpikesinLehmansRepo105UsageAlsoSuggest

theTruePurposeofLehmansRepo105PracticeWasBalance

SheetManipulation.....................................................................................870

(4)Repo105TransactionsServedNoBusinessPurposeOtherThan

BalanceSheetReduction ............................................................................877


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xiv

(a)Repo105TransactionsCameataHigherCostthanOrdinary

RepoTransactions.................................................................................877

(b)WitnessesAlsoStatedThatFinancingWasNottheReal

MotiveforUndertakingRepo105Transactions...............................882

g)

TheMateriality

of

Lehmans

Repo

105

Practice ...........................................884

(1)TheRepo105ProgramExposedLehmantoPotential

ReputationalRisk....................................................................................884

(2)LehmansRepo105PracticeHadaMaterialImpacton

LehmansNetLeverageRatio...................................................................888

(a)LehmanSignificantlyExpandedItsRepo105PracticeinLate

2007andEarly2008 ..............................................................................890

(3)BalanceSheetTargetsforFIDBusinessesWereUnsustainable

WithouttheUseofRepo105Transactions .............................................899

(4)RatingAgenciesAdvisedtheExaminerthatLehmansAccountingTreatmentandUseofRepo105Transactionsto

ManageItsNetLeverageRatioWouldHaveBeenRelevant

Information ..................................................................................................902

(5)GovernmentRegulatorsHadNoKnowledgeofLehmansRepo

105Program.................................................................................................910

(a)OfficialsfromtheFederalReserveBankWouldHave

WantedtoKnowaboutLehmansUseofRepo105

Transactions...........................................................................................910

(b)SecuritiesandExchangeCommissionCSEMonitorsWere

UnawareofLehmansRepo105Program.........................................913

h) KnowledgeofLehmansRepo105ProgramattheHighestLevelsof

theFirm ..............................................................................................................914

(1)RichardFuld,FormerChiefExecutiveOfficer .......................................917

(2)LehmansFormerChiefFinancialOfficers .............................................921

(a)ChrisOMeara,FormerChiefFinancialOfficer ...............................921

(b)ErinCallan,FormerChiefFinancialOfficer......................................930

(c)Ian

Lowitt,

Former

Chief

Financial

Officer .......................................937

(3)LehmansBoardofDirectors.....................................................................945

i) Ernst&YoungsKnowledgeofLehmansRepo105Program ..................948

(1)Ernst&YoungsComfortwithLehmansRepo105Accounting

Policy.............................................................................................................948

(2)TheNettingGrid.....................................................................................951


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xv

(a)QuarterlyReviewandAudit...............................................................953

(3)Ernst&YoungWouldNotOpineontheMaterialityof

LehmansRepo105Usage.........................................................................954

(4)MatthewLeesStatementsRegardingRepo105toErnst&

Young............................................................................................................956

(5)AccountingMotivatedTransactions........................................................962

j) TheExaminersConclusions ...........................................................................962

(1)Materiality....................................................................................................963

(a)WhetherLehmansRepo105TransactionsTechnically

CompliedwithSFAS140DoesNotImpactWhethera

ColorableClaimExists .........................................................................964

(2)DisclosureRequirementsandAnalysis...................................................967

(a)

Disclosure

Obligations:

Regulation

S

K

and

the

MD&A ...............968

(b)DutytoDisclose ....................................................................................972

(c) LehmansPublicFilings.......................................................................973

(i) SummaryofLehmans2000through2007PublicFilings........974

(ii) Lehmans2007Form10K,FirstQuarter2008Form10

Q,andSecondQuarter2008Form10Q.....................................977

a. TreatmentofRepoTransactionsandSFAS140....................978

b. NetLeverage..............................................................................980

c. Derivatives .................................................................................981

d. AReaderofLehmansForms10Kand10QWould

NotHaveBeenAbletoAscertainThatLehman

EngagedinTemporarySalesUsingLiquidSecurities ........984

(d)ConclusionsRegardingLehmansFailuretoDisclose ....................985

(3)ColorableClaims.........................................................................................990

(4)FiduciaryDutyClaims ...............................................................................991

(a)BreachofFiduciaryDutyClaimsagainstBoardofDirectors ........991

(b)BreachofFiduciaryDutyClaimsagainstSpecificLehman

Officers....................................................................................................992

(i) RichardFuld ...................................................................................996

a. ThereIsSufficientEvidencetoSupportaFindingBy

theTrierofFactThatFuldWasatLeastGrossly

NegligentinCausingLehmantoFileMisleading

PeriodicReports ........................................................................997


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xvi

(ii) ChrisOMeara ..............................................................................1002

a. ThereIsSufficientEvidenceToSupportaColorable

ClaimThatOMearaWasatLeastGrosslyNegligent

inAllowingLehmantoFileMisleadingFinancial

Statements

and

Engage

in

Material

Volumes

of

Repo

105Transactions......................................................................1007

b. ThereIsSufficientEvidenceToSupportaColorable

ClaimThatOMearaBreachedHisFiduciaryDuties

byFailingtoInformtheBoardandHisSuperiorsof

LehmansRepo105Practice..................................................1009

(iii)ErinCallan ....................................................................................1013

a. ThereIsSufficientEvidenceToSupportaFindingBy

theTrierofFactThatCallanBreachedHerFiduciary

Dutiesby

Causing

Lehman

to

Make

Materially

MisleadingStatements ...........................................................1017

b. ThereIsSufficientEvidencetoSupportaColorable

ClaimThatCallanBreachedHerFiduciaryDutyof

CarebyFailingtoInformtheBoardofDirectorsof

LehmansRepo105Program ................................................1019

(iv)IanLowitt......................................................................................1021

(c) Remedies ..............................................................................................1024

(5)MalpracticeClaimsAgainstErnst&Young .........................................1027

(a)Background

and

Legal

Standards ....................................................1028

(i) ProfessionalStandards................................................................1028

(ii) CommonLawStandards ............................................................1031

(b)ThereIsSufficientEvidencetoSupportaColorableClaim

ThatErnst&YoungWasNegligent.................................................1032

(i) MalpracticeinFailuretoAdviseAuditCommitteeof

Repo105ActivityandLeesAllegations..................................1033

(ii) Lehmans2008Forms10Q ........................................................1040

(iii)Lehmans

2007

Form

10

K ..........................................................1048

(iv)EffectonPriorFilings..................................................................1050

(v) CausationandDamages .............................................................1051

(c) PossibleDefenses ................................................................................1053


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VOLUME4SectionIII.A.5: SecuredLenders5. PotentialClaimsAgainstLehmansSecuredLenders.....................................1066

a)

Introduction

and

Executive

Summary.........................................................1066

(1)JPMorgan....................................................................................................1068

(2)Citibank ......................................................................................................1073

(3)HSBC...........................................................................................................1077

(4)OtherLenders............................................................................................1080

(5)TheFederalReserveBankofNewYork................................................1081

(6)LehmansLiquidityPool..........................................................................1082

b) LehmansDealingsWithJPMorgan.............................................................1084

(1)Facts.............................................................................................................1084

(a)OverviewofJPMorganLehmanRelationship ...............................1084

(b)TripartyRepoPriorto2008 ...............................................................1089

(c)JPMorganRestructuresItsApproachtoTripartyRisk .................1094

(d)LehmanBeginsPostingAdditionalCollateral ...............................1101

(e)JPMorganConcernOverLehmanCollateralinAugust2008 ......1105

(f) TheAugustAgreements ....................................................................1113

(g)BackgroundtotheSeptember9CollateralRequestand

September

Agreements ......................................................................1125

(h)September9CallsBetweenStevenBlackandRichardFuld ........1138

(i) SeptemberAgreements ......................................................................1143

(j) DailyLiquidityPoolUpdatesFromLehmantoJPMorgan ..........1156

(k)September11CollateralRequestPursuanttotheSeptember

Agreements..........................................................................................1158

(l) AdditionalValuationAnalysesbyJPMorganBeginning

September11........................................................................................1165

(m)LehmanRequestsforReturnofCollateral.....................................1168

(2)AnalysisofPotentialClaims ...................................................................1172

(a)TheEvidenceDoesNotSupportaColorableClaimAgainst

JPMorganforEconomicDuress........................................................1173

(i) LegalBackground:EconomicDuress .......................................1173


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xviii

(ii) ThereIsNoAvailableEvidenceofanExpressUnlawful

ThreatMadebyJPMorganinConnectionWiththe

FormationoftheSeptemberAgreements ................................1174

(iii)TheAvailableEvidenceSuggestsJPMorganDidNot

Have

an

Improper

Purpose........................................................1178

(iv)ThereWasaDegreeofNegotiationOvertheTermsof

theSeptemberAgreements ........................................................1181

(b)ThereIsInsufficientEvidencetoSupportaColorableClaim

ThattheSeptemberAgreementsAreInvalidforLackof

Consideration ......................................................................................1183

(c)ThereisSufficientEvidencetoSupporttheExistenceofa

Technical,ButNotColorable,ClaimThattheSeptember

AgreementsAreInvalidforLackofAuthority..............................1186

(i)

TonucciMay

Have

Acted

With

Apparent

Authority.............1190

(ii) ThereIsSubstantialEvidenceThatLehmanRatifiedthe

SeptemberAgreements...............................................................1193

(d)ThereIsInsufficientEvidencetoSupportaColorableClaim

ThatJPMorganFraudulentlyInducedtheSeptember

Agreements..........................................................................................1198

(e)ThereIsInsufficientEvidencetoSupportaColorableClaim

forBreachofContractoftheSeptemberAgreementsBased

onJPMorgansRefusaltoReturnCollateral ...................................1200

(i)

LegalBackground:

Contractual

Obligations

Under

SeptemberAgreements...............................................................1200

(ii) ThereWasNoWrittenNoticeforCollateralReturn..............1208

(f) ThereIsEvidencetoSupportaColorable,ButNotStrong,

ClaimThatJPMorganBreachedtheImpliedCovenantof

GoodFaithandFairDealingbyDemandingExcessive

CollateralinSeptember2008.............................................................1210

(i) LegalStandardsGoverningImpliedCovenantofGood

FaithandFairDealing.................................................................1211

(ii) ThereIsSufficientEvidenceToSupportaColorable,But

NotaStrong,ClaimThatJPMorganViolatedtheImplied

CovenantbyDemandingExcessiveCollateral .......................1214

(iii)ATrierofFactWillLikelyHavetoResolveaWaiver

Defense ..........................................................................................1220

c) LehmansDealingsWithCitigroup..............................................................1224


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xix

(1)Facts.............................................................................................................1224

(a)CitigroupProvidedContinuousLinkedSettlementService

andOtherClearingandSettlementOperationstoLehman.........1224

(i) BackgroundInformationontheContinuousLinked

SettlementService

Citi

Provided

to

Lehman...........................1224

(ii) OtherClearingandSettlementServicesThatCiti

ProvidedtoLehman....................................................................1227

(iii)CitisClearingandSettlementExposuretoLehman,

Generally.......................................................................................1229

(iv)TheTermsofLehmansCLSAgreementwithCiti.................1231

(b)LehmanProvideda$2BillionCashDepositwithCition

June12,2008ToSupportitsClearingNeeds..................................1233

(i) TheMarketEnvironmentandOtherCircumstances

SurroundingCitisRequestforthe$2BillionCashDepositonJune12.......................................................................1235

(ii) ThePartiesDidNotSharetheSameUnderstandingof

theTermsofthe$2BillionCashDeposit .................................1242

a. WhatLehmanUnderstoodtheTermsoftheDeposit

ToBe..........................................................................................1243

b. WhatCitiUnderstoodtheTermsoftheDepositToBe.....1245

c. TheExactTermsoftheComfortDepositAre

Unknown

Because

the

Terms

Were

Not

Reduced

to

Writing......................................................................................1250

(iii)CitiKnewtheComfortDepositwasIncludedin

LehmansLiquidityPool ............................................................1250

(c) CollateralPledgeDiscussionsBetweenLehmanandCiti

BeganinJune2008andContinuedUntilSeptember2008 ...........1251

(i) TheUnexecutedPledgeAgreement: thePartiesAgreed

toNegotiatetheTermsbutNotExecutetheAgreement

UntilItWasNeeded....................................................................1251

(ii)

CitiHad

Difficulty

Pricing

the

Collateral

Offered

by

LehmanasaSubstitutefortheCashDeposit..........................1254

(iii)TheGuarantyAmendmentWasSignedinaFireDrill

onSeptember9,2008...................................................................1261

a. EventsPriortotheSigningoftheSeptember9

GuarantyAmendmentfromCitisPerspective..................1263


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xx

b. EventsPriortotheSigningoftheSeptember9

GuarantyAmendmentfromLehmansPerspective..........1265

c. NegotiationsBetweenLehmanandCitiPersonnel

RegardingWhichLehmanEntitiesWereToBeAdded

to

the

Parent

Guaranty

by

the

September

9

Guaranty

Amendment .............................................................................1268

(iv)September12,2008:ALehmanCollateralAccountatCiti

wasActivatedAfterTwoMonthsofDiscussion,and

LehmanSignedanAmendmenttotheDirectCustodial

ServicesAgreement .....................................................................1273

(d)LehmansClearingEnvironmentatCitiDuringtheWeekof

September8,2008................................................................................1276

(i) CitiRequiredLehmanToOperateUnderLower

DaylightOverdraft

Limits..........................................................1276

(ii) LehmanDepositedAmountsinExcessofthe$2Billion

DepositatVariousTimesin2008WithCiti.............................1279

(iii)CitiEndeavoredToHelpLehmaninSeptember2008,

PriortotheBankruptcyFiling ...................................................1281

(iv)LehmansAccountsatCitiClosedonFridaySeptember

12WithFundsinExcessofthe$2BillionDeposit..................1284

(e)CitisParticipationinLehmanWeekendEvents........................1285

(f) CitisActionsTowardLehmanAfterLehmanFiledfor

BankruptcyProtection........................................................................1287

(i) CitiContinuedtoProvideCLSServicesforLehman,But

NotinanEntirelyUninterruptedManner...............................1287

(ii) PriortoLehmansBankruptcyFiling,CitiSetOffa

PortionoftheCashDeposit .......................................................1290

(2)AnalysisofPotentialColorableClaims .................................................1291

(a)ValidityoftheSeptember9GuarantyAmendment......................1291

(i) EconomicDuress..........................................................................1291

a.

LegalFramework ....................................................................1292

b. TheEvidenceDoesNotSupporttheExistenceofa

ColorableClaimAgainstCitiforEconomicDuress ..........1293

(ii) TheFailureofConsideration......................................................1297

a. LegalFramework ....................................................................1298


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xxi

b. TheEvidenceDoesNotSupporttheExistenceofa

ColorableClaimAgainstCitiforFailureof

Consideration ..........................................................................1298

(b)BreachoftheDutyofGoodFaithandFairDealingin

Connection

With

the

CLS

Services

Agreement ..............................1300

(i) TheEvidenceDoesNotSupporttheExistenceofa

ColorableClaimAgainstCitiforBreachoftheDutyof

GoodFaithandFairDealinginConnectionWiththe

CLSServicesAgreement.............................................................1301

d) LehmansDealingsWithHSBC ....................................................................1303

(1)OverviewofHSBCsRelationshipWithLehman ................................1305

(a)HSBCProvidedCRESTClearingandSettlementServicesto

Lehman.................................................................................................1306

(b)Overview

of

the

Operative

Agreements..........................................1309

(2)TheExaminersInvestigationofParticularTransactions ...................1311

(a)HSBCCancelleda$1BillionIntradayCreditFacility ...................1311

(b)LehmanMaintaineda$1BillionSegregatedDepositwith

HSBC.....................................................................................................1312

(c) LehmanDeposited$750MillionwithHSBConJune24...............1314

(d)LehmanCommitted$25MilliononAugust15toHSBCs

SyndicatedLendingFacility..............................................................1315

(e)Lehman

Pledged

$6

Million

to

HSBC

as

Collateral

for

Letters

ofCredit................................................................................................1317

(f) OtherSignificantExposures..............................................................1318

(3)HSBCRequiredLehmantoProvideApproximately$1Billionin

CollateralWhileQuietlyEndingTheirRelationship...........................1319

(a)HSBCDeterminedtoEndItsRelationshipwithLehman.............1319

(b)HSBCDemandedCollateralforIntradayCredit ...........................1322

(c) HSBCAgreedToAccommodateLehmanatQuarterEnd ...........1325

(d)

Lehman

Deposited

the

Cash

Collateral

With

HSBC......................1326

(e)LehmanNegotiatedNewTermsandExecutedtheCash

Deeds ....................................................................................................1327

(i) LehmanSecuredConcessionsintheU.K.CashDeeds..........1327

(ii) LehmanExecutedtheHongKongCashDeedLateon

September12 ................................................................................1329


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xxii

(f) HSBCandLBHIStipulatedToSetoffandReturnSomeofthe

FundsCoveredbytheU.K.CashDeeds .........................................1332

(4)OtherIssuesStemmingfromHSBCsCollateralDemand..................1333

(a)LehmanIncludedtheDepositsCoveredbytheCashDeeds

inIts

Reported

Liquidity

Pool...........................................................1333

(b)HSBCConsideredWithholdingPaymentsorRequiring

PrefundingofTradesintheAsiaPacificRegionPriorto

LehmansBankruptcy ........................................................................1336

(5)TheEvidenceDoesNotSupporttheExistenceofColorable

ClaimsArisingFromHSBCsDemandThatLehmanProvide

CashCollateralandExecuteCashDeedsinOrderforHSBCto

ContinueProvidingClearingandSettlementServices .......................1336

(a)TheParametersoftheExaminersAnalysis....................................1336

(b)The

Facts

Provide

Little

to

No

Support

for

Invalidating

the

U.K.CashDeeds..................................................................................1339

(i) AnalyticalFramework ................................................................1339

a. EnglishLawGovernsContractClaimsArisingfrom

theU.K.CashDeeds...............................................................1339

b. EnglishContractLawTreatsDeedsDifferentlyfrom

OtherContracts .......................................................................1340

(ii) TheEvidenceDoesNotSupporttheExistenceofa

ColorableClaimThattheU.K.CashDeedsAreInvalid

forWantofConsideration..........................................................1341

(iii)TheEvidenceDoesNotSupporttheExistenceofa

ColorableClaimforEconomicDuressBecausethe

CRESTAgreementAllowedHSBCToCeaseClearing

andSettlementatItsAbsoluteDiscretion................................1343

a. ElementsofEconomicDuress...............................................1343

b. ApplicationtoLehmanFacts ................................................1344

c. OtherTransactionsDoNotGiveRisetoEconomic

DuressClaims..........................................................................1346

(iv)TheEvidenceDoesNotSupporttheExistenceofa

ColorableClaimthatHSBCViolatedaDutyofGood

FaithandFairDealingbyDemandingCashCollateral.........1348

a. EnglishLawDoesNotRecognizeaPrincipleofGood

FaithandFairDealingofGeneralApplication ..................1349


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xxiii


(v) TheEvidenceDoesNotSupporttheExistenceofa

ColorableClaimthatHSBCViolatedtheNotice

ProvisionoftheCRESTAgreement..........................................1352

a.

Constructionof

Terms............................................................1352


(vi)TheCashDeedsWereNotContractsofAdhesionor

StandardFormContracts............................................................1355

a. CharacteristicsofStandardFormContractsor

ContractsofAdhesion............................................................1355


(c) OtherPotentialTheoriesofLiability................................................1357

(i)

English

Law

Governs

the

Remaining

Potential

Claims

EvenThoughTheyAreNotCoveredbytheChoiceof

LawProvisionoftheCashDeeds..............................................1357

a. AnalyticalFramework............................................................1357

b. ApplicationtoRemainingPotentialClaims........................1359

(ii) TheEvidenceDoesNotSupportTheExistenceOfa

ColorableClaimForUnjustEnrichmentBecause

LehmanConveyedaBenefitonHSBCPursuantto

LehmansValidContractualObligations.................................1360

a.

Elementsof

Unjust

Enrichment ............................................1361


(iii)TheEvidenceDoesNotSupportaColorableClaimThat

HSBCBreachedaFiduciaryDutytoLehmanBecause

HSBCandLehmanWereSophisticatedPartiesina

RelationshipGovernedbyanAgreementThatLimited

HSBCsObligations .....................................................................1363

a. ElementsofBreachofFiduciaryDutyand

Misappropriation ....................................................................1364

b.

Applicationto

Lehman

Facts ................................................1365

(iv)TheEvidenceDoesNotSupportaColorableClaimthat

HSBCsDemandforCollateralTortiouslyInterfered

WithLehmansOtherBusinessorContractsBecause

HSBCWasActingToProtectItsOwnEconomic

Interests .........................................................................................1367


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xxiv

a. ElementsofTortiousInterference ........................................1368


(v) TheEvidenceDoesNotSupportaFindingthatHSBC

FraudulentlyorNegligentlyMisrepresentedItsPlanto

Withdraw ......................................................................................1371

a. ElementsofFraudandMisrepresentation..........................1371


e) LehmansDealingsWithBankofAmerica .................................................1375

f) LehmansDealingswithBankofNewYorkMellon .................................1376

(1)BNYMDemandsandReceivesaCollateralDeposit ...........................1377

(2)TheDepositIsSignificantBecauseofInternalLehmanConcerns

AboutIncludingItinItsPool..................................................................1379

g)

LehmansDealings

With

Standard

Bank.....................................................1382

h) LehmansDealingsWiththeFederalReserveBankofNewYork ..........1385

(1)TheFRBNYSupervisesDepositTakingInstitutionsandAssists

inManagingMonetaryPolicy,butLacksAuthorityToRegulate

InvestmentBankHoldingCompanies...................................................1385

(2)InResponsetotheBearStearnsNearCollapse,theFRBNY

CreatedaVarietyofFacilitiesToBackstoptheLiquidityof

BrokerDealers;Lehman,InTurn,DrewonTheseFacilities..............1387

(a)ThePrimaryDealerCreditFacility ..................................................1387

(b)The

Market

Greeted

the

Creation

of

the

PDCF

as

aPositive

StepTowardBackstoppingBrokerDealerLiquidity,andas

ShoringUpLehmansLiquidity .......................................................1390

(c) InAdditiontoaLiquidityBackstop,LehmanViewedthe

PDCFasanOutletforItsIlliquidPositions....................................1392

(d)LehmanWasReluctanttoDrawonthePDCFBecauseofa

PerceivedStigmaAttachedtoBorrowingfromtheFacility.....1396

(e)LehmanAccessedthePDCFTenTimesin2008;Lehmans

UseofthePDCFWasConcentratedinPeriodsImmediately

Afterthe

Bear

Stearns

Near

Collapse,

and

Immediately

After

LBHIFiledforBankruptcy ................................................................1398

(3)OtherFRBNYLiquidityFacilities ...........................................................1400

(a)TheTermSecuredLendingFacility .................................................1400

(b)OpenMarketsOperations..................................................................1401

i) LehmansLiquidityPool................................................................................1401


27/239

xxv

(1)IntroductionandExecutiveSummary...................................................1401

(2)TheImportanceofLiquiditytoBrokerDealersandInvestment

BankHoldingCompaniesGenerally .....................................................1406

(3)LehmansLiquidityPool..........................................................................1408

(a)The

Purpose

and

Composition

of

Lehmans

Liquidity

Pool........1408

(b)LehmanTestedItsLiquidityPoolandSharedtheResultsof

TheseTestswithRatingAgencies ....................................................1413

(c) MarketParticipantsFormedFavorableOpinionsof

LehmansLiquidityontheBasisofLehmans

RepresentationsAboutItsLiquidityPool.......................................1415

(4)LehmansClearingBanksSoughtCollateralPledgesandCash

DepositsToSecureIntradayCreditRisk;LehmanIncludedThis

CollateralinItsLiquidityPool................................................................1417

(a)LehmanPledgedCLOsandOtherSecuritiestoJPMorganThroughouttheSummerof2008toMeetTripartyRepo

MarginRequirements.........................................................................1417

(b)TheSecuritiesPostedtoMeetJPMorgansMargin

RequirementsWereIncludedinLehmansLiquidityPool ..........1422

(c) OnJune12,2008,LehmanTransferred$2BilliontoCitias

ComfortforContinuingCLSSettlement.....................................1424

(d)TheCitiComfortDepositWasIncludedinLehmans

LiquidityPool......................................................................................1430

(e)OnAugust25,2008,LehmanExecutedaSecurityAgreement

withBankofAmerica,GrantingtheBankaSecurityInterest

ina$500MillionDeposit ...................................................................1433

(f) LBHIandJPMorganExecutedanAmendmenttotheJune

2000ClearanceAgreement,aSecurityAgreementanda

HoldingCompanyGuaranty,allDatedAugust26,2008.............1436

(g)LehmanAssetsSubjecttotheAugustSecurityAgreement

WereIncludedinLehmansLiquidityPool....................................1439

(h)September

2,

2008:

Lehman

Transferred

Just

Under

$1

Billion

toHSBCtoContinueClearingOperations,andEncumbered

ThiswithCashDeedsExecutedonSeptember9and

September12........................................................................................1441

(i) TheHSBCDepositWasRepresentedasLiquidandWas

IncludedinLBHIsLiquidityPool ...................................................1446


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xxvi

(j) LehmanandJPMorganExecutedAnotherRoundofSecurity

DocumentationDatedSeptember9,2008;LehmanMade$3.6

Billionand$5BillionPledgestoJPMorganSubjecttothe

TermsofTheseAgreements..............................................................1446

(k)

Lehman

Made

a

Deposit

to

Bank

of

New

York

Mellon

to

CoverIntradayExposure,andIncludedThatDepositinIts

LiquidityPool......................................................................................1448

(l) TheCumulativeImpactofLehmansInclusionofClearing

BankCollateralandDepositsinItsLiquidityPool........................1450

(5)DisclosuresConcerningtheInclusionofClearingBank

CollateralinLehmansLiquidityPool...................................................1454

(a)LehmanDidNotDiscloseonItsJune16,2008Second

QuarterEarningsCallThatItWasIncludingthe$2Billion

CitiComfort

Deposit

in

Its

Liquidity

Pool..................................1454

(b)LehmanDidNotDiscloseinItsSecondQuarter200810Q,

FiledJuly10,2008,ThatItWasIncludingBoththe$2Billion

CitibankComfortDepositandApproximately$5.5Billion

ofSecuritiesCollateralPledgedtoJPMorganinItsLiquidity

Pool........................................................................................................1455

(c) LehmanDidNotDiscloseOnItsSeptember10,2008

EarningsCallThataSubstantialPortionofItsLiquidityPool

WasEncumberedbyClearingBankPledges .................................1457

(d)Senior

Executives

Did

Not

Disclose

to

the

Board

of

Directors

attheSeptember9,2008FinanceCommitteeMeetingthe

FactThataSubstantialPortionofItsLiquidityPoolWas

EncumberedbyClearingBankPledges ..........................................1460

(e)LehmanOfficersDidNotDisclosetotheBoardofDirectors

ThatItsLiquidityPositionWasSubstantiallyImpairedby

CollateralHeldatClearingBanksUntiltheEveningof

September14,2008..............................................................................1464

(f) LowittsViewsonIncludingClearingBankCollateralinthe

LiquidityPool......................................................................................1466

(6)RatingAgenciesWereUnawareThatLehmanWasIncluding

ClearingBankCollateralinItsLiquidityPool .....................................1467

(a)Fitch.......................................................................................................1467

(b)Standard&Poors...............................................................................1468

(c) Moodys................................................................................................1469


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xxvii

(7)TheFRBNYDidNotViewtheClearingBankCollateralinthe

LiquidityPoolasUnencumbered.......................................................1469

(8)TheSEC,LehmansPrimaryRegulator,WasUnawareofthe

ExtenttoWhichLehmanWasIncludingClearingBank

Collateral

in

Its

Liquidity

Pool;

to

the

Extent

It

Was

Aware,

the

SECDidNotViewThisPracticeasProper...........................................1472

(9)CertainLehmanCounselWereAwareThatAgreementswithIts

ClearingBanksWereStructuredtoIncludeClearingBank

CollateralinItsLiquidityPool,butDisclaimedKnowledge

ConcerningWhatAssetsWereAppropriateorInappropriatefor

theLiquidityPool .....................................................................................1476

(10)LehmansAuditorsMonitoredLehmansLiquidityPool,but

ViewedtheCompositionofthePoolasaRegulatoryIssue...............1478

(11)There

Is

Insufficient

Evidence

To

Support

aDetermination

ThatAnyOfficerorDirectorBreachedaFiduciaryDutyin

ConnectionWiththePublicDisclosureofLehmansLiquidity

Pool..............................................................................................................1479

VOLUME4(CONT.)SectionIII.A.6: Government6. TheInteractionBetweenLehmanandtheGovernment .................................1482

a)

Introduction .....................................................................................................1482

b) TheSECsOversightofLehman...................................................................1484

(1)TheCSEProgram......................................................................................1484

(2)LehmansParticipationintheCSEProgram ........................................1487

(3)TheSEC/OIGFindings.............................................................................1490

(4)TheViewFromtheTop ...........................................................................1492

c) TheFRBNYsOversightofLehman.............................................................1494

d) TheFederalReservesOversightofLehman ..............................................1502

e)

TheTreasury

Departments

Oversight

of

Lehman ....................................1505

f) TheRelationshipoftheSECandFRBNYinMonitoringLehmans

Liquidity...........................................................................................................1507

(1)TheSECPerformedOnlyLimitedMonitoringofLehmans

LiquidityPool............................................................................................1508


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xxviii

(2)TheSECandFRBNYDidNotAlwaysShareInformationAbout

Lehman.......................................................................................................1511

g) TheGovernmentsPreparationfortheLehmanWeekend

MeetingsattheFRBNY..................................................................................1516

h)

Onthe

Evening

of

Friday,

September

12,

2008,

the

Government

ConvenedaMeetingoftheMajorWallStreetFirmsinanAttempt

toFacilitatetheRescueofLehman...............................................................1523

i) LehmansBankruptcyFiling .........................................................................1535

VOLUME5SectionIII.B: AvoidanceActions

B. AreThereAdministrativeClaimsorColorableClaimsforPreferencesor

VoidableTransfers......................................................................................................1544

1. ExecutiveSummary..............................................................................................1544

2. ExaminersInvestigationofPossibleAdministrativeClaimsAgainst

LBHI(FirstBullet).................................................................................................1546

a) Summary ..........................................................................................................1546

b) Introduction .....................................................................................................1547

c) LehmansCashManagementSystem ..........................................................1549

(1)LBHIsRoleasCentralBanker................................................................1550

(2)

Global

Cash

and

Collateral

Management .............................................1551

(3)LehmansExternalandVirtualBankAccounts....................................1554

(4)BankAccountReconciliations.................................................................1560

d) EffectoftheBankruptcyontheCashManagementSystem.....................1562

e) CashTransfersGivingRisetoAdministrativeClaims..............................1564

(1)CashTransfersfromLBHIAffiliatestoLBHI.......................................1565

(2)CashReceivedbyLBHIonBehalfofLBHIAffiliates..........................1566

(3)OtherRelevantTransactions ...................................................................1568

3.

Examiners

Investigation

of

Possible

Avoidance

Actions

(Third,

Fourth

andEighthBullets)................................................................................................1570

a) Summary ..........................................................................................................1570

b) LBHISolvencyAnalysis.................................................................................1570

(1)Introduction ...............................................................................................1570

(2)MarketBasedValuationAnalysis..........................................................1573


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(a)BasisforUtilizationofaMarketBasedValuationAnalysis.........1573

(b)MarketValueofAssetsApproach....................................................1577

(i) ImpliedAssetValue ....................................................................1578

(ii) SmallEquityCushion..................................................................1580

(iii)Limitations

of

the

Market

Based

Approach.............................1581

a. ApplicationofRetrojection....................................................1583

b. TheApplicationofCurrentAwareness...........................1584

(3)Conclusion .................................................................................................1587

c) LBHIAffiliateSolvencyAnalysis .................................................................1587

(1)Summary ....................................................................................................1587

(2)DescriptionoftheExaminersAnalysis.................................................1595

(3)DebtorbyDebtorAnalysis .....................................................................1610

(a)Lehman

Commercial

Paper

Inc.........................................................1610

(b)CESAviation,CESAviationVLLC,CESAviationIX ..................1615

(c) LBSpecialFinancing...........................................................................1618

(d)LBCommodityServices.....................................................................1622

(e)LuxembourgResidentialPropertiesLoanFinanceS.A.R.L..........1627

(f) LBOTCDerivatives............................................................................1628

(g)LB745LLC...........................................................................................1629

(h)LBDerivativeProducts ......................................................................1631

(i)

LBFinancial

Products.........................................................................1633

(j) LBCommercialCorporation .............................................................1635

(k)BNCMortgageLLC............................................................................1638

(l) EastDoverLimited .............................................................................1638

(m)LehmanScottishFinance ..................................................................1640

(n)PAMIStatlerArms..............................................................................1641

d) UnreasonablySmallCapital..........................................................................1642

(1)Summary ....................................................................................................1645

(2)AnalysisoftheUnreasonablySmallCapitalTest ............................1648

(a)SummaryofLegalStandard..............................................................1648

(b)LehmansCountercyclicalStrategy..................................................1650

(c) LehmansRepoBookandLiquidityRisk........................................1654

(i) BearStearnsDemonstratestheLiquidityRiskAssociated

WithRepoFinancing...................................................................1656


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(ii) QualityandTenorofLehmansRepoBook.............................1658

(d)DeleveragingtoWinBackMarketConfidence ..........................1662

(e)BeginningintheThirdQuarterof2008,LehmanCouldHave

ReasonablyAnticipatedaLossofConfidenceWhichWould

HaveTriggered

Its

Liquidity

Risk....................................................1665

(f) LehmanWasNotSufficientlyPreparedtoAbsorba

LiquidityCrisisMarkedbyaSuddenLossofNon

Government,NonAgencyRepoFunding ......................................1674

(i) LehmansLiquidityPool ............................................................1675

(ii) LiquidityStressTests ..................................................................1678

(iii)OtherCapitalAdequacyMetrics...............................................1687

a. CashCapitalSurplus..............................................................1687

b.

Equity

Adequacy

Framework...............................................1688

c. CSECapitalRatio....................................................................1690

(g)LBHIAffiliateUnreasonablySmallCapitalAnalysis................1692

e) InsiderPreferencesAgainstLBHI(ThirdBullet) .......................................1694

(1)Summary ....................................................................................................1694

(2)LegalSummary .........................................................................................1696

(3)SourcesofPotentialPreferentialActivity..............................................1698

(4)DeterminationsandAssumptionsonSection547(b)Elements .........1705

(5)

Scope

of

Defenses

Under

Section

547(c) ................................................1710

(6)FindingsforLBSF......................................................................................1713

(7)FindingsforLBCS.....................................................................................1718

(8)FindingsforLCPI......................................................................................1722

f) PreferencesAgainstNonLBHILehmanAffiliates(FourthBullet).........1730

g) AvoidanceAnalysisofLBHIandLBHIAffiliatesAgainstFinancial

ParticipantsandPreChapter11Lenders(FourthandEighth

Bullets) ..............................................................................................................1731

(1)Summary ....................................................