9/15/2017 Lehman board was kept in the dark about dwindling liquidity - Risk.

net

Lehman board was kept in the

dark about dwindling liquidity

Duncan Wood
@Duncan_Wood

12 Mar 2010

In the months leading up to its September 2008 bankruptcy filing, Lehman

Brothers repeatedly made inflated claims about the amount of liquidity it could
access - failing to disclose to analysts or its own board that billions of dollars of
assets in its liquidity pool were pledged as collateral to its clearing banks and
other counterparties, according to a report published on March 11 by a
bankruptcy court-appointed examiner.

The report concludes there is not enough evidence to support claims against
Lehman's counterparties for demanding too much collateral - nor is there
enough evidence to claim a fiduciary breach by Lehman executives.

Corporate governance expert Nell Minow believes the board should share the
blame. "Lehman's board included an actress, a Broadway producer, and an
admiral. It did not include anywhere close to adequate expertise. We knew they
did not know the answers. But what's damning in this report is that it shows they
did not even ask the right questions," she says.

On a September 10 third-quarter earnings conference call, Lehman's chief

financial officer, Ian Lowitt, said the bank's liquidity position "remains very
strong" and highlighted its $42 billion liquidity pool. However, he did not mention

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9/15/2017 Lehman board was kept in the dark about dwindling liquidity - Risk.net

the liquidity pool contained $6.7 billion of cash, money-market funds and
securitised loans that had been pledged to JP Morgan, plus a further sum of
around $3.5 billion pledged to Citigroup, Bank of America and HSBC, the report
notes.

On the evening before the conference call, Lehman's own liquidity analysis
showed the bank had access to a pool of $40.6 billion - of which it would be
easily able to sell only $25 billion.

The bank's liquidity position continued to deteriorate in the days that followed,
with billions of dollars more being posted to JP Morgan - but Lehman's own
board wasn't informed that a substantial portion of its liquidity cushion was
locked up as collateral until a meeting on the evening of September 14.

The minutes of that meeting show that Lowitt informed the board Lehman "had a
liquidity problem, with much of its liquidity tied up at clearing banks". Following
an adjournment, Lowitt gave the board more details, including the revelation that
$17 billion in assets had been posted to JP Morgan as collateral. At the end of
the meeting, the board voted to make a Chapter 11 bankruptcy filing.

Lowitt, who was appointed chief financial officer in June 2008, told the examiner
that he was "not... very attentive to what was in the liquidity pool" and did not
know what the rationale was for including collateral in the pool at the time.

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