The ghost of Lehman Brothers tries to drag JP Morgan’s whale into court

February 28, 2013
February 28, 2013

Bruno Iksil, the trader blamed for amassing a massive position that caused some $6.2 billion in losses JP Morgan last year, is under fire yet again. And this time, JP Morgan is actually arguing in his defense. The now defunct remains of Lehman Brothers—at one time, Wall Street’s fourth-largest bank—are trying to draw Iksil into bankruptcy proceedings, alleging that the trader could have had something to do with an event connected with the collapse of Lehman Brothers.

A little background: On Sept. 9, 2008, JP Morgan allegedly asked Lehman to increase the collateral it had pledged against positions it had with JP Morgan. At that time, Lehman Brothers was taking a beating in the markets and swiftly losing credibility. Therefore, JP Morgan wanted to make sure its exposure to Lehman was covered in case the bank failed. That collateral call was the first of two that JP Morgan made right before Lehman collapsed—finally totaling $8.6 billion.

Although consensus from the court and from former US Treasury secretary Timothy Geithner indicates that JP Morgan’s collateral calls alone probably weren’t enough to trigger Lehman’s collapse, a run on Lehman’s funding ultimately left it illiquid and unable to continue operating. Now in bankruptcy court, Lehman would like to get that $8.6 billion back to pay toward some of the $65 billion it still owes creditors.

Which is where Iksil, known as the London Whale, comes in. US investigators are looking into whether he and other traders at JP Morgan’s chief investment office deliberately mismarked the value of its positions to cover up losses and flout the bank’s risk management practices. In the “whale” trade, they would have done this because they believed those positions would ultimately succeed. But they could potentially have done the same thing to Lehman. As the counterparty to Lehman on various trades, JP Morgan could have overestimated the value of its positions in order to force Lehman to cough up more cash. If true, this would amount to fraud.

Iksil is a French citizen, and his lawyers have made clear he’ll only testify if he receives an official request from the US court. Lehman submitted filings to the bankruptcy court in Manhattan to ask for that request last night. JP Morgan is arguing that Iksil had nothing to do with the 2008 collateral calls, claiming that Lehman is only interested in dragging him into this because “he has been in the news.”

And now here is, in the news again.

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