The Fed's Backup Plan(s) for Lehman

Here are the last of the documents from the Lehman Examiner's Report that I found interesting (or at least the last ones that I'm planning to post). The first is a list of the top 25 Lehman counterparties by exposure. (CCE is current credit exposure; MPE is maximum potential exposure.) The two counterparties with the highest exposure to Lehman? The Italian government, and Berkshire Hathaway (BH Finance LLC is a Berkshire sub).



Counterparties' Exposure to Lehman (May 31, 2008)

The next two documents are the two backup plans that the Fed had for dealing with a Lehman failure. The first plan is called "Managing a Loss of Confidence in a Major Tri-Party Repo Borrower," and is dated July 11, 2008. While it initially talks about primary dealers in general, it goes on to calculate the financial impact of the plan in the event of a Lehman failure, and was very clearly developed for Lehman. The second is a good bank/bad bank plan, and involves the Fed setting up a Bear Stearns-style SPV. Had the FSA allowed Barclays to buy Lehman, and had the Wall Street consortium been unwilling to fund the entire "bad bank" to facilitate the Barclays sale, it's quite likely that the Fed would have implemented this plan. But, of course, when the time came, BofA bailed on Lehman for Merrill, and the FSA refused to let Barclays purchase Lehman.



NY Fed - Backup Plan for Lehman (July 11, 2008)

NY Fed - Lehman SPV-Style Proposal (July 15, 2008)

Next is an email exchange between Fed Vice Chairman Don Kohn and Ben Bernanke on Lehman from June 2008. The whole thing is interesting, but the most interesting part is when Kohn says to Bernanke: "One of the hedge fund types on Cape Cod told me that his colleagues think Lehman can't survive—the question is when and how they go out of business not whether. He claimed this was a Widely shared view on the Street."



Fed - Kohn Email Exchange With Bernanke on Lehman (June 12-13, 2008) Last but not least, here's an internal JPMorgan presentation detailing JPM's exposure to Lehman as of Sept. 5, 2008. This is just interesting from a data standpoint, especially because JPM was Lehman's main clearing bank. It also partly explains why JPM decided to make their infamous $5bn collateral call on the Thursday before Lehman failed — even before JPM marked down the value of Lehman's clearing bank collateral, they had a $3bn exposure to Lehman.

JPMorgan - Lehman Exposure Summary (Sept. 5, 2008)