Lehman took $18 bn from secret Fed programme

Lehman Brothers Holdings’ brokerage borrowed as much as $18 billion in four separate loans from a previously secret programme of the US Federal Reserve in June 2008, three months before its parent filed the biggest bankruptcy in US history.

The programme, which peaked at $80 billion in loans outstanding, was known as the Fed’s single-tranche open-market operations, or ST OMO. It made 28-day loans to units of 19 banks from March 7, 2008, to December 30, 2008. Bloomberg reported on ST OMO in May, after the Fed released incomplete records on the programme. In response to a subsequent Freedom of Information Act request for details, the central bank disclosed borrower names, amounts borrowed and interest rates.

The Lehman brokerage, Lehman Brothers, tapped the ST OMO programme for as much as $5 billion in short term funding in March 2008, and lower amounts at other times during the month. It took as much as $10 billion in June as the credit crisis worsened, according to Fed data. The maximum outstanding for any period was $18 billion.

The brokerage agreed on September 18, 2008, to pay outstanding loans that day, the Fed said. It went into liquidation on September 19, four days after its parent.

REPORTS OF DEMISE
Separately, the Lehman parent then run by Chief Executive Officer Richard Fuld had a $45 billion loan from the Fed’s so-called Primary Dealer Credit Facility around the time of its bankruptcy. An August 2009 article in a Federal Reserve Bank of New York publication said the Fed’s facility was expanded on September 14, 2008, in response to reports that Lehman was “only days away” from bankruptcy, and might put other firms at risk.

The day before Lehman filed for bankruptcy, almost all of its $41 billion cash pool was tied up at bank lenders including JPMorgan Chase & Co, Citigroup and Bank of America, according to a bankruptcy examiner’s report.

Expanding its facility to lend to Lehman, the Fed took previously unacceptable collateral for its loans, including non-investment grade securities and equities, according to the article, “The Federal Reserve’s Primary Dealer Credit Facility”.

Concerned about the safety of the loan, the Fed told Barclays to take over the loan when it bought the defunct investment bank’s North American business, according to court testimony. Barclays closed its purchase of Lehman’s business a week after Lehman’s September 15, 2008 bankruptcy.

BARCLAYS CAPITAL
Separately, the UK bank’s Barclays Capital unit had peak loans from the ST OMO programme of $21.4 billion, Fed data shows.

Kimberly Macleod, a Lehman spokeswoman, didn’t immediately respond to e-mails seeking comment yesterday. Michael O’Looney, a Barclays spokesman, declined to comment.

Lehman failed because of too much leverage, which it tried to hide, and risky real-estate lending, according to bankruptcy examiner Anton Valukas.