Lehman: Don’t Blame Canada: Blame Iksil!

Derivatives, Regulatory 04 Mar 2013

Admirers of the television show South Park, and especially of the 1999 movie of the same name, will remember the glee with which the people of the titular Colorado town – and eventually, those of the whole United States – decided to blame all of their troubles on Canada: “We must blame them and cause a fuss/ Before somebody thinks of blaming us.”

In some circles, it would seem, the “London whale,” Bruno Iksil, has attained the same significance as has Canada.  Iksil worked for JPMorgan, and JPMorgan was the main clearing bank for Lehman in the frantic days before Lehman’s bankruptcy filing in September 2008. Thus: Blame Iksil!

Specifically, in the course of an adversary proceeding between Lehman Brothers and JPMorgan, Lehman has applied for a letter of request for international judicial assistance. In effect, the bankrupt investment bank seeks a sworn deposition of the man who became known a year ago as The London Whale. Concerning events almost four years before that.

The adversary proceeding itself [in U.S. Bankruptcy Court for the Southern District of New York, docket 10-03266-jmp], which was filed in late May 2010, may yet raise important issues of risk management that arise out of the relationships among the major Wall Street players at times of crisis. But our point for today is that this proceeding existed for nearly two years before the name “Bruno Iksil” got into the news, and nobody at Lehman seems to have thought Iksil an especially worthy object of their consideration for the first two of those years.

Fishing in Two Lakes

In the application for its international deposition, Lehman said that the recent “public disclosures” by JPMorgan concerning the investment losses of the latter’s Chief Investment Office, “and Mr. Iksil in particular,” have revealed that they have had “a greater role in the events underlying this litigation than Plaintiffs had previously understood.”

Although Lehman may well have a ‘fishing expedition’ in mind, this isn’t Ahab sailing around the globe in search of his albino whale. Lehman has specified two fairly small topical lakes for its expedition/deposition.  It wants to ask him about whether he had a role in a dispute on September 9, 2008, when JPMorgan demanded of Lehman an additional deposit on a variation margin in a bilateral derivatives deal between the two banks. Lehman “bowed to pressure” and sent the demanded $273.3 million that day, although it was certain (and apparently still is certain) that JPMorgan’s “marks were … clearly wrong.” They believe it possible Iksil was behind the mismarking.

The other point is a bit more macro. Lehman hopes Iksil can tell them about “CIO hedges [in that period] through which JPMorgan stood to profit in the event of a Lehman bankruptcy” that will also corroborate its jaundiced view of JPMorgan’s motives at the time.

Risk Management

In a response filed February 27, JPMorgan asks the court to see that request as an example of Lehman’s “grandstanding tactics to add color to a lawsuit that is devoid of proof,” a simple matter of grabbing headlines this year by latching on to the headlines of last year.

JPMorgan doesn’t dispute that, in connection with a dispute over variation margin, Lehman posted approximately $273 million with JPMorgan as collateral on September 9, 2008.  The defendant’s brief makes these points, rather:

  • that the money in question was part of the normal give-and-take among counterparties to ISDA Master Agreements;
  • that it was returned the following day, and
  • that the problem that led to that dispute wasn’t a matter of mismarking (the supposed hook for Iksil’s involvement) but a rather an “operational failure in generating trade IDs.”

JPMorgan portrays Iksil’s involvement as tangential, and so as no basis for an international deposition. The operational posting issue was “not handled by Mr. Iksil or the CIO.”

Also, a separate matter, JPMorgan did have a macro hedge in place at the time; an S&P put position on the stock market in the event that its prices continued to decline. But Iksil had no role in this macro hedge, which was not a CIO concern.

The world’s understanding of the fall of Lehman is still taking shape, both on the tick-tock level of the specific timelines and in Big Picture terms. What is sad is not that this new move by Lehman’s lawyers fails to help us, but that it seems so blatantly a distraction and diversion that it won’t even serve to amuse observers for very long.

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