NEW YORK — A judge Wednesday approved a deal tentatively resolving a $7.68 billion claim JPMorgan Chase & Co. has against Lehman Brothers Holdings Inc. stemming from controversial collateral demands made by JPMorgan.
The settlement, approved by the judge overseeing Lehman's bankruptcy case, allows JPMorgan to keep $7.1 billion in cash collateral it's holding while transferring a pool of illiquid securities to Lehman that Lehman says could be worth billions of dollars.
Judge James Peck of the U.S. Bankruptcy Court in Manhattan raised a number of questions about the agreement at a court hearing Wednesday. The judge wondered why Lehman was paying off one of its largest secured creditors instead of wrapping the deal into a bankruptcy plan that would satisfy all creditor claims at once.
"I have a lot of concerns about it," Peck said. "The transaction is highly unusual."
But the judge ultimately approved the agreement, saying he was satisfied that it doesn't prevent Lehman from later challenging JPMorgan's claims and attempting to reduce them.
"There are no substantive rights that are being given up, your honor," Harvey Miller, Lehman's bankruptcy lawyer told Peck.
Before Lehman's bankruptcy filing in September 2008, JPMorgan acted as clearing bank for Lehman's broker-dealer unit and required the posting of collateral under the agreement. As Lehman teetered in the summer of 2008, JPMorgan demanded more and more collateral.
Those collateral demands came under fire in a report released last week by the court-appointed examiner that investigated Lehman's historic failure. In the report, the examiner, Anton Valukas, said Lehman may have a legal claim against JPMorgan for making "excessive collateral requests" before Lehman's collapse.
After Lehman's bankruptcy filing, JPMorgan initially filed claims demanding more than $29 billion. Miller said those claims were tied to clearing services, derivatives, repurchase agreements, securities lending, and other items. J.P. has liquidated much of the collateral it was holding to reduce its total claims against Lehman to $7.68 billion, Miller said.
Under the agreement, JPMorgan will take about $7.1 billion in cash collateral it's holding and reduce its claim against Lehman from $7.68 billion to about $550 million. Lehman will then make a $550 million cash payment to JPMorgan.
In exchange, JPMorgan will transfer to Lehman the pool illiquid securities, which Lehman said have "an aggregate face value in the billions of dollars." Lehman said they require "long-term management to enhance recoveries."
Under Lehman's plan to repay creditors, it plans to set up an asset management company that will exist outside of bankruptcy and will oversee a portfolio of Lehman assets.