United States: Lehman Brothers Broker-Dealer Emergency Liquidity Program, 2008

On Sunday, September 14, 2008, a deal to sell the United States investment bank Lehman Brothers Holdings Inc. (LBHI) to United Kingdom-based Barclays fell apart. US authorities informed LBHI that, given the lack of rescue funds, it would need to file for bankruptcy before Monday morning to avoid additional chaos for the firm and markets. However, authorities understood Barclays was still interested in buying Lehman's broker-dealer subsidiary, Lehman Brothers Inc. (LBI). Federal Reserve and Treasury officials were concerned about the impact that the sudden failure of LBI could have on financial markets. LBI had $87 billion in secured overnight repurchase agreements (repos) that it needed its repo clearing bank, JPMorgan Chase & Co., to unwind Monday morning. For JPMorgan, unwinding those agreements--repaying Lehman's repo lenders and funding the underlying collateral--would have created substantial credit risk during the day without assurance that repo lenders would finance those transactions again that night. The Fed announced on Sunday evening an expansion of eligible collateral at its broad-based Primary Dealer Credit Facility (PDCF); this expansion ensured that LBI could use the facility to allow it to pay back repo lenders after its parent, LBHI, declared bankruptcy. LBI's access to the PDCF was on stricter terms than other primary dealers': It could borrow only on collateral it had already posted with JPMorgan on the previous Friday--and at a bigger haircut than other borrowers. In the early hours of September 15, LBHI filed for bankruptcy, and LBI borrowed $28 billion through the PDCF. Barclays agreed to take over the Federal Reserve Bank of New York's financing of LBI, in advance of the finalization of its purchase of most of LBI. This replacement transaction took place on September 18, and Barclays borrowed from the PDCF to support LBI. LBI entered Securities Investor Protection Act liquidation proceedings on September 19, and Barclays completed the purchase of most of LBI on September 22, 2008.