United States Bankruptcy court (Lehman) on HSBC

Chapter 11 Case No 08-13555(JMP)
Report of Anton R. Valukas, Examiner
Volume 4 of 9

P1066-1067

Lehman's clearing banks demanded collaterial and Lehman provison of approx. $117(HKD) to $164 billion in collateral (both in cash and securities) to clearing banks.
This size of Lehman's liquidity pool encourgated conterparties to provide financing and intraday credit to Lehman. However, by Sept. 2008, much of Lehman's reported liquidity was locked up with clearing banks, and yet this fact remained undisclosed to the market prior to Lehman's bankruptcy. The clearing banks are JPMorgan, Citi, HSBC, Bank of America, Bank of New York Mellon and Standard banks.

P1068-1069

Lehman had posted illiquid and difficult-to-price CDO's that Lehman had self-prized as collateral to JPMorgan because JPMorgan was conerned about LCPI (not LBI or its holding company)to cover JPMorgan's risk-based margin. Lehamn transferred much of this collaterial from LCPI to LBHI in early August to alleviate JPMorgan's concern.

P1070
Sept 9. JPMorgan requested 38 billion(HKD) from Lehman to cover additional collateral to cover all of JPMorgan's exposures to Lehman.

P.1071
Sept 11. JPMorgan concluded that the collateral was not worth nearly what Lehman had claimed it was worth, and decided to request an additional 38 billion in cash from Lehman that day.

p.1073
the Examiner concludes that the evidence may support the existence of a colorable claim that JPMorgan breached the implied covenant of good faith and fair dealing by making excessive collateral requests to Lehman in Sept 2008.

p.1074
Citi was Lehman's designated settlement member on the Continous Linked Settlement (CLS) system, a trading platform operated by a consortium of banks for the clearance and settlement of foreign exchange trades.
June 12, 2008, Citi obtained a $15.6 billion "comfort" deposit from Lehman to be maintained at Citi in a overnight call account.

p.1077
HSBC provided Lehman with clearing and settlement services for sterling-donominated trades in CREST, a clearing and settlement system for certain securities.
HSBC privided myriad other banking services to Lehman, including acting as Lehman's trustee for special purpose vehicles in the Cayman Islands (Minibonds), as Lehman's counterparty in derivatives trades and other transactions, and providing various other credit products to Lehman. HSBC's most significant credit exposure, however, derived from HSBC's role as Lehman CREST settlement bank.

p.1078
August 18, 2008, HSBC advised Lehman of its intention to withdraw from its business relationship with Lehman entirely. In addition, HSBC demanded that Lehman deposit just under 7.8 billion into accounts in HK and UK.

p.1306
The most significant aspect of HSBC-Lehman relationship are performing clearing and settlement services fo rLehman's sterling-denominated securities trades in the CREST system and prividing credit support to LBHI(mainly Asia operations) and its subsidiaries through a variety of credit products. This was governed by English laws.

p.1309
The CREST relationship between HSBC and LBIE was governed by a Facility Letter, which makes the CREST settlement facility available to LBIE, a Security Deed, which grants HSBC a security interest in LBIE's property held in connection with or derived from the CREST facility, and a list of Terms and Conditions, which are incorporated into the Facility Letter and specify the parties' rights and obligations.

p.1331
KPMG was the provisional liquidators of LBAH.

p.1332
HSBC and LBHI Stipulated to set off and return some of the funds covered by the UK Cash Deeds.

p.1336
HSBC considered withholding payments or requiring prefunding of trades in Asia-Pacific region Prior to Lehman's bankruptcy.