Citigroup, which handled currency trades for Lehman, received a new guarantee from Lehman when the now-bankrupt firm was already insolvent and didn’t give enough value in return, the report said.
“The examiner concludes that a colorable claim exists to avoid the Amended Guaranty as constructively fraudulent,” Valukas’s report said. The Citigroup guaranty has the same legal issues as JPMorgan’s guaranty, Valukas said.
Citigroup extended intraday credit to Lehman in handling the currency trades, “thereby assuming a certain amount of intraday credit risk,” according to the report. The currency- trading agreement between Lehman and Citigroup provided that any extension of credit by Citigroup was at its “sole discretion,” the report says.
$2 Billion Deposit
In June, Citigroup obtained a $2 billion deposit from Lehman to reduce its intraday risk. The money was to be maintained in a Citigroup overnight call account. The deposit was included in Lehman’s reported liquidity pool, the report said.
In July, the two banks failed to negotiate a collateral pledge agreement after Citigroup declined the securities Lehman proposed as collateral in lieu of the cash deposit because it “questioned whether there was a ready market for them,” the report says.
“By early September, Citi had become acutely concerned about its claim on the $2 billion deposit,” the report says. Citigroup and Lehman amended a Guaranty Agreement and the custodial agreement, “which provided Citi with a broad and explicit security interest over cash, securities or other assets held by Citi on behalf of Lehman,” the report says.
[b]“Given the rapidly deteriorating market conditions, it was not unreasonable for Citi to seek added security from Lehman,” the report says. [/b]