Dobbeck, Dianne

Stefansson, Coryann S.

Yale University

Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale YPFS Documents Browse by Media Type 9-1-2008 Federal Reserve Bank Email from Coryann Stefansson to Deborah P Bailey Re LFI Counterparty Credit Risk Exposure to Lehman Brothers Coryann S. Stefansson Dianne Dobbeck Follow this and additional works at: https://elischolar.library.yale.edu/ypfs-documents Recommended Citation Stefansson, Coryann S. and Dobbeck, Dianne, "Federal Reserve Bank Email from Coryann Stefansson to Deborah P Bailey Re LFI Counterparty Credit Risk Exposure to Lehman Brothers" (2008). YPFS Documents. 5529. https://elischolar.library.yale.edu/ypfs-documents/5529 This Document is brought to you for free and open access by the Browse by Media Type at EliScholar – A Digital Platform for Scholarly Publishing at Yale. It has been accepted for inclusion in YPFS Documents by an authorized administrator of EliScholar – A Digital Platform for Scholarly Publishing at Yale. For more information, please contact elischolar@yale.edu. From: Coryann StefanssonTo: Deborah P BaileySubject: Fw: LFI Counterparty Credit Risk Exposure to LEHDate: 09/12/2008 04:05 PMCoryann S. StefanssonAssociate Director Bank Supervision and RegulationBoard of GovernorsOffice Cell Number Assistant - Ms. Kimberly JensikKim.Jensik@frb.govOffice Number ----- Forwarded by Coryann Stefansson/BOARD/FRS on 09/12/2008 04:05 PM -----Dianne Dobbeck/NY/FRS@FRS09/11/2008 04:15 PMTo BSR LFIC, Jeanmarie Davis/NY/FRS@FRS, John Ricketti/NY/FRS@FRS, Steven JManzari/NY/FRS@FRS, Caroline Frawley/NY/FRS@FRS, Deborah PBailey/BOARD/FRS@BOARD, Clinton Lively/NY/FRS@FRScc Brandon Hall/NY/FRS@FRS, Kyle Grieser/NY/FRS@FRS, StevenMirsky/NY/FRS@FRSSubject LFI Counterparty Credit Risk Exposure to LEH Please find the first of two distributions outlining the LFIs exposure to LEH.  The matrix of below (prepared byBrandon Hall of the counterparty credit risk) outlines select LFIs counterparty credit risk exposure to LEH.  Asexpected, risk coordinators have regular conversations with the LFIs regarding their exposures to financial firms sothe data were obtained through normal channels with in many cases the LFIs raising the topic to the relevant CPCteam.  We've elected to keep this distribution small (that is not include all of the CPC teams) in an effort not topromote new inquiries / specifical requests of the teams to the firms.  In a follow-up message, Brandon will share atable that captures additional exposures the LFIs may have to LEH (e.g. committed lines, settlement lines, etc.)  Wewelcome any questions you may have regarding the data collected. An updated snapshot of LFI CCR exposures (on potential and current exposure bases) to Lehman Brothers, as wellas institutional commentary, is provided below.Exposure UpdateBarclays, Citigroup, and UBS have demonstrated an upward trend in potential exposure to Lehman since 2Q08.Meanwhile, risk appetite has trended downward at Credit Suisse, JPMC, BAC, and Deutsche.Institutional CommentaryBarclays (As of 9/11/08)Barclays has been following a business-as-usual strategy with Lehman, albeit with a more cautious approach to futurebusiness. All assignments and large/structured trades must be approved on an individual basis by Credit.HIGHLY CONFIDENTIAL FRB to LEH Examiner 001490FCIC-155141Overall, Barclays exposure to Lehman has increased to $2.3B (from $2.2B on July 11, 2007) despite the total financinglimit (TFL) decreasing ~$80MM to $3.1B. The decrease in TFL is driven exclusively by a decrease in primary (lending)exposure from a decrease in Bond Holding (from $172 million to $141 million).  There are currently no reportedcollateral disputes outstanding with Lehman.  Total TFL is a numerical limit of the bank's credit risk appetite to aparticular entity.Citigroup (As of 9/10/08)Previously, Citi had requested that Lehman leave $2B on deposit to self-fund some of its intra-day clearing lines.  OnMonday, Citi and Lehman signed a formal agreement which gives Citi the right to offset any overdraft exposure againstthis deposit.  Citi has informed Lehman that it will not extend any intra-day exposure beyond the size of this deposit.At the end of yesterday, Lehman added to the deposit, increasing it to $2.7B.  Yesterday, Citi approved (at the highestlevels) an additional $500MM above the $2.7B in order to release a payment to CLS.  The approval was based on Citi'sconfidence in CLS and the concern that holding this payment could be disruptive to an orderly settlement.Citi continues to trade normally with Lehman.  Citi has seen a pick-up in novation activity but continues to acceptthese.  There where no notable collateral disputes with Lehman.Total Exposure to Lehman is $3.4B consisting of: - $2.6B potential exposure ($207MM current exposure) from trading across 10 ISDA agreements- $610MM in direct loans (offset by $490MM in CDS)- $50MM in un-drawn contingent linesCiti also has $3.2B in FX settlement limits for Lehman.Credit Suisse (As of 9/11/08)The firm has concerns about Lehman given the dramatic increase in CDS spreads and the declining share price.  CSnoted combined derivatives and FX MTM exposure of approximately $130MM.  This includes approximately $70MMdue to collateral not yet received and $5MM in disputes. The firm reported seeing a significant influx of requests for parties looking to novate away from Lehman.  Novationrequests have been seen across all desks, with particular concentration in FX trades.  A few requests have beendeclined over the last two days when deemed outside the normal course of business.  The firm is currently undertakingdiscussions to determine policy for what novations to accept and not.CRM has increased monitoring on hedge funds R3 and GLG.  Lehman Brothers has invested in R3’s new debtstrategies fund, which purchased $5B in assets from Lehman in June.Deutsche Bank (As of 8/21/08)As of August 21st, DB does not have any credit exposure to Lehman Brothers.  In fact, DB owes Lehman around $2.1Bon derivative trades, of which DB has posted to Lehman $2.0B in cash and Treasuries.As of last week’s meeting with CRM, DB has not changed its stance in that it will continue to watch Lehman verycarefully, but is not prepared to curtail trading with Lehman at this time.JPMC (As of 9/10/08)JPMC has secured an additional $3B in O/N collateral since yesterday from Lehman, and that is posted under a lienagreement in place with the firm.  The collateral consisted of $1B in cash posted yesterday and $2B in JPMC moneymarket fund investments made by Lehman.  Today Lehman asked to substitute in some securities and JPMC riskexecutives are considering it.  JPMC was concerned about not being in a position to meet calls on behalf of Lehmanand so requested the additional coverage.  Lehman met that request in addition to covering roughly $500MM incollateral disputes outstanding.  To the extent JPMC determines the disputes are not warranted they may returncollateral to Lehman but for now Lehman agreed to cover them.3rd party haircuts are up substantially although no more details were offered other than confirmation one largeinvestor has doubled their haircuts (from 8% to 16/20%).  If tri-party investors increase haircuts its will force Lehmanto reduce the size of its book.A one notch ratings agency downgrade would require Lehman to post an additional $2B in collateral (Lehman'sestimate) and a two notch downgrade approximately $5B in collateral across all counterparties. They are concernedthat the rating agencies, particularly S&P, are ready to act and may not be satisifed by the proposed asset sales andreal estate spin.Novation activity has picked up on Lehman throughout the day but it is still too early to determine if the underlyingexposures are sizable. JPMC is very sensitive to other firms attempting to move entire derivative books over withouttelling JPMC upfront and so may reserve the right to decline the novation requests if they feel that is the case.JPMC reiterated, as it has in the past, that it does not want to be the first to stop trading, cut lines, and/or run fromLehman and are mindful of the implications of such a decision.  However, they did state that they do not want to bethe last one to make that decision and so will remain vigilant concerning (a) prime brokerage onboarding activity atJPMC, (b) activities of other major counterparties, and (c) behavior of tri-party investors.HIGHLY CONFIDENTIAL FRB to LEH Examiner 001491FCIC-155142UBS (As of 9/9/08)As of 9/9/08, UBS's posture toward Lehman is business as usual.  Traders were instructed to continue dealing withLehman over the next 24 hours.  Lines will not be cut and the name will not be turned down.  Traders were instructedto hedge (correlated) exposure where possible.  UBS is most concerned with the sensitivity in the derivatives book andcorrelation risk (assets held such as CRE/CMBS that may deteriorate if Lehman deteriorates further). UBS is monitoring the Lehman PB business and noted that one hedge fund is planning on moving away from Lehmanto UBS.  UBS will continue to monitor the PB business and will let us know if other HF's begin to move away fromLehman.  UBS is also reviewing legal contracts, determining which Lehman entities they are exposed to and runningvarious stress scenarios on current exposures.UBS's exposure to Lehman is as follows: 1.  OTC derivatives: $1B MTM / Net of Collateral: $15MM MTM2.  Uncollateralized OTC derivatives: ~$03.  Close-out exposure: $1.2B4.  Securities Borrowing/Lending UBS has lent out $4.7B in securities to Lehman entities (105% collateralized)UBS has borrowed $900MM in securities from Lehman entities (collateralized)Repo: UBS has cash in of around $400MM and cash out of around $300MM. HIGHLY CONFIDENTIAL FRB to LEH Examiner 001492FCIC-155143

Federal Reserve Bank Email from Coryann Stefansson to Deborah P Bailey Re LFI Counterparty Credit Risk Exposure to Lehman Brothers

https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=6577&context=ypfs-documents

Federal Reserve Bank Email from Coryann Stefansson to Deborah P Bailey Re LFI Counterparty Credit Risk Exposure to Lehman Brothers

Abstract

Similar works

Full text

Available Versions

Yale University