Almost a decade after the global financial crisis, the fate of another $2 billion from the wreckage of Lehman Brothers Holdings Inc. is about to be determined.

The failed New York investment bank is seeking to recoup the cash from one of its old derivatives trading partners, Citigroup Inc. In a trial that started this week in Manhattan bankruptcy court, Lehman alleges Citigroup created “phantom transaction costs” in order to justify a bankruptcy claim that would allow it to keep $2 billion in cash Lehman had deposited on the trades.

Lehman claims that in the days, and even months after its bankruptcy, Citigroup concocted an inflated claim, which it eventually filed in September 2009. Lawyers for Lehman said in court Wednesday that traders at Citigroup were instructed to stray from convention in valuing their positions. Instead of pricing trades at the mid-point of bid and offer prices, the bank marked the trades on one side or the other, depending on which was to their advantage.

“Citi cherry-picked the valuation curve,”

The bankruptcy is In re: Lehman Brothers Holdings Inc., case number 1:08-bk-13555, U.S. Bankruptcy Court for the Southern District of New York.

[Augusr 21 2015 95 percent of some U.S. swaps markets trading volume disappears in less than two years ]

Some of the largest U.S. banks — including Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, and Morgan Stanley — got around new regulations on derivatives enacted in the wake of the financial crisis by tweaking a few key words in swaps contracts and shifted some other trades to affiliates in London, where regulations are far more lenient. Those affiliates remain largely outside the jurisdiction of U.S. regulators, thanks to a loophole in swaps rules that banks successfully won from the Commodity Futures Trading Commission in 2013. Swaps include interest rate swaps, where a bank takes a fee for exchanging a variable-rate interest payment for a fixed rate with a client, and credit default swaps, a sort of insurance where one party, often a bank, agrees to pay another party in the event of a bond default. By December of 2014, certain U.S. swaps markets had seen 95 percent of their trading volume disappear in less than two years.

[December 02 2011 Willingness not particularly pronounced:The comparison with 2008 is frightening. ]

September 14, 2008, Young Lehman Bankers take home their 'tombstones'

September 14, 2008, Young Lehman Bankers take home their ‘tombstones’

The comparison with 2008 is frightening. Following the fall of the investment bank Lehman Brothers, the entire financial system faced collapse. And this time, the condition of the markets is, if anything, even worse: The crisis has eaten its way deep into the credit system. The entire method by which European countries access money is under threat — and by extension, so too is European prosperity.
“The willingness of investors to engage in banks on the longer term is not particularly pronounced,” Deutsche Bank head Ackermann said. The longer the double-crisis — of state debt and bank liquidity — continues, the more dangerous it will become for the ultimate survival of the euro. The two are, after all, dependent on each other. Countries need liquid banks to purchase their bonds and the banks need financially solid states as guarantors of the state bonds on their balance sheets. At the moment, neither half of the relationship is functioning properly.

[November 30]Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada and the Swiss Central Bank are all cutting the interest rates on ‘dollar swaps’, which will effectively make it cheaper for commercial banks to get access to dollars. [before] The Euribor-OIS spread, a measure of banks’ reluctance to lend to one another in Europe, was little changed at 97 basis points. The spread, which is the difference between the borrowing benchmark and overnight index swaps, was 98 basis points on Nov. 3, the widest since March 2009. [2008] Overnight Index Swap rate is seen as a gauge of banks’ willingness to lend to each other — a wider spread is seen as an indication of decreased inclination to lend.

The problem is that the ECB, and other European authorities led by the German government, are still playing the same game of brinkmanship that they have been playing for the past two years. They are more concerned to press austerity policies on the weaker eurozone countries than they are about tanking the European and global economy. They continue to see the crisis as an opportunity to force through unpopular “reforms” – such as cutting jobs and pensions, raising the retirement age, privatisations and reducing the size and scope of the welfare state. They have already caused a recession in the eurozone and seem more than willing to let it deepen in order to get what they want. guardian

The only explanation for the massive action is that central banks were concerned about a pending failure that is not publically known. The shortage of dollars in Europe results partly from the pullback of American money market funds, which cut their investments in European banks by 42 percent between the end of May and the end of October, according to Fitch Ratings. The retreat from France was particularly severe, with funds cutting their exposure by 69 percent. “The French banks do a lot of dollar-based lending, but there’s not a natural source of deposits so they do it by wholesale funding [borrowing huge sums on the international money markets]. But US money market funds have withdrawn their exposure to European banks because they are worried about the sovereign risk.” French banks emerged stronger than rivals following the 2008 collapse of Lehman Brothers Holdings Inc. “French banks benefitted from the post-Lehman fragility of U.S. and U.K. banks, but now they’ve been knocked down by the euro zone’s weakness. In France, the banks had the smallest slice of loans since at least 1999.