NEW YORK (Reuters) - The New York Federal Reserve intervened aggressively to shore up the U.S. financial system this week, providing at least $87 billion to help underpin trades with units of bankrupt Lehman Brothers Holdings Inc, court documents show.
The Fed's action is the latest sign of how U.S. authorities have been seeking to prop up financial markets following the failure of Lehman (LEH.P) and as big insurer American International Group (AIG.N) fights for survival.
While the government had pledged not to fund a rescue of Lehman, the disclosure on Tuesday showed that authorities were taking other financial steps to prevent markets from descending into chaos.
JPMorgan Chase & Co (JPM.N) advanced $87 billion to the units on Monday to help clear and facilitate securities transactions with customers and clients of Lehman "to avoid disruption of financial markets," according to documents filed in the U.S. Bankruptcy Court for the Southern District of New York.
Lehman and the New York Fed had requested the advance, known as a "commencement date advance" and the New York Fed repaid it, according to filings.
In effect, the New York Fed lent the funds to the units.
A representative for the New York Fed declined to comment.
"This expansion of the Fed's credit program is unprecedented," said David Pauker, a managing director with restructuring adviser Goldin Associates.
"It should provide the liquidity necessary to facilitate the sale of Lehman's core brokerage and banking business."
In court on Tuesday, U.S. Bankruptcy Judge James Peck said he would provide a "comfort order" for JPMorgan, allowing it to continue providing the advances to Lehman.
Harold Novikoff, a lawyer for JPMorgan, told the court that the firm has regularly provided these advances for Lehman to facilitate its trading, but was typically paid back by other parties who would step in overnight to repay JPMorgan. However, some of those third parties have disappeared since Lehman's bankruptcy, filing necessitating the intervention from the Fed.
A representative for the Federal Reserve Bank of New York said in court that services provided by JPMorgan were "integral" to the market.
"If we stop, the broker dealer stops. It's that simple," Novikoff told reporters after the hearing.
Lehman had provided JPMorgan with $17 billion in collateral for the advancing services prior to the bankruptcy filing, Lehman's lawyer Shai Weisman told the court.
The sale of Lehman's broker-dealer business appeared closer on Tuesday, as a source said Britain's Barclays (BARC.L) had agreed to buy Lehman's core broker-dealer business for about $2 billion.
Lehman's holding company filed for bankruptcy in the early hours of Monday, in the largest U.S. bankruptcy ever.
Although Lehman's broker-dealer units are not covered under the filing, customers typically unwind trades with a dealer whose holding company is bankrupt.
On Tuesday, at the request of Lehman and the New York Fed, JPMorgan advanced $51 billion to Lehman as part of a so-called second-day advance.
Court documents did not specify whether the New York Fed would repay the second amount.
JPMorgan may elect to advance additional money to Lehman units as part of a "post-petition advance."
All post-petition advances are guaranteed by Lehman and collateralized, according to the documents.
"The Lehman Brothers bankruptcy is taking the restructuring industry into uncharted waters," Pauker said.
(Reporting by Chelsea Emery, Dan Wilchins, and Emily Chasan in New York; Additional reporting by Glenn Somerville in Washington; Editing by Ted Kerr, Gary Hill)
