JPMorgan Chase has agreed to pay $US1.42 billion ($A2.02 billion) to settle allegations that it withheld critical funds from Lehman Brothers in the final days leading up to Lehman's collapse during the financial crisis.
Lehman's failure is considered a critical moment in the financial crisis, one that helped deepen and extend the US recession.
As Lehman's clearing bank, JP Morgan provided the cash that Lehman used to do business every day. In the final days leading up to Lehman's failure, JPMorgan executives began to worry that the collateral Lehman pledged was less valuable than Lehman said it was. JPMorgan worried that if Lehman couldn't pay back the cash, JP Morgan might get stuck with billions of dollars' worth of what were then being called "toxic assets".
As a result, JPMorgan required Lehman to pledge increasing amounts of collateral in order to keep Lehman's operations open.
Lehman Brothers' bankrupt entity originally sued JPMorgan Chase in 2010 for $US8.6 billion, alleging that JPMorgan used its position as Lehman's clearing bank to extract virtually all of Lehman's remaining liquid assets and establish an $US8.6 billion "slush fund" for its own use. A federal judge ruled in favour of most of the allegations against JPMorgan in October 2015.
A JPMorgan spokesman declined to comment on the settlement. The bank said in a regulatory filing that the settlement will have no impact on the bank's first quarter results.
The funds will be distributed to Lehman's creditors as part of its bankruptcy proceedings.
Lehman Brothers filed for bankruptcy in September 2008 after federal regulators chose not to save the bank from collapse, even though they had saved Bear Stearns in March of that year.
Lehman's bankruptcy is the largest in US financial history and its collapse caused financial waves that led to unexpected and severe financial problems at other institutions, including Merrill Lynch, American International Group and even General Electric.
The settlement between JPMorgan and the bankrupt shell of Lehman ends most of the legal issues between the two banks.
In a separate settlement, JPMorgan reached an agreement with the bond insurer Ambac. That settlement is tied to several mortgage-backed securities that a JPMorgan subsidiary issued that Ambac then insured. Under the settlement, JPMorgan will pay $US995 million to Ambac.
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