Tuesday, August 31, 2010

Flying blind at Lehman 

The litigation currently going on in the Lehman Brothers bankruptcy case reveals just how uninformed the risk managers at Lehman were on the eve of the firm blowing up. Bloomberg reports:
Barclays Plc had no idea how big Lehman Brothers Holdings Inc.’s futures-and-options trading business was when it considered taking over the defunct bank’s derivatives trades at exchanges in 2008, a Barclays executive said.

“Lehman’s books were in such a mess that I don’t think they knew where they were,” Elizabeth James, a director of Barclays’s futures business, testified today in U.S. Bankruptcy Court in Manhattan. James worked on Barclays’s purchase of Lehman’s brokerage during the 2008 financial crisis.

She said she received an e-mail from former Barclays trading executive Stephen King saying Lehman had “absolutely no idea” if it had sold $2 billion more options than it had bought, or whether it owned $4 billion more than it had sold.

The e-mail was dated Sept. 22, 2008, the day Barclays completed its takeover of the brokerage and a week after Lehman filed the biggest bankruptcy in U.S. history. James was testifying in a trial to determine whether Barclays should pay Lehman as much as $11 billion for making an allegedly undisclosed “windfall” on the deal.
All of this ultimately reflects poorly on Dick Fuld, who ran the firm in an autocratic manner. One wonders if better senior management would have placed more emphasis on compliance, back office operations, and rigorous risk management practices with respect to derivatives. There was more going wrong at Lehman than the linked article discusses, and the evaporation of the firm's capital was so huge, and so rapid, that it was a case of fraud, or incompetence, or both. In that belief, I follow in the Jim Chanos school of thought.

CWCID: Bomber Girl


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