If Lehman Had “No Idea,” Who Else is Clueless?

Phoenix Capital Research's picture

Here’s a
zinger of a news story:


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.


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


Source: http://www.bloomberg.com/news/2010-08-30/lehman-derivatives-records-a-mess-barclays-executive-says.html


I’ve railed
for months that the central issue surrounding the Financial Crisis
(derivatives) was not only misunderstood but completely ignored by the
mainstream financial media. Here we are, nearly two years after Lehman Brothers
went bust, and they’re telling us that Lehman had “no idea” what its options
and futures exposure was.


Let’s put
this into perspective.


The notional
value of the derivatives market at the time that Lehman went bust was somewhere
between $600 trillion and $1 Quadrillion (1,000 trillions). It was a market of
inter-linked paper contracts entangling virtually every financial institution
(including some non-financials), country (Greece, Italy used derivatives to get
into the European union), and county (Birmingham Alabama is one example) in the
world. As a market it was at least 20
times larger than the world stock market and somewhere north of 10 time World


In other
words, this was the giant white elephant in the living room.


And here’s
Lehman brothers, one of Wall Streets’ finest, most respected financial
institutions which had been in business for over 150 years announcing that it
had “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.”


In today’s
world of trillion dollar bailouts, $2-4 billion doesn’t sound like much, so
let’s give some perspective here… in its golden days, Lehman Brother’s market
cap was roughly $47 billion. So you’re talking about bets equal to an amount
between five and 10% of its market cap. Not exactly chump change.


And Lehman
had no idea where it was or how much it really owed.


Mind you,
we’re only addressing Lehman’s options and futures derivatives, we’re
completely ignoring its mortgage backed securities, collateralized debt
obligations (CDOs), and other Level 3 assets. Options and futures are literally
the “tip of the iceberg,” the most visible portion of the behemoth that was
Lehman’s off balance sheet derivative issues.  After all, these are regulated securities unlike most derivatives.


Now, if the
above statement doesn’t send shivers down your spine, have a look at the
notional value of derivatives exposure at the top five financial institutions
in the US (mind you, this chart is denominated in TRILLIONS).



If Lehman
had “no idea” what it owned even when it came to options and futures (regulated
derivatives), what are the odds that these other firms, whose derivative
exposure is tens if not hundreds of times larger than that of Lehman’s, might
similarly be “in the dark’ regarding their risk?


who on earth might be on the opposite end of these deals? Other US counties
like Birmingham Alabama (which JP Morgan transformed into 3rd world
country status)? Other countries like Italy or Greece (who used Goldman’s financial
engineering to get into the European Union)? My next-door neighbor’s house? Tim
Geithner’s long-lost tax returns? WHO KNOWS?


The point is
that the very same issues that nearly took the financial world under in 2008
still exist today. In fact, this time around the systemic risk is even more severe.


that the Credit Default Swap (CDS) market which nearly took the financial
system down in 2008 was roughly $50-60 trillion in size. In contrast, the
interest rate based derivative market is
in the ballpark of $500+ trillion.


Indeed, US
commercial banks alone have $182 TRILLION in notional value of interest rate
based derivatives outstanding right now. To
put that ridiculous number in perspective it’s 13 times US GDP and roughly
three times WORLD GDP.


Fed Chairman
Ben Bernanke has promised to maintain Zero Interest Rate Policy (ZIRP) for as
long as possible. Now you know why. But even this guarantees nothing because at
some point the bond vigilantes that visited Greece, Hungary, and Ireland will set
their sights on the US. When that happens, inevitably interest rates will rise
and the financial system will once again begin to implode only on a scale TEN
TIMES that of 2008.


I realize this
may sound ridiculous now, but all warnings of doom sounded ridiculous in 2008
right up until the world imploded (I was warning as far back as April 2008 that
a full-scale Crash was coming). Again, remember Lehman Brothers had “no idea” what
its options and future positions were… again, these were for regulated derivatives… do you think this ignorance was somehow a
special or unique?


Or do you
think Lehman’s admission is just a
taste of what’s to come?

Good Trading!



PS. If
you’re worried about the future of the stock market and have yet to take steps
to prepare for the Second Round of the Financial Crisis… I highly suggest you
download my FREE Special Report specifying exactly how to prepare for what’s to


I call it The Financial Crisis “Round Two” Survival
. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).


Again, this
is all 100% FREE. To pick up your copy today, www.gainspainscapital.com and click


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blindman's picture

this talk of spreading risk and notional value sounds like

some kind of financial suicide pact or an ancien t form of

loveless bad luv,....?  see this..





boogey_bank's picture

Another question for Mephisto, I said that and I do agree with you about the derivative notional problem, but... what is your opinion about this ?


"Those who argue that these frightening numbers are merely ‘notional’ and, as such,

they have no relevance to the real economy, do not know what they are talking about. The

size of the derivatives market is fast approaching the quadrillion dollar mark (if it hasn’t

already surpassed it by the time this article is published). It has been talked down by

mainstream economists and the financial media saying that “there is nothing to worry about, it

is notional value anyhow”. Yet that notional value was able to break the back of the mighty

American banking system (along with that of the British). This is so because the total notional

value of derivatives represents the liquidation value of insured bonded debt.

We can expect much greater increases in the debt of the federal government, in the

trillions of dollars, but the really frightening numbers are not so much the actual increases in

the outstanding debt but, rather, the increases in the liquidation value of the total debt caused

by the serial halving that the monetization of the increased federal debt will necessitate."

boogey_bank's picture

Thanks Mephisto. IMHO physical silver is another one.

boogey_bank's picture

double post...

captcha bichez ;-)

boogey_bank's picture

I agree with Mephisto. It's not a matter of gross notional.

It's a matter of INSANE  policies in the insurance universe.

It's like Bwin start accepting bets on Lakers being US champions paying it 100 to 1.

Mephisto, in your opinion, what could be an "insane bets" index?

Could be a bet against a sovereign government an insane bet regardless?

Think about Bardi family and the King of England in 1343...

mephisto's picture

If i knew that, I wouldnt be here. I'd be running my own fund, or writing academic papers explaining how Wall Street can't quantify risk, or both.

Personally I regard both the SPX and the 10-year T-Note as good candidate 'insane bets' indices right now, but that's maybe just me.

Contrarian View's picture

Anyone who uses the gross notional amount of the non-CDS derivatives markets to make exclamations about how evil they are has put a very low cap on his credibility with me. Serious arguments must be supported by relevant facts, not hysterical headline numbers.

mephisto's picture

The notional value of the derivatives market at the time that Lehman went bust was somewhere between $600 trillion and $1 Quadrillion (1,000 trillions).

I can double that in 1 trade. I trade a swap with you based on the SPX. If we close over 1050 then I pay you 1-quadrillionth of the notional. If we close below, you pay me. Lets do this on 1 quadrillion USD.

So you and I have 1 USD at risk, but we just doubled the global derivatives market "size" in 1 trade.

My point is, the notional of the business is irrelevant. It's not a bond market. There is no way to measure the global size of the derivatives markets, it's all about the risks.


Tapeworm's picture

To me this reads like the usual scare tactics from scammy gold selllers that advertise on Beck's show.

 The interest rate derivatives are notionally huge. One problem with those ghastly numbers is that no one bothers to look to see how they net out. Netted and closed derivatives on interest rate swaps rarely get reported when they close from any sort of reason. They remain out there as if they still exist even though they were dead ad buried three years ago.

 Any non third world financial system would have a way to net out cancelled derivative contracts so that there could be some transparency in the markets.

 It doesn't happen here in the Manhattan scam.


 If anyone was serious about this there would be a netting operation for the first step. Then there would be a separate venue for adjudication of derivative contracts that would be paid for by a tax on the transactions. If you demand legal standing, you pay for the courts that sort this crap out. Do not expect the taxcow to provide you a lawyer playpen.

 Any OTC derivatives must be adjudicated in a participant funded court that is completely outside of the civil and criminal courtjester racket in the USA and especially Manhattan. Take it to Palermo or Tel Aviv and take your chances, but not at our expense. We need the courts to prosecute blatant fraud that cost the taxcow over two thousand thousand millions. (that last was an, "I'm just kidding".

MichaelG's picture

GS originally said they had 'no idea' how much of their profit came from derivatives. Sounded like GS BS at the time - now, I'm not so sure. And if you've no idea how much you're making, wouldn't it follow that you've no idea what you're risking, particularly as that will be a much larger and more complex number?

carbonmutant's picture

Is this a trick question?

blindman's picture

here some more stuff our "bankers" and fed  know nothing about..



Behind the Wheel


Sonntag, 29. August 2010 13:23 von Lars Schall


Can you explain to us from a banking point of view about the “high yield investment” nature of drug money? What’s so special about it?

To answer this, let me give you an example of the economy. It’s an oversimplified example. Let’s say I want to take over a county in America, which is run by about a hundred small business people and a local municipality - that’s the leadership. I can bring drugs into that county in a way that has little costs. I can even teach the kids there to make the drugs in case I want to use meth. But for the most part I bring the drugs in and proceed to get lots of people, particularly the kids, in that place taking drugs in a way that completely distracts the small business people. The small business people are trying to keep their businesses from being robbed or they having to go down to the jail and bail their kids out of the jail.

So I keep them busy dealing with all the dysfunction, while in the meantime I’m making money that finances my bringing in franchises or big box stores and other businesses that take away their market share. I’m buying them with their own money. Think of it as a leveraged buyout of a place. Through their children I’m accessing their financial resources and then using those financial resources to take over their market share, which means that they’re financing their own economic destruction. I pass laws that require that the government deposits and contracts are much more likely to go to the big banks and large companies. I pass more laws that cause the small businesses and local pension funds to invest their employee retirement savings in the large companies that are taking away their market share. Meantime, I have an infinite rate of return because I am financing the take over of the place with the places own income and capital. A very important component to kick start the process is making money on the drugs. The drug money helps me buy control of the local governmental and enforcement machinery. And that helps me get control of the government grants and all sorts of other government monies, which I then direct back through the banks and companies that my syndicate controls.


Thus it’s an infinite rate of return, because I’m taking control of the whole place for no money down, and as I do, I switch the bank deposits, the store purchases, the contracts to my businesses, and all I need to kick start it are the drugs. Not just as a source of cash flow, but as a source of distraction, that enervates the dreams of my enemies. Sun Tsu’s The Art of War says: “Always eat your enemy’s food” – in other words, a pound of food that you steal from your enemy is worth many multiples of food that you need to provide yourself. So by using this kind of leveraged buyout of the entire economy and political structure with their money in a way that makes them weak, you’re eating their food. And then the control of the territory gives you an unending cash flow and further access to different resources. Not to mention, the more control you have the more you can insist that their children work in your banks or go to war in your army. Ultimately the richest resource is human capital. The kids you’re not destroying with drugs, you’re sending to your army to fight your wars or sending to your colleges to train to work for your banks.

i-dog's picture

That is a first class interview in which Catherine Austin Fitts tells it EXACTLY how it is ... and has been since well before the USA was founded.

matthew1182's picture

2 words; plausible deniability

blindman's picture

the life blood of politics,

i puke here.  soring and/or soaring ignorance will not and cannot sustain us.

Mark Beck's picture

This concept has some merit, but not for things that you can easily establish price. So I am a little confused by the article that an option or futures contract could not be priced. The strategy can be complex but to me they are easily priced within a range. For example, how do you have no idea of price for an option unilateral contract. This is just silly.

The plausible deniability is more effective for derivatives, off balance sheet, or that are not easily priced, or perhaps even morph from a liability to an asset depending upon what you want to do. The advantage with derivatives is in hiding behind complexity. If something cannot be easily priced, for example from the IRS or your auditor, then it is what you say it is. If this range can extend into the +/- 25% range. This gives you a lot of latitude in minimizing tax.

The trap is that how do you sell it if it is not easily priced? Also the risk is nonlinear in terms of price increase or decrease. If the base asset class price is falling, offers will be skewed to the low side.

So I think the danger would be in derivative exposure relative to capital.

Mark Beck

blindman's picture

it is absurd.  the dark matter dominates the room/space and those

who claim to have the capacity to ignite it become untouchable;

gods in their own minds, and morons pray to them and seek their

council and heed their voice/narrative/story-less story.  we have 

become terminally dumb.  (no offense intended to the truly voiceless).


One Lump Or Two?
By James Howard Kunstler
on August 30, 2010 9:38 AM

" In the meantime, the financial markets are getting ready to puke, the housing
market has yet a million frauds left to unwind, the commercial real estate and retail
sectors are crashing, the projects in Afghanistan, and Iraq, too (despite the current
hype about the end of the combat mission there), are set to suck a few billion a day out
of the system, indefinitely, and the season leading into the holidays is taking shape as
a major amplification of all the converging clusterfucks that make these such interesting
times. The tea-bagger faction will only get more desperately crazy as a result.
     The bigger mystery in all this -- if I may perhaps engage in some nostalgia of my
own -- is: what happened to reasonable, rational, educated people of purpose in this
country to drive them into such burrow of cowardice that they can't speak the truth, or
act decisively, or even defend themselves against such a host of vicious morons in a time
of troubles?"

pachanguero's picture

Tea bagger?  You sound like the sheeple who repeat the mantra of the Corporate/Goverment cabal.  Tea party=bad=no escape from the two party system=Republican/Democrat monopoly=war=depression=oppression=death. Pepsi or Coke is all we have to choose from.

But go back to your NY Times world.  The are owned by the New World Order just like they own YOU!  You must feel safe there.

I'm sure glad I woke up in 2004 and LOADED up on physical Gold!  But you sheeple hate gold. haha

Without the sheeple like you to repeat their mantra they are doomed.  Yes by all means support the corporation/NWO and end up toast just like they will be very soon.  Just repeat Tea bagger one hundred times, click your heels  and you will wind up in your dream world job.

OBAMA's bootlicker!

blindman's picture

obama's bootlicker?  where?

pachanguero's picture

Its part of his stimulus package

blindman's picture

it seems to me the tea party has been co-opted by the same party

that harbors dick cheney and w. etc..  the second

sara palin became associated it was over. 

the republican party did a similar thing with the independent

party recently, last 10 years,  it continues.

rovian bullshit.

i have no interest or exposure in the

g. beck phenom.   so, coke / pepsi and now we have sprite too.  or root beer,

a&w.   so there ya' go amigo.  have a cupcake and a soft drink.


the diversions and tangents are infinite,  this is why we will always be stimulated but

never free in symbolic life.  someone once made the analogy of a fungal mat to

the minds and lives of most men. 




Optimusprime's picture

Kunstler is an amusing an occasionally insightful writer--but when you scratch him you find a neo-con, SPLC-lover, red-neck hater, etc., etc.  In other words, a purveyor of next-generation PC.  Beware.

tony bonn's picture

yes, the brilliant mba masters of the universe don't have a clue about their companies' financial statuses or financially engineered derivatives which will engulf the world in a complete conflagration of both the financial and military varieties. the ignorance of bliss and the arrogance of fucktardedness are the credentials of management.

when enough imbalance in interest rate swaps arrives, then the bond market will collapse like the controlled demolitions which destroyed the wtc in a bath of nanothermite.

the usa is mortally and irreparably wounded.

Gromit's picture

Both sides book profits and pay bonuses.....

I am a Man I am Forty's picture

It was written in The Greatest Trade Ever that Jamie Dimon didn't know that you could buy credit default swaps against the subprime mortgage market.

I am a Man I am Forty's picture

yep, he would not have intentionally looked dumb in front of a client the way he did, but of course i don't know for sure

blindman's picture

if you know, was he making money for that client or taking money from that client?

was his ignorance covering up his clients losses in some way?