Lehman Had "Absolutely No Idea” How Big Its Derivative Book Was In Days Following Bankruptcy

Tyler Durden's picture

In an indication of just how good "redundancy" record keeping is within the financial industry, Bloomberg discloses that according to testimony by Barclays' Elizabeth James, a director of
Barclays’s futures business, in bankruptcy court, Lehman Brothers basically had no idea whatsoever how big its derivative book was within a +/- range of $2 billion. In addition to robts running wild and jeopardizing flash crashes on a daily basis, this should certainly restore some credibility to the market. “Lehman’s books were in such a mess that I don’t think
they knew where they were.” She said she received an e-mail from former Barclays
trading executive Stephen King saying Lehman had “absolutely no
” if it had sold $2 billion more options than it had
bought, or whether it owned $4 billion more than it had sold. Just lovely.

More from Bloomberg:

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.

Lehman, its creditors and the brokerage trustee, James Giddens, brought the case against London-based Barclays last November. The disputed amount includes $4 billion in Lehman margin accounts at exchanges.

Lehman agreed in 2008 to turn over the collateral to Barclays, because the U.K. bank became responsible for securing the positions at the exchanges when it took over the business, James said.

‘Normal Practice’

Transferring margin together with trading positions “is normal practice in the ETD business,” she told U.S. Bankruptcy Judge James Peck, referring to Lehman’s exchange-traded derivatives. “You’d be crazy if you didn’t.”

She said Lehman’s lack of records initially prevented her from performing “due diligence” to discover what Lehman’s and its customers’ positions were, where Lehman kept its bank accounts, and who its brokers were.

Luckily, unlike in CDS, there is something vaguely reminiscent of a central clearing house to shed some light on Lehman's complete bookkeeping disaster. Alas, the disclosure is not good:

James said she had seen a tabulation of Lehman’s positions at the Options Clearing Corp. showing that the daily margin requirements for its trades had varied by as much as $1 billion within a few days in September 2008.

Just before the deal closed, Barclays learned that it also had to take over a large position in a volatility index it hadn’t known about, James said. A volatility index allows traders to bet on market price changes.

It sure brings a warm, tingly feeling knowing that the custodians of hundreds of billions in derivatives likely have no data to reconcile who owns what should the shit hit the fan. But of course, DoNk provisioned for this as part of the Great and Magnificent Financial Regulatory Reform, and so there is nothing more to ever worry about... Right?

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walküre's picture

Valid question and my very first thought.

But rest assured all is well in the age of post Lehman "stress tests".

Keep buying the dips. Today is a grand opportunity to buy cheap. /sarc

BGO's picture

This problem isnt unique to Lehman's or the derivatives markets. Fifteen years ago, I used to watch bond traders wrecklessly buy and sell hand over fist when they had no idea what their positions were. It was very common. Not at all surprising the same practice would get (much) worse over time.

walküre's picture

like any other industry, I would be 100% certain that the competition is not far behind...

there is no "edge" in this industry, just who-knows-who and political leverage which was the real LEH problem.

Boilermaker's picture

It's kind of like watch someone at a roulette table toss $1 chips all over the table at random where even if they win they actually lose.  I always watch in amazement at the utter lack of any thought as they just start covering numbers.  Of course, it's normally someone that has NO business gambling at all...whereas these guys are college educated...but...

centerline's picture

Plausibe deniability.

firstdivision's picture

Lehman have irrational exuberance....never.

Gromit's picture

What do they care?

If cash on hand is insufficient to pay bonuses, what does it matter what the net position is?

sweet ebony diamond's picture

Client accounts have cash. Bonus Time!

Mongo's picture

pickaboo accounting bitchez!

godfader's picture

That's why Hussman keeps saying: The chaotic way of letting Lehman fail in an completely uncontrolled way was a recipe for disaster. The point is not that Lehman should not have been allowed to fail, the problem is the chaotic way.

Liquidators had no idea how to access IT systems, they didn't know what positions they had on, it was a complete crash'n burn.

Hank Paulson fu**ed this one up, big time. We're still payign the price his incompetence today.

Ripped Chunk's picture

Hank needs to live out his remaining days in a pain amplifier.

MountainMan's picture

Nation falling apart at the seams...meanwhile...


Roger Clemens arrives in court for arraignment
John McCloy's picture

  I am just going to say something here. I turn on CNBC early this morning and they spend five minutes discussing Roger Clemens and they are throwing around the word perjury and I  had a moment of anger I almost turned into the Hulk. Why are we spending tax dollars and effort to even attempt to prosecute this sideshow?

The timing on this is nothing more than a headline for the consumption of the blue collars hoping to distract them from our economic problems and the President's record low approval ratings with elections 2 months away. May we should concern ourselves with Clemens perjury after looking into every pol, banker and regulator complicit in indebting our generation and our future generations are facing arraigment. We are a nation without justice at this point.

walküre's picture

...Glenn Beck and Sarah Palin at the DC Mall calling for structural change in America.

Look over here! Consumer spending is up, up and away!!!

Death throws. Feels a lot like the Sixties but from the opposite angle.

aheady's picture

I think the blue collars see right through it at this point as well.  But I could be wrong.

VegasBD's picture

You are. All my friends n family could be described as blue collar to upper middle class. They could care less and are more concerned with the season getting started and Brett Favre's TD to INT ratio.

aheady's picture

Yeah, that was way too optimistic (wishful thinking?).  I get blank stares when I ask people if they know who Ben Bernanke is and glazed eyes when I try to explain... Mindboggling.

Hang The Fed's picture

My collar is about as blue as it comes, and I could give a flying fuck less about prosecuting a baseball player for perjury.  I would rather see five minutes of a group of orphans lining up to punch Bernanke in his beanbag than listen to the hours and hours of this fucking sideshow.

Clayton Bigsby's picture

I was thinkin the same thing when they were having all those guys testify in front of congress in the first place.  I mean, really?  This is what our fucking tax dollars are going to?  Somebody ougtta plant a dirty bomb up clemens ass and fix this whole "congress" problem once and for all.

Clayton Bigsby's picture

PS  Hi, NSA/CIA/FBI et al..  Please note that my post in no way, shape, or form represents intent for criminal misconduct jeopardizing national security...

Boilermaker's picture

What about re-trying Blago in Illinois?  Several more million in the shitter?

Ignatius J Reilly's picture

Congress must maintain the illusion of control/power.

tony bonn's picture

and wasn't sarbanes oxley supposed to deliver once and for all from financial chicanery, fraud, and malfeasance....looks like another piece of fascist legislation gone up in smoke.

crosey's picture

Nah...SOX was just supposed to look good and spend a ton of money.

carbonmutant's picture

The US government doesn't either...

LoneStarHog's picture

Who cares in The New Normal!

If you don't own it, sell it short.

If you buy it, don't worry about funny things like FTD.

Just buy, buy, buy and records be damned.

Stepney's picture

I used to be angry at Lehman's for rejecting me for a role writing automated trading systems for them sometime around 2000.


Now I am thankful that they did!

Hephasteus's picture

Hopefully you got a chance to help out with the let's make computers call everyone and annoy the crap out of them during the late 80's and early 90's.

Dental Floss Tycoon's picture

How much did Barclays takeover influence the decision to let Lehman go bankrupt?

MichaelG's picture

Barclays tried to buy before the bankruptcy filing, but weren't able to as the quick sale would have broken UK law requiring (Barclays) shareholder approval. (Oddly quaint idea, obeying the law, I know.)

paver's picture

Didn't the law require that someone certify the adequacy of the systems/controls?

Boilermaker's picture

10,000 comedians are out of work and you are cracking jokes?  SHAME!

Missing_Link's picture

Wall Street  ...  What a bunch of freaking rocket scientists.

Getagrip's picture

Would someone just take this dysfunctional system out and shoot it-put it out of our misery.

Shameful's picture

I wish I had enough assets or assets under control that I can't be concerned about record keeping even when billions are involved.  You know what they say, a billion here, a billion there, and soon we are talking about real money.

Internet Tough Guy's picture

They probably had already fired the people that knew.

VWbug's picture

the people that knew were long gone before the SHTF

Miles Kendig's picture

Pay for performance hits new highs.

Boilermaker's picture

Once again, irrelevant, as the phantom rally commences directly at 2:30 pm.

Facts are useless.  Welcome to ThunderDome.

sethco's picture

not sure they pull it off today. mitigating the slide may be the goal.

walküre's picture

Friday was a preview of a bond "flash" crash.

In an instant bonds were liquidated and billions flowed into equities.

That's why bond rates and equities surged at the same time.

It will never get investigated and it would be very simple to do.

Just check for charts (not the technical kind) on Bill Gross' underpants from last Friday. That guy must have had a very sudden bowel movement.

Death throws. The market is in cardiac arrest and all the reanimation won't work.

Boilermaker's picture

Nah, they'll get-er-done.  It'll be some epic shove upward on a very small timeframe, as usual.  Volume is pathetic so this is a gimme.  But, then again, I'm not very good at calling the action...same as anyone else.

walküre's picture

lower highs... check

lower lows... working on it. bots need to be reprogrammed to stop buying at S&P 1040.

Boilermaker's picture

I'm still guessing there will be a sudden, violent, and inexplicable shove upward before close....could be wrong though.

walküre's picture

on the other hand.. low volume decline is a new trend. what's up with that?

Rick64's picture

Does anyone really expect these people to tell the truth especially when its not in their interest? Integrity and honesty aren't in their vocabulary.