This page has been archived and commenting is disabled.

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?


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 08/30/2010 - 13:53 | 553261 Boilermaker
Boilermaker's picture

Do they know now?

Mon, 08/30/2010 - 14:30 | 553354 walküre
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

Mon, 08/30/2010 - 14:49 | 553390 BGO
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.

Mon, 08/30/2010 - 14:55 | 553397 walküre
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.

Mon, 08/30/2010 - 15:00 | 553412 Boilermaker
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...

Mon, 08/30/2010 - 13:55 | 553264 centerline
centerline's picture

Plausibe deniability.

Mon, 08/30/2010 - 13:55 | 553266 firstdivision
firstdivision's picture

Lehman have irrational exuberance....never.

Mon, 08/30/2010 - 13:57 | 553270 Gromit
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?

Mon, 08/30/2010 - 14:04 | 553287 sweet ebony diamond
sweet ebony diamond's picture

Client accounts have cash. Bonus Time!

Mon, 08/30/2010 - 13:57 | 553271 Mongo
Mongo's picture

pickaboo accounting bitchez!

Mon, 08/30/2010 - 14:01 | 553278 godfader
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.

Mon, 08/30/2010 - 14:42 | 553381 Ripped Chunk
Ripped Chunk's picture

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

Mon, 08/30/2010 - 14:04 | 553289 MountainMan
MountainMan's picture

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


Roger Clemens arrives in court for arraignment
Mon, 08/30/2010 - 14:18 | 553330 John McCloy
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.

Mon, 08/30/2010 - 14:31 | 553355 Rick64
Rick64's picture


Mon, 08/30/2010 - 14:33 | 553361 walküre
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.

Mon, 08/30/2010 - 14:34 | 553362 aheady
aheady's picture

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

Mon, 08/30/2010 - 14:40 | 553377 VegasBD
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.

Mon, 08/30/2010 - 14:52 | 553392 aheady
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.

Mon, 08/30/2010 - 23:20 | 554383 Hang The Fed
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.

Mon, 08/30/2010 - 14:35 | 553365 Clayton Bigsby
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.

Mon, 08/30/2010 - 14:37 | 553371 Clayton Bigsby
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...

Mon, 08/30/2010 - 14:39 | 553375 Boilermaker
Boilermaker's picture

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

Mon, 08/30/2010 - 15:29 | 553489 Ignatius J Reilly
Ignatius J Reilly's picture

Congress must maintain the illusion of control/power.

Mon, 08/30/2010 - 14:05 | 553292 tony bonn
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.

Mon, 08/30/2010 - 14:16 | 553322 crosey
crosey's picture

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

Mon, 08/30/2010 - 14:07 | 553295 carbonmutant
carbonmutant's picture

The US government doesn't either...

Mon, 08/30/2010 - 14:09 | 553298 LoneStarHog
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.

Mon, 08/30/2010 - 14:09 | 553299 Stepney
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!

Mon, 08/30/2010 - 14:37 | 553370 Hephasteus
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.

Mon, 08/30/2010 - 14:09 | 553300 Dental Floss Tycoon
Dental Floss Tycoon's picture

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

Mon, 08/30/2010 - 17:26 | 553754 MichaelG
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.)

Mon, 08/30/2010 - 14:12 | 553308 paver
paver's picture

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

Mon, 08/30/2010 - 14:14 | 553314 williambanzai7
williambanzai7's picture

Laws? What laws!

Mon, 08/30/2010 - 14:19 | 553331 Voodoo-economist
Voodoo-economist's picture

sox 404

Mon, 08/30/2010 - 14:17 | 553326 Boilermaker
Boilermaker's picture

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

Mon, 08/30/2010 - 14:13 | 553311 Missing_Link
Missing_Link's picture

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

Mon, 08/30/2010 - 14:14 | 553315 Getagrip
Getagrip's picture

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

Mon, 08/30/2010 - 14:15 | 553316 Shameful
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.

Mon, 08/30/2010 - 14:16 | 553323 Internet Tough Guy
Internet Tough Guy's picture

They probably had already fired the people that knew.

Mon, 08/30/2010 - 14:23 | 553340 VWbug
VWbug's picture

the people that knew were long gone before the SHTF

Mon, 08/30/2010 - 14:21 | 553337 Miles Kendig
Miles Kendig's picture

Pay for performance hits new highs.

Mon, 08/30/2010 - 14:30 | 553353 Boilermaker
Boilermaker's picture

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

Facts are useless.  Welcome to ThunderDome.

Mon, 08/30/2010 - 14:36 | 553369 sethco
sethco's picture

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

Mon, 08/30/2010 - 14:46 | 553385 walküre
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.

Mon, 08/30/2010 - 14:47 | 553387 Boilermaker
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.

Mon, 08/30/2010 - 14:58 | 553401 walküre
walküre's picture

lower highs... check

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

Mon, 08/30/2010 - 15:01 | 553416 Boilermaker
Boilermaker's picture

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

Mon, 08/30/2010 - 15:10 | 553436 walküre
walküre's picture

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

Mon, 08/30/2010 - 14:33 | 553360 Rick64
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.

Mon, 08/30/2010 - 14:53 | 553395 lizzy36
lizzy36's picture

Yet, 2 years after Lehman failed, no executive or accounting body has been charged with anything.

On the regulatory side, all those people who were in charge of regulatory oversight of LEH were promoted or remain in their same position. 

And the promises of the SEC to bring more charges for frauds perpetrated in 2006, means they system will have long collapsed by the time the powers that be turn their attention to dealing with the fraud that is HFT (sometime in 2014-2015). 


Mon, 08/30/2010 - 15:03 | 553425 Hall 9000
Hall 9000's picture


CIA - Kids' Page

Apr 12, 2007 07:59 AM

"Welcome. We’re glad you’re here to learn more about the Central Intelligence Agency. The CIA is an independent US government agency that provides national security “intelligence” to key US leaders so they can make important, informed decisions. CIA employees gather intelligence (or information) in a variety of ways, not just by “spying” like you see in the movies or on TV (though we do some of that, too). On the following pages, you can read more about us, play some games, and help us solve some puzzles. Throughout this section, you’ll also see some top secret things you won’t find anywhere else.

So if you’re ready to learn more about the CIA, our employees, and what we do every day, click the appropriate link above and we’ll start you on your way.

K-5th Grade

You may have heard about the Central Intelligence Agency. But, do you know what we really do and how we do it? The people of the CIA do very important work. They help keep our country safe. They give our leaders information so they can make good decisions. And they take pride in their important jobs.

We have a lot of different jobs here. We have analysts, doctors, lawyers, scientists, geographers, and librarians, to name just a few.

Look through our pages and you will learn all about us. If you read carefully, you can become a CIA expert. We also have some fun stories and games for you.



* Stalin would be impressed.

Maybe there are other options to resovlve issues surrounding the derivative books.


Mon, 08/30/2010 - 15:16 | 553461 walküre
walküre's picture

"We have a lot of different jobs here. We have analysts, doctors, lawyers, scientists, geographers, and librarians, to name just a few."

They forget to mention that they have hundreds of bloggers and other internet "specialists" and that the very first visit to their website logs the IP address forever. Also that the CIA is keeping tabs on all Americans at any time.

Of course, they're completely independent from the US government so that the judiciary can never challenge the executive branch. One of the drawbacks of democracy is that as oligarchy you have to put up with the 3 independent levels of government, the judiciary, the legislative and the executive.

Mon, 08/30/2010 - 15:41 | 553523 Hall 9000
Hall 9000's picture

Thanks, walküre wrote:

"Also that the CIA is keeping tabs on all Americans at any time."

Sounds like the CIA is almost as powerful as VISA.

Mon, 08/30/2010 - 16:22 | 553620 walküre
walküre's picture

CIA can access Visa records at any time.

Do you care to learn what exactly the East Germans found when they stormed the offices of their National Intelligence Agency during the revolution of 1989?

There is NO difference in how much the CIA has access to through various channels than any of the former East Bloc spy agencies. Now the US has Homeland Security which has a very nice ring to it. I like all things "home land". Translate that into German and you'd think Hitler's bones got pulled from the Kremlin.

Mon, 08/30/2010 - 15:42 | 553513 115spider
115spider's picture

Probably says more about Lehman's risk and treasury operations than anything else. OTC and ETD trades will be managed in different FO systems depending upon whether they are FI or EQ (insert commodities at  random into one of the main systems).

OTC and ETD are also managed at an Ops level on different platforms. Lehmans used one which came with an Auto-rec tool, which also highlights FO-BO differences. The trades feed from these two platforms to a central accounting system managed by treasury who will perform the financial FO-BO rec.

ETD Options are a god-send for a piss-poor trader needing to make his numbers come bonus time. Sell 1000s of long dated index opts, rake in premium, flog at a loss back into the market after the bonus hits the account, start the carousel again.

Another major US bank relocated its ETD reconciliations to a wartorn shithole in the UK and staffed it with ex-civil servants. wonder how much they're down now...


Mon, 08/30/2010 - 17:32 | 553770 MichaelG
MichaelG's picture

So when GS said they didn't know how much of their profits came from derivatives they could actually have been telling simple truth? Who knew?...

Mon, 08/30/2010 - 15:37 | 553514 Hang The Fed
Hang The Fed's picture

"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."

Hahaha, King's next book will be, "The Creature From Jekyll Island."

Financial obfuscation, bitchez.

Mon, 08/30/2010 - 15:51 | 553533 Hall 9000
Hall 9000's picture

Well spoken, Hang the Fed :-)

Mon, 08/30/2010 - 15:53 | 553536 CONners
CONners's picture

Good thing that Wall Street hires the best....A bank is no more than a utility company that should be regulated like a city's sewage facility. 

Mon, 08/30/2010 - 16:08 | 553576 Hephasteus
Hephasteus's picture

How big is my derivatives book? It's huge baby. It's a MONSTER. Some say too big but most think it's just really big. Of course it's all internet inches and meant to hide the 2inches of underlying assets.

Mon, 08/30/2010 - 16:14 | 553596 omi
omi's picture

How could you expect anything else?


Best course of action when caught hands down is to plead ignorance or insanity.

If you claim you know what you were doing (in theory) and in practice you blew up, that's just opening up another can of worms.

Mon, 08/30/2010 - 17:01 | 553703 Lndmvr
Lndmvr's picture

From  Chase today,


"By accessing and using the Online Service, you represent on a continuing basis that you are authorized to have viewing access to any account that you access. All account data is provided as a convenience and for your information, but it is not the official record of your account or its activity.  All account information should be confirmed with J.P. Morgan OnLine Site Support before you take investment action.'

I need someone to tell me what I'm looking at?


Mon, 08/30/2010 - 17:07 | 553711 Hall 9000
Hall 9000's picture


omni wrote:  on Mon, 08/30/2010 

"How could you expect anything else?

"Best course of action when caught hands down is to plead ignorance or insanity."

Henrik Tikkanen  wrote:
" Truly great madness cannot be achieved without significant intelligence. "


Mon, 08/30/2010 - 18:05 | 553822 Remington IV
Remington IV's picture

... so what's the problem ????

Mon, 08/30/2010 - 18:16 | 553838 Hall 9000
Hall 9000's picture


" Our lives are based on what is reasonable and common sense; 
Truth is apt to be neither. "



Christmas Humphreys


Mon, 08/30/2010 - 21:35 | 554169 StychoKiller
StychoKiller's picture

So, Stephen King goes from writing horror novels to trading Executive -- curiously poetic.

Mon, 08/30/2010 - 23:25 | 554390 Hang The Fed
Hang The Fed's picture

Hahaha, he finally found something more horrifying than slobbering immortal monsters from another dimension.

Mon, 08/30/2010 - 22:54 | 554341 congoapd
congoapd's picture

As a former employee of one of the big broker dealers, I was in charge of putting together all of the OTC position data for all Lehman entities versus my fromer employer. It took something like 40 hours in total to aggregate and properly allocate trades to correct entities. Billions of dollars worth of trades were miss booked for multiple years until a thorough scrubbing was done by myself.

No one ever really paid attention for a decade to lots of trades because there was too much volume, and no one could possibly fail. Even after the Bear Sterns hedge funds failed, no one looked over any of the counter parties. 


I can assure the ZH public that the big broker dealers have at the very least hundreds of millions of transactions on their balance sheet miss booked adding or subtracting value to their balance sheet. 

It really makes me wonder about why anyone bothers doing any sort of fundamental analysis based on balance sheets.


Mon, 08/30/2010 - 23:27 | 554395 Hang The Fed
Hang The Fed's picture

Somewhere along the line, the bookkeepers for outfits like Lehman, Bear Sterns, et al, began emulating CIA spook tactics.  Very fucking sad.

Tue, 08/31/2010 - 05:26 | 554709 mephisto
mephisto's picture

Full disclosure time here guys, I was a senior lehman trader when we blew up.

I knew my risks on all my books - as I should of course. For 2 reasons, first the market was very flaky, you had to know your book inside out. Second we were told to expect calls from either BofA or Barcap over the weekend on the 13/14 Sep and we wanted to be on op of our books so we could kill not be killed when we me our new 'owners'.

However - did I know my notional traded, ie number of options, as Ms James complains about in the article? Nope, not a clue, not my role. Did I know what my listed/OTC spread was? Nope. Listed margining is not a traders problem, mainly because it is handled at a floor level to allow offseting of as many similar positions as possible. OTC Collateral too, as long as the client is known & the trade is within the pre-arranged limits, it's all OK to fire at will.

I dont care how big my book is, as long as my risks look realistic and I can explain my daily PnL.

All this is calculated and stored in systems the traders almost never see. At Lehman, the problem was a focus on front office (sales & trading) to the detriment of the rest of the systems and procedures. We cut costs to boost our RoE and, yes, our bonuses. We hired monkeys, we paid peanuts and eventually we got covered in monkey shit.

FWIW I believe the large vol position Barcap were horrified by was a massive short VIX position, . Lehman had a large part of the VIX market making business and covered the risk with variance swaps. However the variance swaps were OTC, VIX is listed. Clients were long VIX calls & futures like crazy, so the desk was short VIX and long variance swaps. When LEH went under, all the variance swaps vanish as they cashed out at NPV under an ISDA agreement, leaving only this massive short VIX position for barcap to cover. Cost them millions, I heard. I think Goldman raped them on an unwind level for a lot of it, which would be par for the course. 

Tue, 08/31/2010 - 06:33 | 554736 Madhouse
Madhouse's picture

Former Lehman myself...but in the 90s....  so the culture was in bear denial (short VIX)... curious but was that the propaganda broadcasted internally by the strategists, econs or was it management trying to desperately and pathetically hold up the market... or both ?

Tue, 08/31/2010 - 07:24 | 554760 mephisto
mephisto's picture

Not at all, the book was flat vol, long convexity. But it was short listed VIX, and long vol in OTC trades. Barcap never received those OTC hedges.

Wed, 09/29/2010 - 07:22 | 612172 Herry12
Herry12's picture


Article is very interesting,thanks for your sharing.I will visit this site.welcome to my site!.... cheap site hosting
windows web hosting
windows vps hosting

Do NOT follow this link or you will be banned from the site!