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Interesting article. Asher's famous. 
Hidden costs emerge from the debris of Lehman crash
By Aline van Duyn
Published: September 11 2009 19:34 | Last updated: September 11 2009 19:34
This time a year ago, many people were anxious, stressed and uncertain. The world’s most senior bankers, regulators and traders and legions of junior staff too were working around the clock amid a frantic effort to prevent Lehman Brothers going bankrupt.
A year later, the repercussions of Lehman’s demise – and the rescue of AIG a day later – continue to be felt, not least in the global efforts to tame the privately-traded derivatives markets, home to financial contracts with an estimated face value of roughly $600,000bn.
Yet with the focus on lessons learnt from the global market’s inadequacies before Lehman’s collapse, some crucial teachings may yet come from efforts by Lehman Brothers’ creditors to unwind the derivatives portfolio.
Before explaining why, I want to mention a factor in most people’s lives that probably caused as much stress a year ago as it does now: technology.
The gap between the promises of technology and the experience that is delivered is often substantial. Real-life examples abound.
Most people have experienced moments either at home or in the office when computers do not work. The limits of technology is also one reason reviews in the sector are so popular.
A recent verdict on a new video gadget is a perfect example. Called Yoostar, it allows people to film themselves in front of a green screen and then superimpose their acting on to famous scenes from movies like Forrest Gump.
“The software is a disaster,” wrote a New York Times reviewer. “It crashes constantly. Playback scroll bars don’t work. Cuts from one camera angle to another include one empty frame where you’re supposed to be....” You get the picture.
The point is, no one is shocked to hear stories about technology not working exactly as it should. It is therefore staggering that so much of the financial system relies on faith that technology will work and do what it says it does.
This is where the two themes – a bankrupt Lehman Brothers and technology – come together.
Unwinding derivatives is a complex task at the best of times. In the case of Lehman, one of the biggest dealers in some of the most complex derivatives markets, this has been even more so. Lehman’s global derivatives book included contracts with a notional face value of $39,000bn and deals with 8,000 different counterparties when it went bust. The derivatives business was actually split into multiple strands, backed up by between 20 and 30 different systems.
Once it went bankrupt, the staff who supported these systems “evaporated”, according to Steven O’Hanlon, president of Numerix, a pricing and valuation company which is working with Lehman Brothers Holding Inc to unwind the derivatives portfolio.
“The more time goes by, the less insight remains in terms of the people who staffed those systems,” said Mr O’Hanlon. He likens the amount learnt about derivatives from the Lehman job to lessons from wars. “The medical industry has advanced itself whenever there is a war, when it has to undertake hundreds and thousands of procedures in a compressed period of time.”
The main conclusion so far – and there are many fascinating details in the Lehman unwind – is that the technology costs for derivatives have been underestimated. In addition, the answers that every regulator now wants and every investor should demand, in terms of levels of exposures and risks that banks hold, cannot be easily gleaned from the current multiple systems used to value and track positions.
“Many previously hidden costs of running a derivatives business, including technology support of multiple disjointed systems, can no longer be discounted,” says Luc Faucheux, a managing director at Lehman Brothers Holding Inc in New York.
The unwinding of Lehman Brothers’ derivatives book might yet prove to be one of the best places for regulators to look for clues to how they should push financial markets to change.
By Aline van Duyn
Published: September 11 2009 19:34 | Last updated: September 11 2009 19:34
This time a year ago, many people were anxious, stressed and uncertain. The world’s most senior bankers, regulators and traders and legions of junior staff too were working around the clock amid a frantic effort to prevent Lehman Brothers going bankrupt.
A year later, the repercussions of Lehman’s demise – and the rescue of AIG a day later – continue to be felt, not least in the global efforts to tame the privately-traded derivatives markets, home to financial contracts with an estimated face value of roughly $600,000bn.
Yet with the focus on lessons learnt from the global market’s inadequacies before Lehman’s collapse, some crucial teachings may yet come from efforts by Lehman Brothers’ creditors to unwind the derivatives portfolio.
Before explaining why, I want to mention a factor in most people’s lives that probably caused as much stress a year ago as it does now: technology.
The gap between the promises of technology and the experience that is delivered is often substantial. Real-life examples abound.
Most people have experienced moments either at home or in the office when computers do not work. The limits of technology is also one reason reviews in the sector are so popular.
A recent verdict on a new video gadget is a perfect example. Called Yoostar, it allows people to film themselves in front of a green screen and then superimpose their acting on to famous scenes from movies like Forrest Gump.
“The software is a disaster,” wrote a New York Times reviewer. “It crashes constantly. Playback scroll bars don’t work. Cuts from one camera angle to another include one empty frame where you’re supposed to be....” You get the picture.
The point is, no one is shocked to hear stories about technology not working exactly as it should. It is therefore staggering that so much of the financial system relies on faith that technology will work and do what it says it does.
This is where the two themes – a bankrupt Lehman Brothers and technology – come together.
Unwinding derivatives is a complex task at the best of times. In the case of Lehman, one of the biggest dealers in some of the most complex derivatives markets, this has been even more so. Lehman’s global derivatives book included contracts with a notional face value of $39,000bn and deals with 8,000 different counterparties when it went bust. The derivatives business was actually split into multiple strands, backed up by between 20 and 30 different systems.
Once it went bankrupt, the staff who supported these systems “evaporated”, according to Steven O’Hanlon, president of Numerix, a pricing and valuation company which is working with Lehman Brothers Holding Inc to unwind the derivatives portfolio.
“The more time goes by, the less insight remains in terms of the people who staffed those systems,” said Mr O’Hanlon. He likens the amount learnt about derivatives from the Lehman job to lessons from wars. “The medical industry has advanced itself whenever there is a war, when it has to undertake hundreds and thousands of procedures in a compressed period of time.”
The main conclusion so far – and there are many fascinating details in the Lehman unwind – is that the technology costs for derivatives have been underestimated. In addition, the answers that every regulator now wants and every investor should demand, in terms of levels of exposures and risks that banks hold, cannot be easily gleaned from the current multiple systems used to value and track positions.
“Many previously hidden costs of running a derivatives business, including technology support of multiple disjointed systems, can no longer be discounted,” says Luc Faucheux, a managing director at Lehman Brothers Holding Inc in New York.
The unwinding of Lehman Brothers’ derivatives book might yet prove to be one of the best places for regulators to look for clues to how they should push financial markets to change.
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