El Stuntman wrote:
The CFO and COO of Lehmans have been sacked, share price down about 10% in pre-market trading.
you have to hand it to the yanks, they don't fuck around like we do when it comes to accountability
It is a bit of a nonsense choice of victims though. The CFO just reports the numbers. The finance function in an investment bank has shag all say in terms of trading strategy. Going into the credit crisis Lehman had a huge balance sheet of sub-prime mortgages and commercial mortgages ready for securitisation but then the music stopped. That plus syndicating high yield loans was the trade that they were riding. Responsibility? The head of fixed income trading or Dick Fuld himself.
The music stops and Lehman can not shift its inventory as the syndication and securitisation markets are closed. Prices in the subprime, CMBS and High Yield markets are falling and Lehman is taking losses as it marks down its loan books. To hedge these losses it can buy default swap protection on the CMBX, ABX or LEVX indices (see markit partners website). In a normal market as the price of the subprime or CMBS bonds falls the value of protection hedging it rises, net net no gain or losses. Trouble is nobody is actually buying CMBS or sub-prime RMBS bonds or the underlying loans so there is no clarity on pricing. But everyone is buying the derivative protection on the CMBX, ABX and LEVX, some to hedge their positions, but most to short the market. Hedge funds were taking a bet that the indices would rise and a bubble was created, the price of buying protection lost all relationship to the credit risk of the underlying bonds. Lehman bought their protection at the top of this bubble.
It was discussed on Sudden Debt, Calculated Risk and I think here that there was a disconnect between the CMBX and ABX and the underlying cash bond markets. It was no great secret, but shareholder and press pressure must have led Lehman to buy at those levels. The bubble burst after March. The speculators closed out their bets and took their profits. BBB CMBS protection on CMBX was 1200bps in March and is 400 now. The protection is worth a third of its value, but as the bond market had become disconnected it has not shown a commensurate gain.
So Lehman take their losses on the derivatives and no gains on the bonds and loans. It was a pretty crude strategy. But the strategy would have been agreed at the top, by the heads of trading and Dick Fuld. The finance function would have had no say. But hey some one has to be seen to lose their job, so lets shoot the messenger. Utter nonsense