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

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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 idea” 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 sh1t 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?

I mean how close do people really need it a margin of +-$2bn is really here nor there compared the vast sums thrown at the bankers.

Still glad to see this accounting flaw didn't ever effect bonuses.

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