Tuesday, September 8, 2009

It’s the rehypothecation clauses, stupid.

Lehman’s £10.4bn hangover points to need for insolvency regime shake-up

Clients of Lehman Brothers’ UK business are still waiting for the return of $17 billion (£10.4 billion) of assets almost a year after the collapse of the investment bank. $639 billion of assets are wrapped up in a cat’s cradle of trades and investments across a vast array of jurisdictions, subsidiaries and clients. The bankruptcy exposed ignorance among supposedly sophisticated financial institutions about the status of their assets held by Lehman’s UK business.

Posted by devo @ 06:27 AM (771 views)
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3 thoughts on “It’s the rehypothecation clauses, stupid.

  • not really that long in an insolvency. Esp one as big as this? complex? See the videos i posted – esp the CDS one to help explain why.

    http://pharmagossip.blogspot.com/2008/10/cdos-explained.html – 1st one shows that the problem is CDO of CDO , and the second explains CDS.

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  • I suppose that we will need global regulations then, ho hum.

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  • Moving on from mortgage-backed CDOs. AIG made big profits insuring them with credit default swaps, insurance against defaults on these pooled mortgage securities. When the housing market collapsed AIG couldn’t pay out and the government stepped in with the thick end of $200bn to honour AIG’s contracts.

    There is now a lot of pressure from the public and Congress to regulate the derivatives markets – mainly CDSs and interest-rate swaps. This is bad news for the big investment banks, who make a substantial proportion of their profits (about half) from over-the-counter trades in derivatives. These banks simply rake in monopoly-type profits by charging clients more to hedge their trades than it costs the bank to do this. The administration wants to mandate derivatives clearing houses – transparent exchanges – where the members make good on defaults and standardised trades (which make up the vast majority of trades) are listed and reported. This would cost Wall Street a lot of money.

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