The thing about useful stuff is

I haven't fallen into a dark pool [of shares] Thursday, October 30, 2008

It was an easy mistake for those kind enough to send me congratulations to make - but sadly I'm not the John Wilson that has just been appointed to be the CEO of Baikal, the London Stock Exchange venture which plans to launch a dark pool for pan-European equities trading.

The future of the Baikal project has been in doubt following the collapse of the LSE's former joint venture partner Lehman Brothers. Planned to launch in early 2009, Baikal was going to utilise Lehman Brothers technology.

Apparently my namesake had previously served on the executive committees for both equities and fixed income and as head of equity and fixed income research at Lehman Brothers.

Good luck John Wilson.

Labels: Baikal, dark pool, Lehman Brothers, London Stock Exchange, LSE

posted by John Wilson @ 6:56 PM Permanent Link ,

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Former Lehman staffer tells it how it is Friday, October 17, 2008

A heartbreaking story of a former master of the universe coping with life after Lehman - gotta love it.

Brilliant satire.

Hat tip to The Big Picture.

Labels: humour, lehman, Lehman Brothers

posted by John Wilson @ 7:13 PM Permanent Link ,

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Barclays trying to undermine Nomura Monday, September 29, 2008

Image via WikipediaAfter buying the US arm of Lehman, Barclays looked over the European business but apparently declined to bid and so it was bought by Nomura. Buying all of Lehman in Europe was always going to less appealing to Barclays given the considerable overlap that would have existed between Lehman and Barclays Capital, especially in Fixed Income. However, demonstrating why Nomura had to put in place large retention payments for Lehman staff, Barclays has apparently been attempting to cherry pick staff in London - always a much cheaper alternate than buying a business.

Whilst perfectly legitimate, you could understand if Nomura might be irritated by BarCap's move. Whilst the acquisition was not altruistic, it has saved a considerable number of City jobs and will need the best talent to stay, if it is to rebuild the business.

Labels: Barclays plc, Lehman Brothers, Nomura Group

posted by John Wilson @ 10:59 AM Permanent Link ,

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A few good bond traders Wednesday, September 24, 2008

The Big Picture has published an excellent email doing the rounds on Bloomberg email. Think Jack Nicholson on the witness stand in A Few Good Men replaced by a Head of Fixed Income at an Investment Bank.

Son, we live in a world that has bonds and those bonds need to be bought by men with balance sheets. Who's gonna do it? You? You, Lieutenant Fuld?

I have a greater responsibility than you can possibly fathom. You weep for Bear Sterns and curse the short sellers; you have that luxury. You have the luxury of not knowing what I know: that Lehman's death, while tragic, probably saved firms and that my existence, while grotesque and incomprehensible to you, saves markets.

You don't want the truth because deep down in places you don't talk about at parties you want me buying bonds, you need me buying bonds. We use words like TSLF, PDLF, Super SIV. We use them as the backbone of a life trying to defend something. You use them as a punchline.

I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom I provide and then questions the manner in which I provide it. I would rather you just said "thank you," and went on your way. Otherwise, I suggest that you pick a sub-prime option arm bond and pay par.

Either way, I don't give a damn what you think you are entitled to.

Labels: bear stearns, Hank Paulson, humour, lehman, Lehman Brothers

posted by John Wilson @ 11:25 PM Permanent Link ,

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Credit teams are the real villians of the financial crisis Monday, September 22, 2008

Image via WikipediaWas it short sellers that prompted panic about bank collapses or might the withdrawal/reduction of credit lines from commercial banks played a greater part? Merrill Lynch confirmed that Bank of America had cut its' credit lines to Merrill in the week preceding its' acquisition.

Credit lines are an essential part of the liquidity portfolio for brokers and if they are removed that does two things

it immediately constrains the ability of the broker to trade and may force them to reduce positions at a time when forced sales will exacerbate their financial woes
it sends a clear message that confidence has been lost and that news travels fast, causing further "panic" and prompting either asset withdrawals by investors or tightening of credit lines by other firms, all concerned about being left with nothing

A weakened share price by itself does not cause a company to fail. However, the indirect effects are usually

it impedes the company's ability to raise further capital
it generates a loss of confidence in the company - a share price reflects views on a company, which in turn triggers more direct effects e.g. withdrawal of deposits
a re-examination of a company by a credit rating agency, which in turn may downgrade the company and prompt further problems

Had Lehman had an abundance of credit, it wouldn't have collapsed - it was its' liquidity [or lack thereof] that prompted the end of the firm.

In case you think I am picking on commercial banks, brokers have their own credit teams who do the very same thing and will readily cut the trading lines of a client if there is a hint of a problem.

Labels: Bank of America, Lehman Brothers, Merrill Lynch

posted by John Wilson @ 8:26 AM Permanent Link ,

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GLG and Lehman - a lucky break? Friday, September 19, 2008

TOKYO - SEPTEMBER 16: A man walks past the si...

Image by Getty Images via DaylifeIn seeking to distance itself from Lehman Brothers, with whom it was closely connected, GLG has announced that last week it transferred substantially all of the positions of its funds still with Lehman to other prime brokers. It claimed that the majority of these transfers have already settled and the firm expect the remainder to settle shortly. It says it believes the funds' residual exposure to Lehman will not be material.

Gosh - the timing of those transfers is remarkably lucky. A few more days and they would have been caught up in the mayhem, probably losing access to those assets.

GLG also confirmed that all its funds have at least two prime brokers and in nearly all cases, at least one prime broker is a commercial bank, a point I had been making in a recent post here.

Labels: GLG, Lehman Brothers

posted by John Wilson @ 8:28 AM Permanent Link ,

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Now Morgan Stanley - what next, Goldman? Thursday, September 18, 2008

Image via Wikipedia After a week of turmoil which has seen Lehman declare insolvency and Merrill run into the arms of Bank of America, only two independent investment banks remain - Morgan Stanley and Goldman Sachs. And now the unthinkable is underway - the share prices of these two Goliaths are under attack and the CDS prices for their debt is ballooning.

Every "given" during my working life has been torn to shreds this week. A week ago it would have been unthinkable for these firms to be considered vulnerable. But a day seems an eternity right now and news has emerged in the last 16 hours that Morgan Stanley is already in talks with Wachovia Bank, presumably on the basis that its' management know it may not survive being in the spotlight for long. If this goes through, that leaves just Goldman Sachs - the most respected firm in wholesale markets. Can they withstand the spotlight and hold the hounds at bay - if anyone can give you a categoric answer, then I doubt they know what they are talking about, given the climate we are in.

Along with many others, I have spent the last week in a shock. When the dust settles, it will be a very different [financial] world we face. The game is changing very quickly and the power base of London and New York may have been fundamentally undermined. This leaves open the possibility of markets shifting, especially with the growing might of sovereign wealth funds. International money can move easily and people follow money. Many other places stand very ready to welcome both.

Labels: Bank of America, goldman sachs, Lehman Brothers, markets, Merrill Lynch, Morgan Stanley, Stock market, Wachovia

posted by John Wilson @ 8:24 AM Permanent Link ,

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Clearing up Lehman pending settlements Wednesday, September 17, 2008

News is seeping out about the unwinding of the pending settlements [trades executed but yet to settle] and open interest in exchange traded as well as OTC contracts.

Firstly, Reuters reports that JP Morgan lent $87m to Lehman subsidiaries on Monday to enable them to clear and facilitate securities transactions, but apparently the New York Fed repaid them.

Next, LCH has declared Lehman in default and begun the process of unwinding and moving their trades. Lehman was a clearing member of LCH, acting on behalf of clients as well as its' own trading on variety of Exchanges. Lehman was also a Swapclear member, which clears OTC Interest Rate Swaps.

The easiest transfers are for those clients who traded on a segregated basis i.e. their trades were processed via and held in separate accounts from those of Lehman. Much harder to separate out are clients trades processed through non-segregated accounts in which will be co-mingled Lehman's own proprietary trades and will inevitably require Administrator assistance.

Clients have to make a positive decision as to whether to be segregated or not but firms usually incentivise them to be non-segregated e.g. higher interest rate on credit balances, in order that they can utilise the client assets, which is not permissible with segregated balances.

Any losses resulting from unwinding the business of Lehman will be offset against the margin balances Lehman had with the Clearing House. If these balances are insufficient, then a call will be made on the Default Fund which is funded by the members.

The exercise to close a trading firm is a huge undertaking - you don't simply close the doors because at any point in time, there is considerable activity "in progress" all of which needs to be unwound. It is likely to take months before the majority of the work is done.

Labels: JPMorgan Chase, LCH, lehman, Lehman Brothers, New York Federal Reserve Bank

posted by John Wilson @ 1:51 PM Permanent Link ,

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Sale of Financial Stock, Everything Must Go [?]

The New York Times has a stark interactive graphic here showing the dramatic falls in market capitalisation of 29 US financial firms over the last 12 months up to Sept 12th 2008, prior to the weekend meltdown. On 9 October 2007, the firms had a collective value of $1.86 trillion - no longer.

Amidst the huge falls group, several firms stand-out for their resilience and marked contrast.

Bancorp - down 1.1% to $57.8bn [$58.4bn]
Wells Fargo - down 8.8% $113.2bn [$124.1bn]
JP Morgan -down 11.7% $142.2bn [$161bn]

Other names included Lehman, Freddie Mac, Fannie Mae, Merrill Lynch, AIG who sadly have somewhat different results.

Labels: bear stearns, Fannie Mae, Freddie Mac, JPMorgan Chase, Lehman Brothers, Wells Fargo

posted by John Wilson @ 8:42 AM Permanent Link ,

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What's happening to Lehman pending settlements? Tuesday, September 16, 2008

Image via Wikipedia I've spoken to a few people this morning trying to find out if Lehman were settling trades yesterday and today.

I'm assuming their accounts were frozen, which would have brought settlement chaos but it's not being reported and there's been no announcement by the CSDs. A friend at Dresdner thought that people were leaving delivery versus payment ["DVP"] trades in place and those DVP trade that had been "pre-matched" were settling. But who is doing the work to settle them as most of the staff were told to go home, certainly in London.

Assuming they are not settling trades, the ramifications would be multi-fold

Settlement blockages: Lehman is a major counterparty in a number of market, and its' inability to deliver stock from its' accounts to buyers would preclude them from any on-deliveries
Replacement cost: If you have trades with Lehman that aren't going to settle, then your positions need to be re-stated. As such, if you choose to replace those trades you may face a different price [probably much less, in which case better to walk away from the trade anyway and ignore any subsequent calls from the Administrators]

This leaves aside all of the position maintenance e.g. corporate actions that arise on positions that Lehmans were holding that need to be acted upon.

Lehman has been declared in default by Hong Kong Securities Clearing Company, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited.

At the same time, Lehman administers assets on behalf of many clients, which are dispersed in many locations. These will need to be moved back under client control. Likewise, stock loans will need to be returned to the real legal owners.

Sorry to be floating questions and wondering aloud, but my mind is whirring.

Labels: Hong Kong Exchanges and Clearing, lehman, Lehman Brothers, markets

posted by John Wilson @ 1:39 PM Permanent Link ,

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Prelude to Lehman guys getting screwed caught on camera?

This CNN video clip outside of Lehman offices is quite funny.

Presenter in the studio tries to hide their embarrassment by saying "two guys, obviously, just trying to make light of a bad situation, pretending to console each other."

Labels: CNN, humour, lehman, Lehman Brothers

posted by John Wilson @ 9:59 AM Permanent Link ,

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Why having only one prime broker is a bad idea

When conducting business continuity planning you aim to identify all single / critical points of failure and implement measures to eliminate them to the extent this is possible.

In which case, why did 33 hedge funds in Europe give Lehman a sole prime broking mandate with the result that their assets are now frozen and their prime brokerage contacts are unavailable to assist in almost all cases?

Recent examples at Bear Stearns and MF Global should have provided enough of a wake-up call to every hedge fund about the dangers of concentrating all your business in one place. Whilst those assets should be segregated and hence ring-fenced from those of Lehman, inability to access them in turbulent markets renders the funds hapless.

Setting aside the other benefits of operating with 2 or more prime brokers which is the obvious answer to the identified risk e.g. you remain closely attuned to price/service differences between firms, there are usually higher direct [fees paid] and indirect [netting opportunities foregone] costs to bear from distributing business. Yet one has to wonder if the managers in question were incompetent or plain stupid, since the consequences of a risk event occurring dramatically outweigh versus the costs of cover.

According to the FT, another 67 firms that were prime broking clients of Lehman are also affected by its' demise, but they had in place alternate prime broking arrangements, so are able to access some of their fund assets and continue to trade.

Labels: bear stearns, Broker, Hedge fund, lehman, Lehman Brothers

posted by John Wilson @ 9:07 AM Permanent Link ,

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In case you think Lehman management aren't aligned with shareholders. Friday, September 12, 2008

In case you think Lehman staff aren't personally affected by the crisis facing their company, outside of fearing for their jobs, think again - the executives and rank-and-file at Lehman collectively own about 25% of the company.

According the Wall Street Journal, Lehman CEO Dick Fuld owns 10.9 million shares, or approx 1.4% of the company. The current value of those shares is approx $46 million, which equates to a paper loss of $649.2 million [93% fall] since 31st Jan 2008.

Other senior executives hit include their Chief Legal Officer [1.5 million shares]; Chief Risk Officer [259,791 shares]; and CFO [248,056 shares].

So, despite having followed the best practice notion of aligning managers and shareholder interests which theoretically would curb excessive risk taking, it appears that Lehman will fail to avoid a dramatic end to the business. Whilst it could remain intact were it to be rescued at the last minute by an overseas white knight, this seems unlikely given

a) the lack of time to conduct any due diligence given the urgent need to find a buyer and inject new capital into the business; and

b) the probable absence of any US Govt financial support for an overseas buyer, unlike that provided to JP Morgan in buying JP Morgan.

A possible solution to raise capital might come in the form a hastily arranged sale of Lehman's asset management business, but this may not be enough to provide permanent respite from the troubles it faces.

Instead, the most likely outcome seems to be a carve up amongst other banks, in which case employees will be hit with the trebble whammy of a massive drop in their personal wealth; unemployment at a time when job opportunities are almost non-existent; and missing out on a bonus which would ordinarily form a sizeable proportion of the compensation.

Whilst you may have little sympathy for Lehman staff given the past years of plenty enjoyed by folks in this sector and believe they brought it on themselves given past excesses, remember that the World economy benefited from good years recently in part due to cheap and abundant credit. Moreover, if you live in the UK, financial services accounts for 20% of UK GDP, which means a severe decline in the sector will also have a considerable impact on tax revenues that are desperately needed by the Government to spend on universal services like health care and social security.

Labels: JPMorgan Chase, lehman, Lehman Brothers, Wall Street Journal

posted by John Wilson @ 4:07 PM Permanent Link ,

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Is walking away a negotiating tactic by Korea Devt Bank? Thursday, September 11, 2008

Korea Development Bank (KDB) has ended negotiations with the shaky investment bank Lehman Brothers. Lehmans was looking to sell a stake rumoured to be $6bn to KDB in order to shore up its balance sheet. After the news broke, shares in Lehman fell by 45 per cent in New York yesterday.

Of course, this means that it's much cheaper to buy Lehmans today than it was on Monday. So, knowing that would be the likely consequence, might KDB be following the example of anyone haggling at a Asian market stall and wait for the buyer to implore them to return by offering a lower price?

Labels: lehman, Lehman Brothers, markets, Stock market

posted by John Wilson @ 3:49 PM Permanent Link ,

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Clearing in Europe is going to heat up Friday, August 15, 2008

European Central Counterparty Limited (EuroCCP) launches tomorrow with 15 clearing firms, including the 9 founding members of Turquoise.

The Turquoise firms are Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, Merrill Lynch, Citi, UBS, BNP Paribas and Societe Generale. The others are ABN Amro, Barclays Capital, Credit Agricole Cheuvreux, Instinet, KAS Bank and Lehman Brothers.

Of the 15 firms, 6 are general clearing participants who will be able to clear and settle trades for trading firms who are not EuroCCP clearers. The remainder will be clearing and settling their own trades.

Owned by DTCC, this is a overseas significant expansion by the US outfit, albeit it has taken them many years to land a large contract despite having had people on the ground in Europe for many years. It will undoubtedly create an even more competitive landscape in the central clearer market. Moreover, DTCC has deep pockets to fund its efforts thanks to its US revenues.