Earlier today we posted the unredacted version of the 5th volume of the Lehman Examiner report, which unhid all the specifics of the unwind related to Lehman's options and futures positions. There was a reason why Goldman et al felt sufficiently motivated to make the data hidden in the first place. The reason: the banks participating in the liquidation made a killing on the unwind. Yet another involuntary gift from the Lehman creditor estate to the big banks who had the inside scoop on Lehman's books all along, and certainly in the days just before the bankruptcy was announced. The market continues to be one for the banks, and one for "everyone else." And "everyone else" still can not borrow at the Discount Window. Although we are confident that that may change soon.
From an anonymous tipster:
The amount given to these firms to take on these positions was huge. The LEH book was basically short spu’s, long fixed income, short oil and long all other commodities. That position was perfect at that time though obviously not enough in relation to their mortgage positions. All of these firms knew what the positions were and obviously knew the markets were going their way so it really wasn’t much of a gamble to take the positions down, especially when spotted such huge upfront cash payments and knowing how it may net against what you have on your own books. As long as they eliminate the risk in one day there will not be any more margin requirements and they keep the cash. The risk would be that the markets would move against them in one day by more than the spotted cash but even the exchange said the span margin was well under the payments so it wasn’t likely. Forget the large negative option value numbers because those are misleading and irrelevant because that is factored into the span and margin being used already. All of these firms just had to get the books delta neutral during the day and then manage strike risk after that. Almost all of the risk was delta risk which is easily managed in the futures markets. (for this we are talking -50k spu, +70k bond equivalent, -20k oil) Anybody could get that delta neutral quickly- Especially when it is going your way and you are spotted huge dollars. It has been rumored that DRW eliminated their fixed income delta risk before the floor session was even opened for 40 minutes. It probably took longer for them to load up the algorithm with the positions then to actually execute it. Look at the charts of some of the agriculture futures at that time and those did have some slippage. Cattle was down limit a couple days as well on this liquidation but it didn’t matter because that was a favor to get the valuable fixed income piece.
In light of this daylight robbery, Valukas noted in his comment that the Lehman estate may have grounds to sue Goldman and Barclays. From Bloomberg:
Goldman was the highest bidder for Lehman’s equity derivatives at CME, and took $445 million of those assets at a private auction in September 2008, according to previously censored details of Valukas’s March 11 report. Barclays was the highest bidder for Lehman’s energy derivatives and took $707 million in assets from CME.
DRW Trading was the highest bidder for Lehman’s foreign exchange, agricultural and interest-rate derivatives, Valukas said. As a result of the auction to the three successful bidders, Lehman lost $1.2 billion out of total deposits with the CME of $2 billion, Valukas said.
“The examiner concludes that an argument can be made that the transfers at issue were fraudulent,” Valukas said in the report. Under bankruptcy law, the auction may be able to be undone, he said. Lehman received “less than reasonably equivalent value”, Valukas said in his partly censored March 11 report on the 2008 bankruptcy.
Goldman and the others, which used the Fed approach of claiming they may be harmed if confidentiality was breached, ended up just protecting their asses, from what they knew would likely end up being a Fraudulent Transfer case.
http://www.zerohedge.com/article/great-lehman-derivative-robbery-tipster
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