Now raising intellectual capital

Contrarian Capital…not so much


With a name like Contrarian Capital one would think this Greenwich, Conn. hedge fund would have been savvy enough to sniff-out the impending trouble at Lehman Brothers. But apparently, the managers of Contrarian weren’t contrarian enough.

A week ago, Contrarian filed a rather large $100 million notice of claim in the Lehman bankruptcy, an indication that it was a bit too bullish on the failed investment house. But what makes the claim really interesting is that it stems from losses on Lehman-issued structured notes–something often sold to retail investors.

I’ve been writing a lot about structured notes being a terribly flawed investment product. The main problem with structured notes is that they generate big fees for investment banks and often are falsely pitched as conservative investments. Many are described as being “principal protected.” But as the Lehman experience has shown, that guarantee means nothing if the issuer goes bust.

Additionally, the main feature of a structured note–an embedded derivative that tries to capture the price increase in an underlying basket of stocks, commodities or a particular index–is something that often can be replicated by a investor without the aid of an investment bank. And the embedded derivative is notoriously complex and simply adds more counterparty risk into the financial system.