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When derivatives go bad

THUD! That’s the sound a busted derivative trade makes when it lands at the courthouse steps.

Drake Capital Management, once a highflying hedge fund manager that is now winding down its operations, claims it’s still owed some $102 million on a derivatives trade that went kablooie when Lehman Brothers filed for bankruptcy. Like most of Lehman’s thousands of creditors, the New York hedge fund hasn’t been paid a penny.

So Drake has filed a weighty 543-page document in bankruptcy court to press its point. A close look at the Drake filing shows why the Obama administration’s proposal to regulate and rein in these often exotic financial instruments may be easier said then done.

Only five pages of the filing are devoted to the so-called proof of claim, where Drake co-founder Steven Luttrell explains why the hedge fund is still owed money. Most of the remaining 538 pages are what constitutes the actual derivative — the various contractual agreements spelling out the terms of the trades between Drake and Lehman. The agreements date back to August 2004.

Lehman’s huge NYC tax bill

New York City wants Lehman Brothers’ outstanding tax bill paid off now–or at least before any other creditor gets money in the bankruptcy case.

Earlier this month, the city tax office filed a $626,999,222 claim against Lehman’s bankruptcy estate. In the official notice, NYC says its claim should be “allowed and paid in full as a priority claim in advance of any distribution to creditors.”

from Rolfe Winkler:

“There were no discussions on AIG”

I'm sorry I missed this CNBC interview last week with Robert Wolf, chief of UBS Investment Bank in the U.S.  There's a remarkably eye-opening sound bite.   (hat tip M. Mayer)

...there were no discussions on AIG during that three day period [the weekend Lehman failed].

Lehman creditors, you didn’t lose any money

You read that right. Peter Wallison, a senior fellow at the American Enterprise Institute, a right-leaning think tank, doesn’t think Lehman’s collapse caused any “substantial losses.”

In an op-ed in The Wall Street Journal, Wallison, in criticizing the Obama administration’s financial regulatory overhaul plan, concludes that the only reason Lehman’s bankruptcy caused so much market turmoil is because no one thought the federal government would allow it to fail.

No fix for the derivatives monster

It’s still not clear if the Obama administration has a plan for dealing with the derivatives monster, which is one of the biggest problems regulators must confront in dealing with the potential collpase of a “too big to fail” financial institution.

The administration’s financial regulatory reform package would give the FDIC, and in some cases the SEC, broad authority to transfer a firm’s derivatives book to a “bridge instititution” to avoid “termination of the contracts by the firm’s counterparties.” But that may be easier said then done.

Goldman fills the Lehman void

Lehman’s collapse left a big whole in the world of structured products–a largely unnecessary investment vehicle that’s been all too popular in Europe and Asia. But it seems Goldman Sachs is rushing in to fill the void.

A week ago, a three-month-old Goldman Sachs subsidiary filed a registration statement with Irish authorities for the future sale of structured notes in the UK and elsewhere–but not in the US. The so-called “base prospectus” filed by Goldman Sachs Financial Solutions PLC is the second structured note offering a Goldman subsidiary has filed this year with Irish regulators.

Et tu Schwab?

Discount brokerage Charles Schwab may be facing a Lehman-sized headache.

It appears some Schwab brokers were actively selling so-called structured notes–derivative-like investments–that were issued by the now bankrupt Lehman Brothers. The structured notes were pitched as principal protected, meaning investors might not make a lot of money if a strategy failed, but they wouldn’t lose their initial investment either.

The only problem with the sales is pitch that the Lehman issued structured notes were guaranteed by Lehman. The notion that an investors’ prinicipal investment was 100% protected went out the window when the Wall Street firm filed for bankrupty last fall.

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