The scandalous Lehman CME auction

By Felix Salmon
April 14, 2010
less than half their value -- handing a $1.2 billion windfall to Barclays, DRW Trading, and -- you knew this was coming -- Goldman Sachs.

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It was one of the least transparent and most underpriced asset sales since the days of Russian privatizations. In the chaos of the immediate aftermath of the collapse of Lehman Brothers, the CME Group auctioned off Lehman’s derivatives assets for less than half their value — handing a $1.2 billion windfall to Barclays, DRW Trading, and — you knew this was coming — Goldman Sachs.

The details are in pages 319-328 of the newly-unredacted Valukas report, and Andrew Clavell has a good summary: essentially Barclays walked away with $335 million, DRW made $303 million, and Goldman, coming out on top as always, managed to profit to the tune of $450 million.

Valukas concludes:

The bulk sale process resulted in a substantial loss to LBI exceeding $1.2 billion over the close‐of‐business liabilities associated with the positions… This process represented the first and only time the CME had conducted a forced transfer/liquidation of a clearing memberʹs positions…

Thus, LBI may have a colorable claim against CME, or any of the firms that bought LBI’s positions at a steep discount during the liquidation ordered by the CME, for the losses that LBI sustained as a result of the forced sale of house positions held for the benefit of LBI and its affiliates.

The smelly thing here is the way the auction was conducted. Not only was the whole thing utterly unprecedented, it was also far from transparent: only six firms were invited to bid. If the CME was actively trying to get the lowest possible bids it’s hard to think how they could have done better than this, holding a hurried auction in the midst of utter market chaos, with no minimum bids and seemingly not a care in the world about whether Lehman was getting a fair price for its assets. It looks very much as though the CME wanted to hand Lehman spoils to its largest clients, since Lehman itself was clearly not going to be a client going forwards and was in no position to object.

The craziest deal is the Goldman one:

Goldman Sachs assumed the equity positions cleared through the CME, as of close of business on Wednesday, in consideration for the transfer to Goldman Sachs of $445,132,487 from LBI’s margin and collateral deposits at the CME. The equity positions included options with a net option value of $4,867,513 so the amount transferred to Goldman Sachs exceeded the Wednesday close of business position liabilities associated with the positions by $450 million.

In other words, Lehman’s equity-derivatives positions were worth $4.9 million. And Goldman, in bidding for those positions, didn’t bid a single penny — instead, it demanded a whopping $445 million from Lehman’s margin accounts in order to take them over. So it got the positions for free, and another $445 million as gravy, on top. You can almost see the money being sucked up the Goldman blood funnel, no?

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