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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Why was CME responsible for auctioning Lehman’s derivatives positions?

Posted by dariustahir | Report as abusive

The situation with Goldman makes me think of somebody gathering clues in a thriller movie. In a wall there are a lot crime scenes pictures, and for some reason Goldman just happened to pass by and was captured on every image. The sad thing is that the detective still hasn’t put all the pieces together.

Posted by Engels | Report as abusive

and people are surprised ? why? because of Goldman’s “sterling” reputation? c’mon it’s it’s hardly a surprise and hardly anything new. Look at their profit figures for the past year or so, they had to squeeze it from somewhere.

Posted by Judyjl | Report as abusive

Keep up the good work. I wonder if these Goldmanites are troubled at all by all the dirty money they are spending.

Truly though, this situation is a drop in the bucket compared to all the welfare money going to Goldman Sachs in the form of interest-free borrowing from the government. Many of those guys would earn but a fraction of what they are making now in the form of taxpayer-subsidized welfare if they had to get real jobs. A chimpanzee and certainly a five year old could make money borrowing interest-free and then buying yield. If you look at their imcome breakdown, most of their revenue stems from trading related to government welfare policies; very little comes from investment banking.

Posted by DanHess | Report as abusive

“The aggregate Span Risk – or
margin requirements – associated with these positions, $737,443,448, was greater than this amount.”
Do you know what means? Obviously not, the size of Lehman positions must have been north of $8 billion and Goldman got roughly at most a 5% discount in chaotic market conditions..and had to put up $292 million in margin.

Posted by alea | Report as abusive

whilst people lose their jobs/houses and whatever else is going

the might GS takes another quick turn to help paying out egregious bonuses

all backed by the taxpayers’s generosity of course

v sad reflection of where the US financial system is going today…

Posted by jmk | Report as abusive

alea is right: 450mm sounds like a lot until you put it in context of the entire position being assumed. And you neglected to mention why the CME was in such a hurry to unload the position: LBI was going to file bankruptcy next day. The that would have left the merc with all the risk, and a central exchange isn’t supposed to be a risk-taker, remember? Otherwise, the current push to move OTCs onto CCPs/exchanges won’t accomplish much in the way of safety.

However … what about the energy positions sold on Monday? The danger then wasn’t quite so imminent, and the numbers there were +622mm margin -482mm mark for 140mm net against a span risk of only 129mm. Superficially, that looks simultaneously far more lucrative and yet less urgent. What was the story there?

Posted by Greycap | Report as abusive

Of course he understands Aggregate Span Risk. He has a PhD in Derivatives from the University of Wikipedia.

So obviously he reran the scanning risks to verify his above conclusion. Probably used Adesi-Whaley valuation and I’m guessing Newton’s method to iterate convergence. Quite a sophisticated model if you ask me.

Posted by stevenstevo | Report as abusive