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October 11, 2008

Lehman: Like George Bailey --- Without the Bank or the Ethics

There is a truly numbing piece up on BusinessWeek's site about the mess that Lehman made via taking counterparty collateral obtained in one swap and using it as collateral in a myriad more. Post-bankruptcy, that has led to a sort of interplanetary Where's Waldo?, with counterparties hunting frantically for their posted collateral -- is it here at JPM? at Barclay's? yoo-hoo, collateral! -- largely to no avail.

This sounds mischievous and nasty, doesn't it? Taking collateral from one swap and using it as part of another seems ... ungood somehow. Then again, is it that different from the usual drill in fractional reserve banking (whoa, easy out there all you grassy knoll banking sorts) wherein the money you and I deposit in the bank of your choice is largely loaned out again as fast as possible? It's just re-investing the float, albeit in the shadow banking system, as opposed to its non-shadow banking equivalent.

So, George Bailey would be proud, right? Not so much. While Bailey studiously kept track of his obligations and didn't over-extend himself unduly, Lehman seemingly took the opposite approach, with a molehill of collateral supporting a Lhotse of loans. It was a barker game, a move-fast-and-light excercise that worked just dandy until some of those damn counterparties and reference parties started defaulting. Undercapitalized fuckers.

More here.

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