Lehman Brothers, Fact and Fancy

If you are concerned about the power of the fed government to manage big problems, here are two things to ponder, beginning with bankruptcy of Lehman Brothers on September 14, 2008

When Lehman Brothers Holdings Inc. collapsed, its U.S. operations had 1.2 million derivatives transactions outstanding with 6,500 trading partners. Many of them were far from Wall Street, including schools such as Beaver Country Day School outside of Boston or companies like Metavante Corp. in Milwaukee, which had relied on Lehman to help reduce their exposure to fluctuating interest rates through derivatives. In all, the contracts, which were tied to interest rates, bonds, currencies, commodities and stocks, had a "notional," or theoretical, value of $39 trillion. (wsj)
 

The crisis confronted philosophy and law.

Many financial institutions in Europe also faced the liquidity problem that they needed to raise their capital adequacy ratio. As the crisis developed, stock markets fell worldwide, and global financial regulators attempted to coordinate efforts to contain the crisis. The US government composed a $700 billion plan to purchase unperforming collaterals and assets. However, the plan failed to pass because some members of the US Congress rejected the idea of using taxpayers' money to bail out Wall Street investment bankers. After the stock market plunged, Congress amended the $700 billion bail out plan and passed the legislation.

Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and head of the New York Federal Reserve Bank, Timothy Geithner worried that they lacked the legal authority to rescue Lehman. Under the law, they said, the Fed couldn’t lend to a financial institution with a negative net worth: its liabilities (what it owed) exceeding its assets (what it owned). This was the case with Lehman Brothers, they have contended.

 

The world's gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist.

The notional value of the world's derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position's assets. This distinction is necessary because when you're talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments.

the Bank for International Settlements (BIS) estimated the net notional value of uncollateralized derivatives risks is between $2 trillion and $8 trillion, which is still a staggering amount of money and well beyond the billions being talked about in Europe.

In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller.
The four banks in question: JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc.