Looking back, of course, we all knew that Lehman Brothers would go bankrupt. Didn't we? Well, the smart minority had it that Lehman might be allowed to fall, but the overwhelming majority of opinion was, after so many government-sponsored bailouts, that the 158-year old bank was too big, or at least too important, to cast off.
Whether you attribute the loss to the greed of Lehman boss Dick Fuld, or you think that banks should be subject to market forces and allowed to go to the wall, it doesn't really matter.
What we are left with is confusion - no one knows what will happen, other than they will probably lose most of their investments. Without wanting to delve deeper into history than entirely necessary, what we have here is not unique. Banks build up the billions in the good times, but must be feasting on kryptonite to believe they will not go bankrupt when times are tough.
We are also faced with deals that need to be either unwound, novated or resolved, for the good of those wanting a return of their damaged goods. How does this work? No one knows, or so it would appear. While we clamour for some degree of certainty, markets are being made by other product issuers, generally in small sizes, and mostly on the quiet.
Deals done by Lehman as an issuer across the world are different, so it is impossible to generalise. But what we can say is, while regulators and distributors work out how and if they can help the 'mom and pop' investors, the word 'guarantee' may well have to be removed from product documentation.
On this page of the October 2007 issue of Structured Products, I talked about how little time was really spent on assessing issuer credit. Unfortunately, now we know how prophetic those words were. And in the US report that we included in the July/August 2008 issue, a Q&A on counterparty risk noted that banks were perceived as 'too large and interconnected to fail'. That statement seems rather poignant now.
Richard Jory, firstname.lastname@example.org, +44 (0)20 7484 9802.
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