The securities industry wants these exemptions because without them people would be reluctant to enter into repurchase agreements and derivatives because of the inability to manage risk through collateral.

Second, Jim Bianco’s statement that your credit rating gets downgraded to that of your weakest counterparty is an exaggeration. Many derivatives contracts are collateralized; a downgrade could prompt the requirement of the weaker counterparty to accept a larger haircut (post more excess collateral) or in some cases allow the trade to be unwounded or reassigned. It would also mean that fewer counterparties would be permitted to trade.

Second, the change in the bankruptcy law on repurchase agreements is not so malignent as you maintain. Normally counterparties in derivatives contracts and repurchase agreements attempt to limit their losses by requiring each other to post collateral. Under current law and contracts when one party declares bankruptcy the counterparty can typically unwind the trade at market prices and seize collateral up to the amount owed. It appears the law you cite merely expanded the types of transactions exempted. Without such exemptions, the collateral would be frozen in the bankruptcy and the counterparty would be unsure of its recovery and unable to protect itself against possible price movements in the collateral.

While I defer to an expert’s knowledge, I’m not certain that he fully understands the details.

The only way the Feds could have done this was backstopping the transactions. For a variety of reasons, that’s a terrible idea. For one, backstopped transactions in New York will not save the London desk from a quick closeout. I know of a lot of commodity desks that were reading ISDAs very carefully prior to Lehman’s bankruptcy, to ensure that they’d be jumping to termination as soon as legally possible.

There is no reason to expect that Lehman’s counterparties would have behaved anything other than rationally.

It’s called the Shock Doctrine.

The last argument made by Anon @10:47 concerning an orderly dissolution would appear to be supported by the bankruptcy attorney hired to represent LEH. See the fifth paragraph of the following article in the NY Times:

http://www.nytimes.com/2008/12/14/business/14miller.html

I can only go on what the Journal reported, and the summary they made of the A&M report contradicts bankruptcy law as applied to derivatives and reportedly keys off the premise that an "orderly" bankruptcy was an option, which per above, it was not.

Second, as Independent Accountant indicated above, A&M is conflicted in the issuance of any report on the bankruptcy process, given their status as an advisor hired prior to the filing. An independent firm should have been hired and was not. Frankly, they should have recuses themselves (they could have provided data and analysis to a third party which would have made an independent determination).

Third, if you do not think that firms to not issue client-serving reports from big-billing clients, you are sorely naive. I have seen repeated instances of highly questionable work, to put it politely, done at client request while I was at McKinsey and Goldman, and also have seen numerous instances of dubious reports out of other major consulting firms and accounting firms that I have been asked to review in a professional capacity.

Second, A&M wasn't hired to write a report – they are in charge of the liquidation of the Lehman estate. You don't need 150 people full time to write a report.

Finally, Yves, you seem to take it for granted that Lehman had to file for bankruptcy on the 15th. While ratings downgrades (which would have gravely hindered the chances of any recovery) were threatened by the credit rating agencies, those hadn't yet happened. Had Chris Cox not urged Lehman's board to file the night of the 14th and the company instead opened for business that week with the goal of unwinding its derivative exposure, a much different picture might have emerged.

But yes, if a counterparty has two trades outstanding with Leh (in roughly opposite direction), I suspect the unwind value in each would have involved a massive bid / offer . And Leh (creditors) would be out of pocket
So I dont know if 75 billion is ballpark or not, but some money would have been transferrred to counterparties as a result. The resr, as CNBC says, has gone to dollar heaven

Isn’t it all a zero-sum game in the end? Wasn’t it just a bunch of marks on paper and computer files that changed?