Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Dear Lehman: Risk Comes Full Circle


In 1998, Prof. Succo questioned firm's derivative risk - and was fired for it.


Editor's Note: The following originally appeared on August 12, 2005 and in light of current events has been reprinted here for the benefit of the Minyanville community.

In 1998, I'd been running derivative trading for Lehman for about 2 years. There, I took the experience I'd first acquired at Morgan Stanley (MS) and applied it by integrating derivative trading with cash (stock) trading. Minyanville's Why Wall Street Will Never Be the Same

We were on the verge of seamlessly combining the 2 in order to make deep liquidity markets in both to customers, while at the same time running large proprietary portfolios. My thesis was that using proprietary positions in derivatives would give us a "basis" for making markets to customers.

We began to dominate the business and attract new customers because of the size of markets we were willing to make. Understand: I do not use the word size glibly; we had intense risk controls, and size in long volatility positions when making markets actually reduced risk.

One of those new customers was LTCM. Through salesmen, they began to do some normal derivative trading, which we were happy to oblige them in. One day, they asked for a market in what was called a "performance swap."

My interest was piqued, because this trade is all about leverage. Essentially, a customer wants price exposure to an asset -- let's say a stock -- but doesn't want to actually buy that stock. There may be some obscure reason why this may be the case, but the real one is that they simply don't want to put up the cash.

In a performance swap, I as the broker would offer the performance of the stock in an over-the-counter agreement, and make the customer put up only a small amount of money in order to honor that agreement (there are details I won't go into here, but they don't change the gist of the story).

Is there another Bear Stearns out there?
Minyanville's Buzz & Banter- 14 day FREE Trial

Click Here to Purchase John Succo's "A Derivatives Primer: Options, Futures and Structures"

< Previous
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos