Basic Questions Remain 6 Months into Lehman Post-Mortem

Further insights into the extent of the financial debris left by the credit crunch were revealed by administrators to Lehman Brothers International (Europe) last week.  Aside from the extremely large numbers reported as gross assets (US$628bn) and liabilities (US$611.8bn) which amplifies the concerns of regulators and commentators concerning the overleveraged nature of the investment banking business, the report also highlights the highly interconnected, global and complex nature of the modern financial services industry.  The question remains as to whether this will continue to be the case in the future if protectionism and a 'back to basics' agenda takes off.

Further, if it has taken PwC, the world's largest professional services firm, six months to get to grips with the inner workings of the bank, the issue as to how risk managers and executives within the bank were able to effectively deal with risk arises.

Consider the facts : Its key trader status meant Lehmans was responsible for 10 percent of trades on the LSE, there still remain a large number of open positions on the Lehmans trading book, under half of client assets by way of value have been returned to their rightful owners, more than US$8bn of cash was swept out of the UK operations the Friday before it collapsed (as part of a common practice of sweeping all cash back each day to the parent company) and fewer than two thirds of customers have provided sufficient detail to allow a full reconciliation between Lehmans' and the clients' positions.

At the nub of this issue is the question of "Who owns what?".  When entering relationships with counterparties such as fund managers it is vital to understand the exact terms on which trustees and directors are entering in to contracts, none more so than in the world of hedge funds and more exotic financial instruments.  However, this should equally apply to more routine investments - the maxim of not investing in what you don't understand has never been more apt.

Ultimately, the question has to be "If it all goes wrong and I need access to funds, can I get them?".  Clients of Lehmans are finding out the answer to that question.

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