HOW MUCH DID LEHMAN OWE YOU?

HOW MUCH DID LEHMAN OWE YOU? An article in yesterday’s Wall Street Journal dramatizes how difficult it is going to be to unwind the complicated financial assets that are so much a part of this crisis. (the link has a summary of the article). The article begins: “Scores of hedge funds are trying to decipher how exposed they are to Lehman Brothers Holdings Inc. and are letting investors know how much they potentially stand to lose, which for some funds represents hundreds of millions of dollars.” Think about that. Lehman Brothers went bankrupt nine business days ago and hedge funds can’t tell how big their direct and indirect exposure is. I don’t know how you can manage a credit risk if you don’t know what it is. Back in the late sixties, a lot of brokerage houses went bankrupt because of “back-office problems.” A lot of what is happening now could be called “back-office problems” if those are defined as not knowing what you own and what you are owed. That is, institutions were engaging in large-scale exposures without any system in place for knowing what their credit risk was.