Page 358 - untitled
P. 358
SEPTEMBER : THE BANKRUPTCY OF LEHMAN
to more accurately assess the potential effects of its failure, and () identify risk miti-
gation actions for areas of serious potential harm.
As they now realized, regulators did not know nearly enough about over-the-
counter derivatives activities at Lehman and other investment banks, which were ma-
jor OTC derivatives dealers. Investment banks disclosed the total number of OTC
derivative contracts they had, the total exposures of the contracts, and their esti-
mated market value, but they did not publicly report the terms of the contracts or the
counterparties. Thus, there was no way to know who would be owed how much and
when payments would have to be made—information that would be critically impor-
tant to analyze the possible impact of a Lehman bankruptcy on derivatives counter-
parties and the financial markets.
Parkinson reviewed a standing recommendation to form a “default management
group” of senior executives of major market participants to work with regulators to
anticipate issues if a major counterparty should default. The recommendation was
from the private-sector Counterparty Risk Management Policy Group, the same
group that had alerted the Fed to the backlog problem in the OTC derivatives market
earlier in the decade. Parkinson suggested accelerating the formation of this group
while being careful not to signal concerns about any one market participant. On
August , Parkinson emailed New York Fed officials that he was worried that no
sensible game plan could be formulated without more information. He was in-
formed that New York Fed officials had just met with Lehman two days earlier to ob-
tain derivative-related information, that they still needed more information, and that
the meeting had “caused a stir,” which in turn required assurances that requests for
information would not be limited to Lehman.
New York Fed officials were also “very reluctant” to request copies of the master
agreements that would shed light on the Lehman’s derivatives counterparties, be-
cause such a request would send a “huge negative signal.” The formation of the in-
dustry group seemed “less provocative,” wrote a New York Fed official, but could still
“spook the market.” Parkinson believed that the information was important, but at-
tempting to collect it was “not without risks.” He also recognized the difficulties in
unraveling the complex dependencies among the many Lehman subsidiaries and
their counterparties, which would keep lawyers and accountants busy for a long
time.
On August , Treasury’s Steve Shafran informed Parkinson that Secretary Paul-
son agreed on the need to collect information on OTC derivatives. It just had to be
done in a way that minimized disruptions. On September , Parkinson circulated a
draft letter requesting the information from Lehman CEO Fuld. Geithner would
ask E. Gerald Corrigan, the Goldman Sachs executive and former New York Fed
president who had co-chaired the Counterparty Risk Management Policy Group re-
port, to form an industry group to advise on information needed from a troubled in-
vestment bank. Parkinson, Shafran, and others would also create a “playbook” for an
investment bank failure at Secretary Paulson’s request. Events over the following
week would render these efforts moot.
