Magazine article Modern Trader

Lehman Goes for a Triple-A

Magazine article Modern Trader

Lehman Goes for a Triple-A

Article excerpt

The search for the best way to enhance a swap dealer's credit took yet another turn with the unveiling of Lehman Brothers' new triple-A rated special purpose swap subsidiary. By hedging all swaps with futures within the sub and entering into offsetting hedge transactions with the parent, the structure reduces risk to both the sub and its customers from a failure of the parent, says James Vinci, the managing director responsible for the new sub.

"It's an interesting twist," one rival notes. "Lehman structured it so that if the parent goes under, the swap sub has a self-contained book."

Lehman capitalized the sub, Lehman Brothers Financial Products, with $200 million. Like other triple-A subs, Lehman's will enter into swaps with customers and mirror swaps with the parent to transfer market risk out of the sub.

At Merrill Lynch, Salomon Brothers and Westpac, the parent company then hedges any open risk from the swap portfolio with futures or Treasuries. …

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