Barclays To Allow Default of Lehman ETNs?

September 22, 2008

In one of the more shocking developments of a shocking week+, it looks like Barclays PLC may let the Lehman structured products, including their Opta ETNs, default.

This is a stunner. Our publications go from frankly getting a lot of criticism of "overplaying" the credit risk issue with ETNs to dutifully reporting on what looks to be the first ETN default ... in the space of, uh, less than a month. This is a shocking, shocking development and our forceful reporting of the issue was scorned in some quarters and praised in others. And if those things DO default, how real is that credit risk for you?

The amazing part of this is that it appears that Barclays PLC, who bought the Lehman Brothers investment banking and capital marketing business for a SONG (and none of the liabilities), appears willing to let all of those structured products, including the Opta ETNs be subject to the same pennies on a dollar, "get in line please" treatment of the other Lehman Brothers liabilities.

Even more amazing (and embarrassing) is that we were scooped on this story by our friend Dave Hoffman of Investment News, who has been my source for this article. We did manage to cover the February 2008 launch of the Opta ETNs. But they sent us a press release on that one.

You can view Dave's Investment News article on the situation here. Come on Dave, you KNOW that was our story. We've been all over ETNs from Matt Hougan's letters to the IRS asking for a ruling on their tax status (original feature and follow-up available only to paid ETFR subscribers), through their coverage in Heather Bell's weekly ETF Watch, through Paul Amery's tough reporting on the very real credit risk (even-more-detailed and definitive coverage will be in the October issue of ETFR which will mail soon) through the recent problems with ProShares to the just complete reopening for business of all of the AIG-based ETF Securities products in London.

Obviously we've covered the recent crisis in detail, reporting on the ProShares situation, the AIG/ETF Securities drama and the turmoil in general. So do keep your eyes open here for more information on the Opta ETN situation and the implications. It has been a very, very big couple of weeks for this business ... this is a time we'll remember in the years ahead as industry-shaping.

The shocking part of this, frankly, is that Barclays seems to see this on just a pure bottom-line basis and apparently isn't worried about the peripheral brand damage in having those products default. Under the Barclays PLC umbrella, BGI worked very closely on ETNs with Barclays Capital, of course. And you'd have to think that seeing ETN product defaults, wherever they are, is not a good thing for the iPath products. And you'd also think that Barclays being associated with defaults of something it just purchased on the cheap would not be desirable either.

Maybe they'll step up to the plate yet and make good on those products. You'd have thought the Lehman products would have been hedged, but I'm guessing not so much right now since no one's been coming to work over there at 50th and 7th (or have they? - I don't even know). We'll try to check the full lay of the land of not just the ETNs but all the Lehman structured products and see what the assets and exposure is and to see what Barclays PLC (which we'll note is not the same exactly as Barclay's Global Investors) is really thinking. Maybe there's a communication gap in the turmoil over there that is yet to be bridged.

My personal hope is that the general situation has injected some much-needed reality into people's views of these products without throwing the baby out with the bathwater. It seems like it may have been just enough of a crisis to wake people up without reaping tremendous damage on the whole exchange-traded products industry. It's a bit of trial by fire. And hopefully the various products come out the better for it.



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