Intelligence

Ten Years Ago, the Phone Rang

Eric Hazard

CEO, Vested Ventures

She didn’t want to do it. It was risky and the upside was unclear. The firm’s clients were on both sides of the platform and any erroneous data would be fatal to the platform, as the world needed it more than ever.

The Friday before Lehman Brothers collapsed, I was on the phone with Susan Hinko of TriOptima talking through the Wall Street Journal strategy. TriOptima had a unique vantage point into the pending crisis, the notional value of all CDS on the street. At the time, it was estimated to be $66 trillion (or 66 Apples in 2018 terms). The implications of a major counterparty going into default were unfathomable. In part, because no one really knew how CDS may be cleared and settled without a central counterparty.

It was Aaron Lucchetti’s job to provide some modicum of explanation to his readers. TriOptima had the data and he wanted access to it, and a primer on the mechanics of the market. Yeah, the credit desks gave him some understanding but he needed to know how, exactly, these securities would be cleared. TriOptima held the answer. We negotiated into the evening and settled on an off the record conversation to help him understand where the counterparties stood.

But Susan was hesitant. Too much risk. Everyone on the Street would know it was TriOptima’s data. But she also knew the stakes at play were much larger than exposure to her company. So we agreed on a tentative solution. If Lehman Brothers went into default, she’d speak to Aaron. Aaron said I’d be the first call he would make if Lehman employees were called in. He had the story framed up, he needed the data and the explainer. I gave him my cell phone number and waited.

On the other side of the balance sheet of my life was my partner. She worked in prime brokerage at Deutsche Bank, charged in part with managing the risk exposure of her hedge fund clients to credit derivatives. She spent most of the previous week ensuring no trades were routed to Lehman Brothers. Deutsche Bank had already shut off deal flow as one risk management tool. But there was no agreed upon settlement cycle for the credit derivatives, so the notional value of unsettled trades was large. Too large for the bank’s balance sheet depending on which system you looked at. It was a tense situation.

They let her go home on Friday but said everyone was on call that weekend. If Lehman Brothers went into default, it was all hands on deck. Deutsche Bank would have a lot of work to unwind unsettled trades for their clients.

We made a bet. Who’s phone would ring first?  Aaron Lucchetti calling to request the TriOptima interview or Deutsche Bank calling in the prime brokerage team?

That Sunday, the phone rang. It was Aaron. His sources said all Lehman associates were called into the office. The company was running out of cash and around the world, counterparties were refusing to send deals to the firm. He needed to speak to Susan to understand exactly how large the impact may be.

Five minutes later, the other phone rang. It was Deutsche Bank. Come in and prepare for a long evening.

The default had begun. My life would never be the same.

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