Barclays Will Not Pick Up Lehman ETNs

There has been much speculation about whether Barclays Capital (BCS) would walk away from the ETNs that Lehman Brothers (LEHMQ.PK) sponsored. Recall that Barclays bought Lehman Brothers North American investment banking and capital markets businesses on September 16, just prior to Lehman’s bankruptcy filing. I could hear the gnashing of teeth and moral outrage directed towards Barclays all the way to my quiet little corner of the world here on the north coast of California. It was as if it was Barclays’ ethical responsibility to rescue these ETNs from the jaws of bankruptcy, thereby protecting the reputation of ETNs in general.

In a conversation yesterday with someone who is familiar with the merging process of Lehman and Barclays, but who would speak only off the record, I received a definitive answer to the question: No! Barclays will not pick up the assets of Lehman’s ETNs. The ETNs will not be assumed because they were not part of the entity purchased by Barclays.

The details are fairly simple: the assets of these ETNs are obligations of Lehman Brothers Holdings, Inc. which are not part of the Lehman Brothers assets that Barclays purchased. Barclays bought the broker-dealer personnel and Lehman's North American banking operations, which include fixed income and equities sales, trading and research and investment banking business.

This means Barclays may be legally prohibited from stepping in and pulling the ETN assets out of the bankrupt firm, Lehman Brothers, Inc. Once a bankruptcy filing is made, the assets come under the Bankruptcy Court’s jurisdiction, and the Court must protect the assets for the stockholders and creditors of the bankrupt corporation. My source made it clear that if Barclays did somehow pull the ETNs out of the fire, so to speak, it could be subject to severe penalty and legal actions by the owners and creditors of the bankrupt corporation.

The bottom line on this episode is that a purchase of the entire entity of Lehman Brothers, Inc. would have brought the ETNs over, but Barclays rejected that option before it made the deal to purchase only specific pieces of the firm last week. I am curious about whether Barclays will be interested in buying these orphaned ETNs, perhaps at fire sale prices, sometime in the future when the bankruptcy proceedings allow such a sale. I hope by next week to have some specific information on this issue.

Comments

[dieuwer:]

Did ETNs become toxic because of this?

2008 Sep 26 11:05 AM

[Ray Hendon:]

It isn't going to help. But, they were always toxic to me. I have never understood, from an investor's point of view, what the attraction of an ETN was over the much more protected and transparent ETF.

An odd sidenote to this whole episode is that the three ETNs at question have less than $5million in assets each. In total they are just over $13Million. So there are no big enchaladas at stake.

But, the entire story hasn't been told, yet. The bankruptcy judge may arrange a sale of these assets to another buyer sometime before they are otherwise liquidated. Investors in these unfortunate insturments still have a glimmer of hope. But, had they been mutual funds or ETFs, their assets would have been protected from Lehman's failures as money managers.

Best wishes,

Ray

2008 Sep 26 11:39 AM

[mangy cat:]

etns aint lehman assets
they are liabilities

so one day, some day
etn holders might get a penny or two back
in the share out of very thin pizza slices among all non-privileged creditors

so be it

2008 Sep 26 05:01 PM

[Just The Facts:]

And an ETN would be ?

2008 Sep 26 06:23 PM

[Ray Hendon:]

Exchange Traded Note, a financial insturment somewhat similar to an exchange traded fund, except with an ETN the value of the note is strictly limited to the credit worthiness of the sponsor. They are not protected by any of the provisions of the Investment Company act of 1940, as mutual funds and ETFs are.


Best Wishes,

Ray

2008 Sep 26 09:01 PM

[a. palmer jr.:]

Would Lehman Bros. bonds be protected or are they just another example of the little guys (bondholders) getting screwed by the big guys?

2008 Sep 27 09:04 AM

[Dr Jones:]

Barclays has acted very shrewdly in their purchase of specific Lehman assets. Let us remember that Barclays will have the opportunity to take another look at the remaining ETN's, once the bankruptcy proceedings start to move forward.>> Dr. Jones

2008 Sep 27 10:35 AM

[Ray Hendon:]

The bonds will be paid accouring to: their status with respect to other debt--some are senior, some are subordinated, etc., and subject to how much in assets are left to distribute. Also, some bonds may be tied to specific assets, such as mortgages, railroad cars, airplanes, etc. I doubt Lehman had any railroad car bonds, but they may have some that are tied to other specific assets.

Generally, I think the bond holders are just above stockholders in the long line of creditors. Both classes are probably going to take one for the team!

Ray

2008 Sep 27 11:58 AM

[searcher:]

The speculation repeated earlier here and elsewhere of any Barclays relief to creditors (including ETN investors) other than that attendant to the specific structures assumed was ridiculous on the face of it. The notion that any risk to the reputation of ETN's could be mitigated by any Barclays 'noblesse oblige' is ludicrous.

2008 Sep 27 01:19 PM