Tuesday, February 16, 2010

Failure of Common Sense

So I guess the following practice somehow made perfect sense to Lehman at the time.

The following is from an article on proprietary trading:

Back in 2006, Lawrence McDonald, a former Lehman Brothers bond trader, remembers, he asked an intern what he was doing during the winter break at the now bankrupt investment bank. The intern, who was a junior in college, said he was trading derivatives for the firm. Surprised, McDonald asked the intern the size of his pad — Wall Street–speak for how much of the firm's money he was able to trade — figuring it couldn't be much.

The intern's response: $150 million.

"It was one of the most amazing things," says McDonald, who has since written a book about his time at Lehman, titled A Colossal Failure of Common Sense. "This kid didn't even have a college degree."

This anecdote might make it a bit less of a mystery how Lehman got into trouble.

Trading derivatives is obviously not as simple as trading stocks. Much more tricky and potentially dangerous. Difficult to know how much exposure there was for Lehman here but, whatever it was, it was in the hands of an intern over winter break.


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