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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.  Comon 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 followup 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 50^th and 7^th
(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.

Last 5 posts by Jim Wiandt

• FINRA Warns On Leveraged ETFs - June 19th, 2009
• What is Wrong With Matt Hougan? - June 16th, 2009
• ProShares, Direxion Are NOT ETFs - June 16th, 2009
• Shock And Awe - June 12th, 2009
• ETFs Are A Scam? - June 10th, 2009