With all due respect to David Hoffman (one of the best reporters in the business), we did not get scooped on the Lehman Brothers story, as Jim suggests.

In fact, Murray Coleman was way ahead of the story.

Murray’s story on the Opta ETNs posted to our Web site at 2:27 p.m. on Friday, September 12, titled “Lehman Meltdown Raises ETN Questions.” At the time, Lehman Brothers was still a going concern, and the Lehman Brothers Opta ETNs were trading as normal on the New York Stock Exchange.

Murray wrote: “With Lehman Brothers fighting to stave off bankruptcy, shareholders of the once-mighty investment bank aren’t the only ones facing possible big losses. Those owning exchange-traded notes issued by the firm could face a tough time getting out of their investments at fair market value if things take a dramatic turn for the worse.”

The article goes on to call the risk “small”—something I as an editor inserted, after discussing Lehman’s prospects with you, Jim. But the point is, Murray put out an excellent story that warned investors about the risks of holding Lehman ETNs while those ETNs were still trading. A risk-conscious investor could have read that story and said, “The upside of holding these ETNs is limited and the downside is enormous; I should sell.”

I hope they did. Anyone who held those ETNs that weekend was taking a tremendous risk for which there was no compensating reward.

That’s what the best investment journalism does; alerts investors to risks while they can still do something about it.

The idea that Barclays was going to step in and pay off the ETNs as part of its agreement to buy Lehman’s investment banking and trading operations was a fantasy. The Opta ETNs were general obligations of Lehman Brother’s Holdings, and Barclays was very careful to exclude those debts from its buyout. It specifically did not want to take on the structured product debt from Lehman, and it could hardly pay off some but not all of the structured products. Just imagine the outcry!

Once Lehman filed for bankruptcy, those ETNs were over.

The Lehman Brothers story drives home an important point: Credit risk is very real in the ETN business, and it is also digital. Either the bank stays solvent and you receive 100% of the index return, or the bank goes bankrupt and you’re toast. There is no Mr. In Between.

Let’s hope investors understand that.

Last 5 posts by Matt Hougan

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