Renegade Economists podcast 255

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Justice for the People, Not Banksters: Mayor Ken Keith (Shire of Parkes) & Prof Justin O’Brien from the Centre for Law, Markets & Regulation at UNSW discuss the Federal Court ruling that financial advisors have a duty of care when promoting derivatives to their clients. A world leading case.

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Professor O’Brien’s article Understanding the Federal Court’s Landmark Ruling Against Lehmann Brothers included this quote:

In December 2007, four months after the problems in the US securitisation market became apparent, the business (Grange Securities) was rebranded as Lehman Brothers Australia and Lehman Brothers Asset Management respectively.

The incoming chief executive was Jim Ballentine. He was acutely aware of the risks associated with complex derivatives. He was interviewed for a BusinessWeek article as early as 2005 on the risk associated with credit defaults and defective modelling in credit derivatives.

In 2005, Ballentine, as head of structured credit, was partly responsible for Lehman receiving the Euromoney Award for Excellence as “best derivatives house” — an award that the magazine claimed was based on the fact that “Lehman Brothers has been one of the more conservative credit derivatives houses … It has protected the bank from the reputational risk that the likes of Barclays Capital and Bank of America have run selling structured credit products”. It was a reputation that was not to last in either the United States or in Australia. Not only was Lehman to spectacularly blow up, the wave of litigation has now brought into question how government itself can protect itself from financial engineers.