As reported last week in the Wall Street Journal by Carrick Mollenkamp and Alistair MacDonald, for the third time this year a global bank has been caught with trading irregularities. Two weeks ago, it was Lehman Brothers Holdings Inc.’s turn to suspend two traders in its London office pending an equities trading inquiry.
The bank’s inquiry focused on how the traders were valuing securities tied to complex equity derivatives. In their simplest form, equity derivatives allow a bank’s clients or in-house trading desk to hedge against volatile stock markets by locking in prices with indexes or specific stocks.
It is not currently believed that deceptive or fake trades were involved. The traders were suspended after Lehman’s internal systems flagged a breakdown in the procedures for valuing securities. Those familiar with the trades said that the impact of the trades was not material. The estimated value of the trades is said to be about $150 million?well under losses tied to inappropriate trading by France’s Soci?t? G?n?rale SA ($7.2 billion) and Credit Suisse Group ($2.85 billion).
Currently, U.S. firms UBS AG and Merrill Lynch are under investigation by the SEC and the Department of Justice to see if the troubled mortgage securities held by the financiers were properly valued. Since these complex derivatives do not have a ready market in volatile time such as these, they are especially susceptible to possible mis-valuing by traders who want to improve their holdings and profitability.