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Lehman Derivatives Records a ‘Mess,’ Barclays Executive Says

Barclays Plc had no idea how big Lehman Brothers Holdings Inc.’s futures-and-options trading business was when it considered taking over the defunct bank’s derivatives trades at exchanges in 2008, a Barclays executive said.

“Lehman’s books were in such a mess that I don’t think they knew where they were,” Elizabeth James, a director of Barclays’s futures business, testified today in U.S. Bankruptcy Court in Manhattan. James worked on Barclays’s purchase of Lehman’s brokerage during the 2008 financial crisis.

She said she received an e-mail from former Barclays trading executive Stephen King saying Lehman had “absolutely no idea” if it had sold $2 billion more options than it had bought, or whether it owned $4 billion more than it had sold.

The e-mail was dated Sept. 22, 2008, the day Barclays completed its takeover of the brokerage and a week after Lehman filed the biggest bankruptcy in U.S. history. James was testifying in a trial to determine whether Barclays should pay Lehman as much as $11 billion for making an allegedly undisclosed “windfall” on the deal.

Lehman, its creditors and the brokerage trustee, James Giddens, brought the case against London-based Barclays last November. The disputed amount includes $4 billion in Lehman margin accounts at exchanges.

Lehman agreed in 2008 to turn over the collateral to Barclays, because the U.K. bank became responsible for securing the positions at the exchanges when it took over the business, James said.

‘Normal Practice’

Transferring margin together with trading positions “is normal practice in the ETD business,” she told U.S. Bankruptcy Judge James Peck, referring to Lehman’s exchange-traded derivatives. “You’d be crazy if you didn’t.”

She said Lehman’s lack of records initially prevented her from performing “due diligence” to discover what Lehman’s and its customers’ positions were, where Lehman kept its bank accounts, and who its brokers were.

James said she had seen a tabulation of Lehman’s positions at the Options Clearing Corp. showing that the daily margin requirements for its trades had varied by as much as $1 billion within a few days in September 2008.

Just before the deal closed, Barclays learned that it also had to take over a large position in a volatility index it hadn’t known about, James said. A volatility index allows traders to bet on market price changes.

Asset Transfers

Lehman and the brokerage trustee have said Barclays exaggerated its risks and took more assets than it was entitled to, including margin accounts. Barclays’s lawyers have showed the judge e-mails and documents from September 2008 demonstrating that Lehman and the trustee agreed to the asset transfers.

The trial, which resumed last week after a summer break, pits the U.K.’s third-biggest bank against Lehman, which wants money from Barclays to pay creditors.

The money would help Lehman creditors, who may recoup only 15 cents to 44 cents on the dollar, Lehman has said, and hurt Barclays, which made 2.4 billion pounds ($3.7 billion) in the first half.

The cases are In re Lehman Brothers Holdings Inc., 08-13555, and Giddens v. Barclays Capital Inc., 09-01732, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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