The Value in Product Control

Good post from Robert Peston on the BBC website on part that the Product Control Group did (or rather didn't?...) play in the problems at Lehman's, according to the official US bankruptcy report on Lehman's by Anton Valukas.The post highlights the report's findings that the Product Control Group did not have the quant experience to keep up with CDO trading desk.

Interesting findings on Lehman's, but variants on this theme seem to be elsewhere too. A contact who knew Merrill's New York trading operation in the run up to the crisis recently asked me how many quants did I think used to work on the CDO trading desk. The surprising (?) answer was not one...

Comments

[Neil Lancastle]

Agreed, and not just at Lehman and Merrill. According to a UBS report, there was little understanding of CDO pricing, risks and regulatory capital:

UBS’s Group General Counsel and Internal Audit (2008), ‘Shareholder Report on UBS’s Write-Downs’, http://www.ubs.com/1/e/investors/releases?newsId=140339

With hindsight, you'd think they would never have got away with building such a large business without capital. If they had taken a product view, and stress tested some market failures, someone might asked earlier what they would do if CDS protection ran out.