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The Lehman Brothers Bankruptcy F: Introduction to the ISDA Master Agreement

Author

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  • Christian M. McNamara
  • Andrew Metrick

    ()

Abstract

When Lehman Brothers Holdings, Inc. (LBHI) sought Chapter 11 protection, the more than 6,000 counterparties with which its subsidiaries had entered into over 900,000 over-the-counter (OTC) derivatives transactions faced the question of how best to respond to protect their interests. The existence of standardized documentation developed by the International Swaps and Derivatives Association (ISDA) for entering into such transactions meant that the counterparties likely thought that they were dealing with a well defined and robust set of options in answering this question. Yet, in practice, the resolution of Lehman’s OTC derivatives portfolio ended up being less orderly than the existence of standardized documentation might have suggested it would be. This case explores: (1) whether the default provisions contained in the Master Agreement played any meaningful role in Lehman Brothers’ bankruptcy and its outcome, (2) whether changes should be made to the Master Agreement to reduce the systemic risk associated with derivatives transactions, and (3) how attempts to create global certainty through the use of standardized agreements can be thwarted by the operation of local laws.

Suggested Citation

  • Christian M. McNamara & Andrew Metrick, 2014. "The Lehman Brothers Bankruptcy F: Introduction to the ISDA Master Agreement," Yale School of Management YPFS Cases 59185, Yale School of Management, revised Mar 2015.
  • Handle: RePEc:ysm:ypfswp:59185
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    File URL: http://som.yale.edu/sites/default/files/files/001-2014-3F-V1-LehmanBrothers-F-REVA.pdf
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    References listed on IDEAS

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    1. ., 2014. "Maritime networks," Chapters,in: Asian-Pacific Rim Logistics, chapter 3, pages 58-92 Edward Elgar Publishing.
    2. Christian M. McNamara & Andrew Metrick, 2014. "The Lehman Brothers Bankruptcy F: Introduction to the ISDA Master Agreement," Yale School of Management YPFS Cases 59185, Yale School of Management, revised Mar 2015.
    3. anonymous, 2014. "Payday Loans: Time for Review," Inside the Vault, Federal Reserve Bank of St. Louis, issue Fall.
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    Cited by:

    1. Rosalind Z. Wiggins & Thomas Piontek & Andrew Metrick, 2014. "The Lehman Brothers Bankruptcy A: Overview," Yale School of Management YPFS Cases 59181, Yale School of Management.
    2. Christian M. McNamara & Andrew Metrick, 2014. "The Lehman Brothers Bankruptcy F: Introduction to the ISDA Master Agreement," Yale School of Management YPFS Cases 59185, Yale School of Management, revised Mar 2015.
    3. Rosalind Z. Wiggins & Andrew Metrick, 2014. "The Lehman Brothers Bankruptcy E: The Effect on Lehman’s U.S. Broker-Dealer," Yale School of Management YPFS Cases 59184, Yale School of Management.

    More about this item

    Keywords

    Systemic Risk; Financial Crises; Financial Regulation;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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