Lehmans' third anniversary: Are investors better off?

Three years on from the collapse of Lehman Brothers, Laura Miller revisits the shocking events and asks if any lessons have been learned.

Three years on and a rundown of the events of 15 September 2008 is still breathtaking.

Lehman Brothers, the fourth-largest investment bank in the biggest economy in the world, filed for bankruptcy; the Dow Jones industrial average dropped 2.5% – 283 points – by early afternoon. By 17 September, the index had dropped a combined 800 points.

In the UK, the FTSE 100 plunged by more than 5% on the news and closed down 3.9%, wiping £50bn off the value of Britain’s top 100 companies.

Unknown to many UK investors, Lehmans backed thousands of their structured products. When it collapsed, despite its triple-A rating, they found out – and lost millions.

Lehmans’ failure marks the point the global financial system stopped teetering on the edge of crisis and fell head first into the precipice. So, thirty-six months later, how far have we recovered? 

After the fall

Structured products are still toxic in the eyes of many advisers, not least because the FSA – which found failings by both providers and advisers during its 2009 review into their marketing and sale – continues to focus on the investments’ potential risks to investors.

Predictably, product providers say the industry has come a long way since the early days when it was not normally declared who the counterparty was, just that they had a certain minimum credit rating.

Post-Lehmans, once-bitten-twice-shy IFAs will not usually recommend a product unless they know the name of the counterparty. This is a positive change.

So is the recognition that many product providers, advisers, and ultimately the US bank itself, failed by not sticking to the basics of good practice; know what you are buying and selling; spread the risk.

One firm, fined £35,000 by the FSA in 2010 for giving unsuitable advice in relation to sales of Lehman-backed products, advised clients to invest when they could not afford to do so, recommended a high concentration of customers’ portfolios be placed in structured products and failed to fully understand the products or to warn customers of the counterparty risk associated with them. Even if Lehmans hadn’t failed, this is questionable practice.

Back to basics

But since the investment bank’s collapse there has been a reinvigoration of a healthy respect for the basics – clarity as to what you can expect from an investment both in a normal market environment and at times of stress or failure – and a concerted effort on the part of the FSA and many providers and advisers to improve marketing literature and the sale of structured products.

James Harrington, chairman, UK Structured Products Association, says: “We believe that information is available to advisers and investors alike for all UK structured investments, before and after sale, in a format that encourages informed decisions about the suitability or otherwise of a particular investment.”

Advisers say changes have also been client-led, in the number of questions investors ask about their investments; exposure to certain classes; and in particular about a word they had rarely used before Lehmans’ failure – counterparty.

Demand more

The fallout from Lehmans continues. FOS is still investigating claims against Meteor Asset Management over its Lehman-backed product range, and NDF investors continue to dispute the FSCS’s ruling they are ineligible to claim compensation for their Lehmans-backed capital-at-risk investments.

But these cases represent the tangled mess the financial industry got itself into in the run up to 15 September 2008.

In the three years since Lehmans’ bankruptcy, many advisers and investors have learned to demand more from their conversations with each other, which can only lead to greater clarity and better outcomes for both.