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When Prime Brokers Fail

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When Prime Brokers Fail

The Unheeded Risk to Hedge Funds, Banks, and the Financial Industry

Bloomberg Press,

15 min read
10 take-aways
Audio & text

What's inside?

Take a look inside the secretive, largely unreported world of prime brokerage.

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Editorial Rating

8

Qualities

  • Innovative

Recommendation

Former investment banker J. S. Aikman has written an advanced textbook explaining the detailed, complex role prime brokers play in the global financial markets. Largely unknown to even sophisticated investors, prime brokers provide the services hedge funds need, including financing, trading, research, securities lending, trade execution and consulting. When Lehman Brothers collapsed in 2008, its prime brokerage business’s legal and operational entanglements deepened the global financial crisis and shook hedge funds and other prime brokers worldwide. While esoteric, prime brokerage plays a huge role in global money management and certainly warrants more of this kind of professional scrutiny. getAbstract recommends this comprehensive insider’s guide to finance executives and investors who want to know more about the wizard behind the hedge fund curtain.

Summary

From “Euphoric Episode” to Panic

The 2008 financial crisis wiped away the exultant mood that had dominated global financial markets for years. Not only did the collapse kill the market for mortgage-backed securities and other exotic securities, it also deflated the once-high-flying segments of private equity, leveraged buyouts, investment banking, and mergers and acquisitions. Among the most significant casualties were investment bank and prime broker Bear Stearns, which JPMorgan Chase rescued in March 2008, and mortgage guarantors Freddie Mac and Fannie Mae, which the US government took over that September.

But the spark that ignited the real panic came on Sept. 15, 2008, when Lehman Brothers, one of the world’s largest financial institutions, declared bankruptcy. Because of money market funds’ exposure to Lehman, they succumbed quickly; their net asset values (NAVs) dropped below the legally and symbolically important $1 standard. That led to a cascade of redemptions by institutional and retail investors. As the crisis unfolded, major banks disappeared, and big corporations such as General Motors, AIG and Chrysler suffered deep financial wounds. Hedge funds and ...

About the Author

Management consultant and attorney J.S. Aikman lectures on finance at the University of Toronto. He was formerly a vice president of an investment bank in London.

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