Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Lehman Brothers - Fannie Mae Pairs Trade and a Cup of Coffee

Toomre Capital Markets LLC ("TCM") is an active consultancy in the areas of structured finance, risk management and financial engineering. As a result, we have many conversations with numerous people across the spectrum of clients, prospects, former associates and other industry contacts. In the past several months, many of these conversations have touched upon Lehman Brothers, especially given Lars Toomre's personal history of working there and back in the 1980's running that firm's very influential ABS and mortgage derivatives trading business(es).

Given that that specific business area in the fixed-income markets is at the heart of the current credit crunch in the Capital Markets, many have asked more privately just what Lars has been thinking about the on-going market developments. Lars has specifically made a point (until now) on refusing to comment publically about Lehman Brothers and the recent sacking of his former boss, Joe Gregory, who until recently was the President of Lehman Brothers.

On Friday July 11th 2008, yet another contact queried what Lars thought about the on-going melt-down in financial equity securities, particularly those currently in the news such as Fannie Mae, Freddie Mac, Citigroup, Washington Mutual, Wachovia, Lehman Brothers, Merrill Lynch and Morgan Stanley. We talked through the various plus and minuses of these potential investments. This contact, who runs a multi-billion dollar portfolio on a leveraged basis, then asked Lars to put on his theoretical trading hat and suggest some specific trades. Lars demurred.

When pressed, Lars suggested that the pairs trade of long Lehman Brothers and short Fannie Mae on a proceeds basis at the then current prices of $14.00 and $10.00 respectively would be positive over the next month. As a result, we agreed to record this trade thought and to settle up one month hence. The winner will be entitled to a Starbuck's drink of his choice.

As Lars leaves for a combined business trip and some personal time in the Tetons mountains of northwest Wyoming, he is confident that Lehman Brothers CEO Dick Fuld will get that ship in order relative to the virtual black hole that is Fannie Mae. The next month certainly will be interesting as to whether this proposed trade ends up in the money.

Reader comments and thoughts are welcome.