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Beware Etns Part 2

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by Felix Salmon
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Sep 23 2008 8:16pm EDT

Beware ETNs, Part 2

Exchange-traded notes come with a monstrous amount of counterparty risk, as investors in Lehman's ETNs are now discovering:

Holders of Lehman Brothers' structured products "have the same standing as other Lehman holding company senior, unsecured debt, which is trading at 15 to 20 cents on the dollar," said Mr. Seitzer, who himself purchased Lehman structured products in July.

This alone makes it very dangerous to buy an ETN: you're taking a huge amount of counterparty risk and not being paid for it at all. If this had happened a couple of years ago, I might have suggested a monoline wrap to set investors' fears at rest.

Now? I'd wait for a new structure to come along, one where investors actually own the underlying securities, rather than simply an obligation issued by a bank. Or at the very least buy ETNs only from state-owned banks. There will probably be a few of those, by the time this crisis is over.

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