How Lehman Blew Up the City of London

John Hempton illustrates a case of how seemingly hoary US regulations worked well, and by contrast, the UK's blind embrace of deregulation has done lasting damage to London as a financial center.

The case study is the Lehman bankruptcy. In both the US and the UK, the firm had hedge funds as customers. Hedge funds often take margin loans against their holdings. A broker has a customer sign an agreement giving the broker broad authority to loan ("repledge") those securities. The broker needs to do that to fund the loan.

Here is where the fun bit comes in. The US has pretty tough rules on the use of these securities, while the UK had none, and it is becoming clear that Lehman abused its latitude in the UK, and the damage is considerable.