Lehman certificates 2008: Why the promised protection failed when it mattered

On 15 September 2008, Lehman Brothers Holdings filed for insolvency proceedings in the US. According to FINMA, the "capital protection" of Lehman certificates was of little help. Legally, a certificate is a debt security: the issuer owes money to investors. Its promise is only as good as its ability to pay.

This article traces the events from a Swiss perspective. In Germany and Austria, people say "Insolvenz" (insolvency) rather than "Konkurs" (bankruptcy), and mostly "Zertifikat" (certificate). In Switzerland, "strukturiertes Produkt" (structured product) is the usual term.

What happened on 15 September 2008?

On 15 September 2008, the holding company Lehman Brothers Holdings Inc. filed a Chapter 11 petition with the US Bankruptcy Court for the Southern District of New York. This is an insolvency procedure under US law. The group companies active in securities trading, and the other subsidiaries, were not included in the holding company's petition. FINMA's report of 2 March 2010 gives the same date. FINMA is the Swiss Financial Market Supervisory Authority.

In Switzerland, according to FINMA, the impact showed mainly in products with capital protection. Subsidiaries of the holding company had issued and guaranteed them. Many retail clients had bought them. FINMA describes an "almost complete collapse in value". According to FINMA, many market participants regarded a default as "practically impossible". Many also assumed that the group would be supported in an emergency.

What is a certificate, exactly?

A certificate usually combines several investment instruments, such as a bond and an option. A bond is a loan: whoever lends money should get it back later, provided the borrower can pay. What a certificate pays out at the end depends on one or more underlying assets. This is the value the product is linked to, for example an equity index.

Legally, according to SIX Swiss Exchange, the Swiss stock exchange, and FINMA, a certificate is a debt security of the issuer, that is, a security by which the issuer owes money to investors. The issuer is the company that issues the product. Investors therefore hold a claim against it. According to FINMA, a certificate differs from a fund in its issuer risk. This means the risk that the issuer cannot pay. Specialists also call it credit risk. FINMA compares it with the risk on cash bonds (Kassenobligationen) or ordinary bonds.

Why did the protection help so little with Lehman?

Capital protection means that the issuer promises to repay at least a predetermined amount at the end of the term. This is usually the nominal value, that is, the amount printed on the paper. The promise only held as long as the issuer could still pay at that point. Repayment is usually backed by the issuer or a collateral provider. This is a third party that provides additional security. If either of them defaults, FINMA says a total loss may be possible.

The protection has further limits. It applies only at the end of the term. In principle, it applies only to the issue price, not to a higher purchase price. It can also be below 100 per cent of the issue price.

How did the Lehman certificates affect investors in Switzerland?

According to FINMA, the Lehman group had a rating of A2 from Moody's, a rating agency, until the insolvency filing. A rating is a grade for creditworthiness, assigned by a rating agency. According to FINMA, the grade was only slightly lower than that of other issuers. The rating therefore gave no warning of the default.

At the time of purchase, the issuer often played no role. From the clients' point of view, issuers with a similar rating hardly differed. The sales documents also prominently showed the name of the bank selling the product. According to FINMA, there was therefore a risk that clients assumed the credit risk lay with that bank. According to FINMA, many investors were hardly aware that in the extreme case they could lose everything if the issuer defaulted.

In 2010, FINMA found no serious breaches of the Swiss supervisory law of the time. It did call investor protection insufficient and launched the "Vertriebsregeln" (distribution rules) project. From 19 December 2008, according to the 2010 FINMA report, the supervisory authority of the time required minimum information in term sheets in its FAQ. These are the product details provided before issue. They include issuer risk. FINMA does not state how many investors were affected. Whether a bank is liable in an individual case is for the civil courts to decide.

What are certificates with posted collateral?

From 28 September 2009, Collateral Secured Instruments (COSI) could be listed on SIX Swiss Exchange. This means they were admitted to trading there. They were initiated by Scoach Switzerland, the trading venue for these products, and by the Swiss Structured Products Association, an industry body. According to SIX, COSI are meant to reduce issuer risk. For an overview of exchange-traded products, see the article on ETPs, ETFs and the rise of crypto markets.

How does the posted collateral work?

The issuer or a named guarantor posts collateral with SIX that can be turned into cash quickly. A guarantor is a collateral provider who stands in for the issuer. On every banking day, the product and the collateral are valued. Under the SIX concept, the collateral is to be sold if the issuer defaults. This trigger is called a liquidation event. The proceeds, after costs, go to investors in proportion.

Collateral counts only with a discount, the haircut. The haircut states by what percentage the value of a collateral item is reduced. According to SIX, this is meant to leave the product more than covered. The SIX brochure of 2013 gave these haircuts:

On uptake: by 21 June 2012, according to SIX, more than 3,700 COSI products had been issued. For the 2,300 tradable products, collateral worth CHF 2.7 billion was posted. These are historical figures.

Where does the posted collateral reach its limits?

Collateralisation covers only the issuer's default risk. The risk of fluctuating prices stays entirely with investors. For collateral providers from abroad, the sale of the collateral can depend on whether their home country recognises the collateralisation. The collateral provider pays the fee. It may feed into the product price.

Which risks remain?

• Issuer risk: If the issuer defaults, the claim can be lost in whole or in part. A total loss is possible.
• Rating: According to FINMA, the A2 rating did not anticipate Lehman's default.
• Collateralisation: It is not full protection. Price fluctuations, the value of the collateral and the sale abroad remain uncertain.
• Outdated figures: The haircuts date from 2013 and the volume figures from 2012. The rules may have changed since.
• Capital protection: It does not protect against losses in a default and applies only at the end of the term.

This article is a general, historical account. It is not investment, legal or tax advice. The position in an individual case may differ. The account draws on the FINMA reports of 2010 and SIX material from 2009 to 2013. Data as of 20 October 2026.

Conclusion

With the Lehman certificates, capital protection depended on the issuer. Lehman Brothers Holdings filed for Chapter 11 proceedings on 15 September 2008. Capital-protected products issued by subsidiaries of the group were also affected. Legally, a certificate is a debt security, so its protection holds only as long as the issuer pays. From 2009, COSI provided for posted collateral to reduce default risk. The risk of fluctuating prices remains, however.