WHO GETS LEHMAN'S PATENTS?

Okay, Lehman Brothers, a premier investment bank, a venerable Wall Street institution, a key component of the nation’s financial system for over a century, has gone belly up. Now the question is, who gets its patents.

Patents!? What patents would a company that deals in intangibles—stocks, bonds, advice, financial derivatives whose acronyms span the alphabet—have? Aren’t patents limited to things you can touch, feel, get an electrical shock from? Well, my friends, if that is your view of patents, you are so 20th Century.

Today, the United States Patent and Trademark Office grants patents for fuzzy, nebulous things like tax strategies; and financial securities that are just a little bit different than existing financial securities; and systems for, allegedly, making money in the buying and selling of stocks, bonds, and other financial products, including the goofy ones that have contributed to our present troubles.

Last year, In July, Lehman was assigned patent 7,249,083. The subject of this patent is “a novel investment vehicle for increasing the flexibility of select convertible bonds and other equity-linked securities.” The description contained in the patent is convoluted in the extreme and if the subject of a U.S. Supreme Court case could easily result in nine separate opinions. But the essence seems to be a debt instrument that, upon the happening of various contingencies, the purchaser could convert into an equity security that the issuer in turn would have an option to purchase.

Sort of a heads I win, tails you lose thing.

The next month, August 2007, Lehman was assigned patent 7,263,502 for a method of selecting winners and losers based on their market positions. The method used a “volume/turnover filter” that would supposedly enable investors to predict “when to hold some stocks long and others short over various time period[s], thereby maximizing the profitability of a portfolio.”

Maybe you should have used it yourself, Lehman.

And in December 2007, Lehman was assigned patent 7,310,618 for a method of creating a loan delinquency database. The method involves the massaging of historical loan data and various factors concerning loans to arrive at probabilities of delinquencies. The description in the patent asserts that the method “simplifies the underwriting of . . . sub-prime loans.”

Immortal words, those.

Although granted in 2007, the applications for these patents had been filed much earlier, in the years 2000 to 2004, suggesting that the methods and systems described had been in use for some time.

Lehman Brothers is by no means the only financial firm with patents on financial practices that have turned out to be dubious at best. The list of others includes Goldman Sachs & Co., JPMorgan Chase Bank, N.A., and good ol’ Freddie Mac. The troubled Washington Mutual, Inc., even has a patent, 6,681,985, for the arrangement of furniture and equipment, including the provision of “kid’s area,” in a branch office.

Many of these patents are called business methods patents, and the growth in their numbers can be traced to the 1998 State Street decision by the U.S. Court of Appeals for the Federal Circuit (State Street Bank & Trust Company v. Signature Financial Group, Inc.). For the financial industry, these patents provide evidence of the muddled thinking, grand expectations, poor oversight, and outright greed that have brought Wall Street to its knees.

For the U.S. patent system, business methods patents are a beloved child who is growing into a rampaging, out-of-control teenager. The Patent Office contends that it does not grant patents for computer software, but a large proportion of business methods patents contain little more than software. Tweak a bit of existing software and you have a new patent.

The good news, at least for those who think the patent system needs reining in, is that the Court of Appeals for the Federal Circuit heard an important case on the matter in May. The case was In re Bilski, and the patent was for a method enabling energy consumers to hedge risk. A decision is expected anytime, and commentators in the patent field say the court will likely narrow the field of what may be patented.

And as for Lehman’s patents? The financial system might be better off if they join Lehman Brothers in Potter’s Field.