When the heat is on, fire can break out so easily. Not only has this been proven true in Greece, this week it was borne out in the financial markets.
The FT broke the news, the casualty was Barclays and its rival in the battle for control of ABN Amro, RBS, put the boot in.
First, turn your attention to Germany. Europe’s first high profile casualty of the US sub-prime crisis was Germany’s state owned bank SachsenLB. So hard was it hit, that the bank nearly collapsed, and this weekend in an act of desperation, was sold to Germany’s biggest regional bank LBBW.
It was an ignominious mark on the German banking scene – a banking sphere so long known for its prudent lending.
But, then again, it appears Barclays was caught up in the unhappy saga for it was the UK bank which gave advice to SachsenLB, and just three months before its collapse, Barclays set up one of those SIV-lite funds on behalf of the German bank.
Then, last week Standard Poor’s warned that the fund might have to be wound up.
‘Phew,’ said some. That was a lucky escape for Barclays – it was a good job it didn’t put its money where its mouth was, and follow up its advice by injecting capital into the fund.
But, yesterday, the FT suggested that is precisely what Barclays may have done. The article said that Barclays had given a form of guarantee on the fund it had set up, so that if it ran into trouble, the bank was obliged to pour in some cash – cash that could run into hundreds of millions of dollars.
Salt was rubbed into the wound, when a note from RBS said, “Typically Barclays is a liquidity provider to the SIV-lites it has structured and it appears that Barclays is able to withdraw its committed credit line should the #91;net asset value#93; of the SIV-lite fall by more than 10 per cent.”
The note added, however, that “it remains debatable whether Barclays would actually do this and regardless the exposure it retains is material.”
And with all that talk, with the financial world treading on a carpet of dry tinder, wild fire broke out, and the Barclays share price fell by over 3 per cent.
The UK bank was quick to deny a major crisis in the making and in a statement said “To say we have hundreds of millions of dollars of exposure to SIV-lites generally is inaccurate.” Hmm. “Generally inaccurate,” is not exactly a full-blown denial.
The plot thickens further. Last week, Barclays lost one of its gurus, the man behind SIV-lites.
As you no doubt know, SIV-lites have been pretty much centre stage over the last few weeks. They are a lot like Collateralized Debt Obligations (CDOs), in that they are bonds which have exposure to various forms of debt – often bringing sub-prime, and corporate financing together under one roof. The big difference between CDOs and SIV-lites is where they go to raise money. CDOs raise money from the long-term debt markets, SIV-lites raise debt in the form of short-term loans: precisely the type of liquidly that virtually dried up earlier this month.
For a while they seemed like a good idea, and Edward Cahill, the Barclays man behind SIV-lites, became the star of the show – revered within Barclays, bringing back memories of the star status once enjoyed by Nick Leeson at Barings.
But, last week, Mr. Cahill resigned. No one seems to know why. Given what’s been going on, there is surely no surprise. Some say his departure is down to the fact that his great idea has turned to dust. Others look for a more sinister explanation. They say there is no smoke without fire.
Alternatively, maybe Mr. Cahill decided he had enough, and that who needs all this stress, when you have got a nice fat bonus to enjoy. Perhaps he could use it for holidaying somewhere hot. Like Greece.
For further information
It’s so easy to be wise in hindsight. So follow this link, and enjoy your wisdom born of hindsight. It’s an explanation of SIV-lites when they were thought to be a good idea – Risk
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