Credit where it’s due

The newspapers these days must put the toughest of Wall Street traders off their morning cereal.

But even as the news just seems to get worse and worse, some outfits are seemingly sticking up two fingers right back up at the markets.

Ireland has become renowned for being a soft regulatory touch for the listing of debt instrument issuances, and it shows. There are over 90 firms registered in the country with ‘CDO’ (Collaterised Debt Obligation) in the title. Firms from Lehman Brothers– with its Saphir vehicle, to Deutsche Bank with its upbeat-named Jazz CDO, have settled 3,000 miles from the US financial hub, and called Dublin home.

But there have been major structural cracks appearing, the first seen in Dublin-registered SIVs (Structured Investment Vehicles) Cheyne Finance, and subsequently Rhinebridge.

A $2bn SIV, Rhinebridge was sponsored by German bank IKB.

In mid-October it defaulted on its debts to the owners of Rhinebridge’s commercial paper. A receiver, Deloitte, was appointed to Rhinebridge to try and sort out the mess.

“Rhinebridge ran into difficulty due to the recent events in the credit markets resulting in it being unable to fund its short term debt repayments while at the same time the market value of the assets have deteriorated,” said Deloitte a few weeks ago.

It was the second time an Ireland-based SIV had got into trouble. During the summer, Cheyne Finance also stopped paying its short-term debt and Deloitte was also appointed receiver. Royal Bank of Scotland then secured exclusive talks to refinance the $6.6bn fund, but the period of exclusivity expired last week. A deal is still expected to be concluded, however.

But CDOs – an Irish favourite - are even riskier than SIVs, because they’re more expensive to finance. SIVs are open-ended investment structures that can be continually refinanced (even if it isn’t that easy these days), while CDOs are closed-end, with set maturity dates. Merge the two, and you get SIV-lites.

Confused? Good, that’s the way for the banks like to have everyone.

The Saphir vehicles established here by Lehman have already drawn fire from Australia.

Sydney-headquartered Grange Securities, which was acquired by Lehman Brothers in January this year, began selling CDOs called Mahogany Notes through a company called Mahogany Capital, to Australian local councils and other investors in 2004, and again in 2006, according to the Sydney Morning Herald.

The Mahogany Notes were invested in Saphir Notes, which are in turn products from Lehman Brothers, manufactured by its Dublin-based Saphir Public Finance company.

Both the Mahogany issuances are now well underwater and that’s caused some upset.

And as if banks were not getting into enough trouble with the residential mortgages in the US, there’s the prospect of what might happen with so-called commercial-backed mortgage securities (CBMS), with musings over recent weeks that this could be the next of level of subsidence to hit markets.

Just recently though, despite all the turmoil, a new CBMS vehicle was registered in Dublin. Pan European Hotels CBMS, the formation of which was administered through the Channel Island’s office of Allied Irish Banks, is bent on issuing CDOs despite the current turmoil.

It could be someone thinking big, or someone thinking small and one swallow, as they say, doesn’t make a summer – the fact they’re thinking about it at all is a bold move.

Seems like there may be some life left in the debt markets after all.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2726873.ece

http://www.risk.net/public/showPage.html?page=328506

http://www.deloitte.com/dtt/press_release/0,1014,sid%253D2833%2526cid%253D176787,00.html

http://www.ft.com/cms/s/0/6e6e2f26-7ceb-11dc-aee2-0000779fd2ac.html

http://www.arandomwalk.com/2007/08/30/aib-cheyne/

http://ftalphaville.ft.com/blog/2007/08/29/6895/the-cheyne-finance-wind-up-letter/

http://www.iht.com/articles/2007/11/05/business/hedge.php?WT.mc_id=rssbusiness

http://ragingbull.quote.com/mboard/boards.cgi?board=CLB01194&read=114340

http://www.grangesecurities.com.au/dynamicpages.aspx?cid=1&navid=1

http://www.smh.com.au/news/business/asic-protects-cdo-investors-names/2007/11/04/1194117879435.html

Irishman to help clear Merrill mess

No doubt Stan O’Neal is coming to terms with being ousted from Merrill Lynch this week thanks to the whopping $161.5m worth of benefits and stock options he’ll take away with him. Oh, and the personal assistant for three years.

O’Neal (above) is most definitely one of the first major SIV-positive (former) executives – the tag dreamt up by Wall Street wags to describe the most unstable structured investment vehicles that have thrown the credit markets into crisis.

The head of the former General Motors boss was offered on a platter to investors after the company posted a massive $2.24bn quarterly loss – its biggest ever. The firm also booked a $7.9bn charge in the previous quarter following the credit fall-out, ($4.5bn related to sub-prime related products) and some analysts expect it could have to take a further $4bn hit in the next quarter.

Media-shy, O’Neal had encouraged more risk taking from its trading operations as interest rates sank over the past number of years. It expanded into areas such as private equity and structured products and commodity trading. It seemed to be going so well. Last year Merrill Lynch posted earnings of $7.5bn. Then the bottom fell out of the structured finance market.

For some though, there’s a silver lining.

Merrill Lynch’s Ed Moriarty has been appointed to the newly-created role of chief risk officer.

An Irish citizen, it will now fall on Moriarty’s shoulders to assume responsibility for market risk, and “re-evaluating parts of our risk framework,” according to Merrill Lynch. That’s code for “getting the hell out of Dodge”.

“Ed’s promotion reflects the importance of deeper and more comprehensive risk management discipline under a single senior executive,” added Merrill Lynch on the appointment.

For Moriarty, the task must appear monumental. Graciously exiting all its structured investments in an orderly fashion isn’t going to be easy. If Moriarty manages to pull it off, he may even attain a Cicero-type status as the man who helped save Rome, or at least Merrill Lynch. Such accolades will not be easily won though.

A graduate of Clinton, New York-based Hamilton College, Moriarty has been a lifer at Merrill Lynch. Just where his Irish pedigree comes from is unknown, but it could, of course, extend back as far as grandparents.

Moriarty gave New York’s current mayor Michael Bloomberg one of his first big breaks, when the now billionaire turned up at Merrill Lynch’s office touting a new computer system that would offer traders functionality not available elsewhere. A Merrill Lynch executive said the company could do it itself, so Bloomberg offered to put together the system in six months and put Merrill Lynch under no obligation to buy if it wasn’t up to scratch. Moriarty agreed to the deal.

The next year will be a busy one for Moriarty as he tries to clear up the mess at Merrill. One suspects he’ll be in line for a tidy bonus if he does. No doubt more than enough to buy a handsome spread in Ireland from which to plot his retirement.

Meanwhile, those being tipped as candidates to replace O'Neal, include Kelly Martin, chief executive of pharmaceutical firm Elan. He left Merrill Lynch in 2001 to take up the Elan position as the company came close to collapse.

http://www.reuters.com/article/inPlayBriefing/idUSIN20071030154144MER20071030

http://www.kenauletta.com/1997_03_10_thebloombergthreat.html

http://www.freep.com/apps/pbcs.dll/article?AID=/20071031/BUSINESS07/710310398/1002

http://news.independent.co.uk/business/news/article3112837.ece

http://dealbook.blogs.nytimes.com/2007/10/30/merrill-lynchs-32-million-man/

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2774485.ece

http://www.nytimes.com/2007/10/12/business/12insider.html?ref=business