Patrick Hosking, Banking and Finance EditorBarclays Bank was dragged deeper into the sub-prime mortgage crisis last night after Landesbank Sachsen, a major client, had to be rescued by a rival state-owned bank in Germany.
Barclays appears to have been responsible both for designing a complex fund that got Sachsen into difficulty and for helping to pull the plug on the bank by demanding margin calls in respect of another Sachsen investment.
Sachsen, a Saxony-based bank with assets of €68 billion (£46 billion) owned partly by the regional government, said last night that it was being taken over by Landesbank Baden-Württemberg (LBBW) after a previously attempted €17.3 billion bailout failed.
LBBW is paying €300 million to €800 million for Sachsen and has taken the precaution of inserting a clause in the deal allowing it to walk away if further big losses emerge.
Although Sachsen has declined to divulge the size of its losses, it and funds that it sponsors are understood to have been significant casualties of the implosion in securities backed by American sub-prime mortgages.
Sachsen Funding I, a Dublin-registered fund created jointly by Sachsen and Barclays Capital, said last week that it was having financial difficulties and might have to be restructured.
Meanwhile, last week Barclays made margin calls on a client, Synapse Investment Management, a credit hedge fund in which Sachsen has an estimated €200 million stake – almost the entire equity in the fund – and later seized some of its collateral.
Barclays Capital, Barclays’ investment banking unit, has been aggressively marketing so-called SIV-lites such as Sachsen Funding I – investment vehicles sponsored by banks but held off the balance sheet, which use the commercial paper markets to finance purchases of mortgage-backed securities. A souring of sentiment in the commercial paper market left funds desperate for cash, forcing sponsors to provide emergency funding.
Last week Edward Cahill, head of the BarCap department responsible for creating these complex vehicles, left the bank.
BarCap advised on at least three other SIV-lites – Mainsail II, Golden Key and Cairn High Grade Funding I – all of which have been downgraded by debt-rating agencies. Problems in Mainsail II forced it into a fire sale of assets last week. BarCap can be legally liable to provide funding to these vehicles if normal financing sources dry up.
The relationship between Barclays and Sachsen is thought to have been particularly close. The German bank’s 2006 annual report features a double-page photo spread of Jane Privett, a BarCap director, quoted as saying that Sachsen Funding I generates “attractive returns without neglecting the security aspect”.
Barclays is likely to come under pressure to spell out its sub-prime exposure, especially as it is in the middle of a share-based offer for the Dutch bank ABN Amro. Barclays shares have fallen from 745p in mid-July to 611p on Friday, cutting the value of its ABN bid.
Sources close to Barclays said that any SIV losses appeared minimal for it and that it should not be blamed for clients’ difficulties since it was not responsible for picking assets in the funds or running them. It foresaw “little flowback” – continuing financial or legal liabilities. Barclays would in theory be obliged to make a statement only if the loss topped £700 million, a tenth of annual profits.
Moody's may cut IndyMac to junk, affirms WaMu
Mon Aug 27, 2007 6:30PM EDT
By Jonathan Stempel
NEW YORK, Aug 27 (Reuters) - IndyMac Bancorp Inc (IMB.N: Quote, Profile, Research) may be downgraded to junk status by Moody's Investors Service, which said on Monday that difficult mortgage market conditions may hurt profit at the ninth-largest U.S. mortgage lender for a few quarters.
Separately, Moody's affirmed its medium investment-grade rating for Washington Mutual Inc (WM.N: Quote, Profile, Research), the nation's largest U.S. savings and loan and sixth-largest mortgage lender.
Moody's said it may cut IndyMac's "Baa3" issuer rating, its lowest investment grade, and the "Baa2" rating for its IndyMac Bank unit.
"Investor demand for non-agency product has declined severely over the past month and Moody's expects write-downs on IndyMac's inventory to be large in the third quarter," Moody's Senior Vice President Sean Jones wrote. "These potential write-downs, and the significant drop in residential mortgage loan origination and sales volumes, is likely to weigh on the thrift's profitability for a few quarters."
Mortgage lenders have struggled with tighter credit markets as investors, fearful of rising delinquencies, stopped buying a wide variety of home loans, including many once thought safe. Many have tightened their lending standards this year, and dozens have quit the industry.
Pasadena, California-based IndyMac, which specializes in "Alt-A" home loans, which fall between prime and subprime in quality, said it resumed making residential "jumbo" home loans last week, and traded its first mortgage bonds in five weeks.
Moody's said its review will focus on IndyMac's ability to maintain its franchise and financial metrics. IndyMac made $48.1 billion of home loans from January to June, for a 3.4 percent market share, according to newsletter Inside Mortgage Finance.
The credit rating agency affirmed Seattle-based Washington Mutual's "A2" senior debt rating, its sixth highest investment grade, with a stable outlook.
Moody's Jones wrote that Washington Mutual will face "poor" results in its mortgage business through 2008, but that good liquidity and earnings from its retail bank and credit card operations will cushion the impact. The thrift's home loans unit lost $150 million in the first half of 2007.
Moody's also downgraded Fremont General Corp's (FMT.N: Quote, Profile, Research) senior debt to "Caa2," a low junk grade, from "B3," citing low capital levels at the bank, and "increased uncertainty" the Santa Monica, California-based parent can meet its obligations.
Fremont was a subprime mortgage lender before quitting that business earlier this year.
IndyMac shares closed Monday down 35 cents at $23.65 on the New York Stock Exchange, and have fallen 48 percent this year. Washington Mutual shares closed down 98 cents at $36.64 on the NYSE, and are down 19 percent his year. (Additional reporting by Al Yoon)
Lehman, Bear Stearns, Citigroup Rating Cut by Merrill (Update1)
By Sebastian Boyd
Aug. 28 (Bloomberg) -- Lehman Brothers Holdings Inc., Bear Stearns Cos. and Citigroup Inc. were downgraded to ``neutral'' from ``buy'' by Merrill Lynch & Co. analyst Guy Moszkowski, citing a likely slowdown in revenue from investment banking.
New York-based Lehman and Bear Stearns, the fourth- and fifth-biggest U.S. securities firms, will probably lose out because of their dependence on debt markets, and Citigroup may be pinched by loans and leveraged finance commitments, Moszkowski wrote in a note to investors today. He cut his profit estimates for all three companies and JPMorgan Chase & Co.
Record foreclosures on U.S. subprime mortgages have rippled through debt markets, cutting revenue from underwriting bonds and debt-financed buyouts. Lehman fell 31 percent and Bear Stearns was down 27 percent this year in New York trading through yesterday as investors lost confidence in the asset-backed securities that fueled three years of record Wall Street profit.
Next year's ``forecasts appear increasingly unrealistic for most,'' wrote New York-based Moszkowski, the top-rated U.S. brokerage analyst in Institutional Investor magazine's survey of money managers. ``Slower debt, mergers and acquisitions and equity-underwriting businesses seem inevitable.''
Goldman Sachs Group Inc. and Morgan Stanley, the two biggest U.S. securities firms by market value, are the best placed of the American brokers to weather the credit crunch, Moszkowski said in his report, written with Patrick Davitt and entitled ``Differentiation Escalates.''
`Not Great Environment'
``Given their highly diverse business mixes and their significant geographical diversity of earnings, Goldman and Morgan Stanley are best positioned for the current environment, with the perhaps obvious caveat that it's not a great environment for anyone in this business,'' Moszkowski wrote.
Bear Stearns and Lehman are the worst performers this year behind E*Trade Financial Corp. on the 12-member Amex Broker/Dealer Index, which dropped 7.6 percent. Goldman's shares are down 11 percent and Morgan Stanley's are down 5.7 percent.
Merrill cut its estimate of Lehman's earnings by 22 percent to $6.80 a share next year. The firm will probably earn $7.07 this year. Profit at Bear Stearns may rise 1.8 percent to $12.07 a share next year after a 17 percent drop this year to $11.86.
Bear Stearns is unlikely to sell itself, Moszkowski wrote. The company is seeking protection from lawsuits for two bankrupt hedge funds it managed. Bear Stearns closed the funds, which invested in securities backed by home loans, after granting $1.6 billion in emergency funding.
On Aug. 5, Bear Stearns ousted co-President Warren Spector, who ran fixed income and asset management at the firm. The shares reached a two-year low the next day.
``The embarrassments of the past several months and the change in senior management are likely to have some chilling effect on business beyond just the beleaguered asset management area,'' Moszkowski wrote today.
Profit at Citigroup and JPMorgan, the fastest-falling stocks in the Dow Jones Industrial Average Index over the last three months, may fall below previous expectations because the two New York-based banks will probably take losses from loans they made to finance buyouts, Moszkowski wrote. The loans that Citigroup and JPMorgan made and haven't been able to parcel out will crimp earnings most in the third quarter.
JPMorgan is the biggest arranger of risky leveraged loans in the U.S., according to data compiled by Bloomberg. Citigroup is the third-largest after Bank of America Corp. Citigroup is the biggest U.S. financial-services company by market value, followed by Bank of America and JPMorgan.
Merrill cut its estimate of Citigroup's earnings next year by 4.7 percent to $4.91 a share and reduced its estimate for JPMorgan's earnings by 3.9 percent to $4.72 a share.
To contact the reporter on this story: Sebastian Boyd in London at firstname.lastname@example.org