Patrick Hosking, Banking and Finance Editor
August 27, 2007
SourceBarclays 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.