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Saturday, October 20, 2007


first siv defaults

two of the previously understood to be among the most compromised, those of british cheyne finance plc and german bank ikb's rhinebridge plc -- a default of some $7bn.

Rhinebridge, set up and run by a unit of Dusseldorf-based IKB, missed payment on $65 million of commercial paper yesterday after revaluing collateralized debt obligations, Fitch Ratings and Standard & Poor's said.

Rhinebridge has $791 million of commercial paper and a portfolio with a face value of $1.1 billion, S&P said. The market value of the assets is now 63 percent of face value, having fallen $69 million since Oct. 16 alone, S&P said. Revaluations of CDOs of asset-backed securities have caused a ``dramatic'' fall in value, the rating company said.

rhinebridge is the much smaller of the two, and its assets will be sold off into whatever market there is. cheyne is another story.

Receivers from Deloitte & Touche LLP are trying to organize a bailout of Cheyne Finance by restructuring its debt or selling its assets. Cheyne Finance hasn't paid commercial paper that matured after the receivers' announcement on Oct. 17, S&P said.

Cheyne Finance's managers said its assets are worth 93 percent of face value, enough to pay back all of its $6.6 billion of senior debt, S&P said. CDOs of asset-backed securities make up 6 percent of Cheyne Finance's holdings.

with something like $900bn in abcp unredeemed -- and similar losses on cdo's with slashed ratings (not to mention rmbs and eventually their commerical equivalent) and marking-to-market being likely widespread -- this is perhaps just the first pitch of a VERY important game.

how important? almost anyone with big capital is being intimidated by the treasury and the fed to the aid of the super-siv, particularly in light of the reticence of european banks to participate.

the help can't come too soon, if it matters at all. per calculated risk:

Rumors were flying during the last hour of trading of problems at Merrill and Bear. The Merrill rumor was of a special board meeting this weekend with possible additional writedowns - we will see.

as noted previously, it's all very likely to be not nearly enough to do more than slightly defer some severe capital destruction in western banking. alan greenspan thinks it may even hurt more than help.

This bailout was the target of criticism from Mr Greenspan, who said it was geared to support a faltering asset class. He argued that the prices of these assets should be allowed to fall until speculative excesses are wrung out and bargain-hunters emerge.

'If you intervene in the system, the vultures stay away,' he said. 'The vultures sometimes are very useful.'

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