An interesting article in the New York Times yesterday tracked the growth of regulatory capital trades. Until or unless regulators clamp down, the volume of these trades in the market is expected to grow considerably. Note that the Brown-Vitter bill introduced in the US Senate would explicitly block these trades. Notable excerpts from the New York Times story are below.
“Citigroup, Credit Suisse and UBS have recently completed such trades. Rather than selling the assets, potentially at a loss, the banks transfer a slice of the risk associated with the assets, usually loans. The buyers are typically hedge funds, whose investors are often pensions that manage the life savings of schoolteachers and city workers. The buyers agree to cover a percentage of losses on these assets for a fee, sometimes 15 percent a year or more.”
“A number of American investment firms like Spring Hill Capital Partners have been trying to find investors for these deals. Glenn Blasius, another Lehman alumni, said he was raising money for the Ovid Regulatory Capital Relief Fund, which will invest in these trades.”
“The Orchard Global Capital Group has raised a fund to invest in regulatory capital trades, and the New Mexico Educational Retirement Board is among its investors. In December 2011, Allan Martin, a representative with an investment consultant firm that advises pension funds, met with the New Mexican pension fund over investing through Orchard in a regulatory capital trade, according to the minutes of a board meeting.”
“Many major banks have structured these trades. In March, Credit Suisse completed a transaction named Lucerne, after the Swiss lake, in which it bought insurance on a 5 billion Swiss franc portfolio of small and medium-size Swiss business loans, according to people who were briefed on the matter but not authorized to speak on the record because they had signed confidentiality agreements.”
“‘These trades are a good thing,’ said Richard Robb, a New York money manager whose firm, Christofferson, Robb & Company, has been structuring regulatory capital trades for more than a decade. ‘The best way to protect the banks against this risk is to move it outside the banking system to wealthy institutions. No one will be coming to bail out our company or our investors if these trades backfire.'”
The full article is here.