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Monday, 9 March 2009

Cheesy Swiss loans full of holes

I was amused by a line in an FT report on the Lloyds bail out “Lloyds was advised by JPMorgan Cazenove and UBS. Credit Suisse advised the Treasury.” That deserves and award for recycling experience. J.P.Morgan took on the sleazebag collective formally known as Bear Sterns, when the kinder thing to do might have been to let it eat dirt. UBS is the Swiss bank that operates a funicular railway in Zurich. Long term evidence shows that they should have stuck to that business because they have never really cut it in the bigtime, particularly since their failings over LTCM.

But the funniest of the three is Credit Suisse who are advising the UK government. The bank has largely stayed out of the news ever since CS analyst Frank Quattrone had his collar felt by the SEC, apart from the usual tax avoidance and money laundering charges that are laid regularly at the feet of Swiss banks. But let us not forget that Credit Suisse were amongst the earliest creators of collateralised mortgage obligations (CMOs) and all that followed. Indeed it looks as though some of that history is catching them up.

In 2006 they made a $250 million loan to Jean-Pierre Boespflug to finance a ski resort in Idaho. Bankers from Credit Suisse’s Los Angeles office sold the loan when Boespflug's Tamarack Resort was lining up financing for its base village beneath newly cut ski trails. Unlike regular construction loans, which disburse enough money to complete one project at a time, this one would let him build several clusters of homes and condominiums simultaneously. The idea was that proceeds from selling units in one building would be used to finish the next, and so on. Credit Suisse collected its fee and sold the loan to a syndicate of investors it had lined up. Mutual funds bought the loan when it was made, or shortly after, according to regulatory filings.

Then the real estate market went south, and sales at Tamarack slowed. In December 2007, just 19 months after taking the Credit Suisse loan, the developer missed a $5 million payment. Tamarack is one of at least eight high-end projects in the U.S. West, Florida and the Caribbean financed originated by Credit Suisse that are either in default or in bankruptcy. Those failures reverberate in the financial system because Credit Suisse sold loans to investors who, in turn, put them into mutual funds or packaged them into securities called collateralized-loan obligations.

CLOs paid a higher rate of interest than conventional bonds. Both were popular when real estate was hot. Many banks matched borrowers with eager investors during the real estate boom, but Credit Suisse was unusual in making loans over $250 million and because it almost cornered the market on syndicated loans to developments such as Tamarack which were rated by Moody’s for a fee to make the paper marketable.

Good to see that banks can make up lost earnings with government advisory fees.

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