Bailout risks lender's capital

Dresdner Bank AG, Germany's third largest bank, agreed to rescue its $18.8 billion K2 structured investment vehicle, joining Citigroup Inc and HSBC Holdings Plc in putting capital at risk to bail out investment funds crippled by the collapse of the subprime mortgage market.

Dresdner, a unit of Munich-based Allianz SE, will provide a credit line to enable K2 repay all of its senior debt, the bank said in an e-mailed statement yesterday. Dresdner will cut the size of the fund, which has been reduced from $31.2 billion since July, according to the statement.

The bank is the last of the world's biggest financial institutions to salvage the debt funds from the seven-month freeze in credit markets triggered by subprime mortgage losses. Banks including Citigroup, HSBC, Bank of Montreal and WestLB AG have disclosed plans to support their SIVs with $140 billion of assets, while more than $20 billion of the funds have defaulted after being forced to start winding down.

"We have been restructuring the SIV for a few months now and aim to further lower the size," spokesman Ulrich Porwollik in Frankfurt said. "The liquidity line is part of the restructuring process."

SIVs, which use short-term borrowing to buy higher-yielding assets, have shrunk by $100 billion from $400 billion since August, according to Moody's Investors Service.

The rescue should have no "significant impact" on Dresdner's capital base, the statement said. The bank, Germany's third largest by assets, doesn't plan to add the SIV's assets to its books, Porwollik said.

K2 has no "direct exposure" to securities backed by subprime or midprime assets or collateralized debt obligations based on asset-backed notes, the statement said.

One of the SIV's three portfolios has entered a "restricted operating period", a rule designed to protect investors that prevents it making payments to junior-ranking bondholders. The credit line from Dresdner may enable K2 to end the restriction, K2 said in a separate statement yesterday.

"Such an outcome, however, cannot be assured," the statement said. K2 didn't disclose the size of the portfolio.

Allianz said yesterday fourth-quarter profit fell 52 percent to 665 million euros on subprime-related writedowns and trading losses at its banking division. That missed the 729 million-euro median estimate of 12 analysts surveyed by Bloomberg.

Allianz's banking division, which mostly consists of Dresdner, had an operating profit of 730 million euros last year, down from 1.4 billion euros in 2006, after more than 1.3 billion euros in writedowns on structured products.

The bank rescues avert the risk of forced sales of assets by SIVs. Concern that such fire sales would further roil credit markets prompted US Treasury Secretary Henry Paulson to begin talks on setting up an $80 billion bailout fund last year. New York-based Citigroup and JPMorgan Chase & Co and Bank of America Corp in Charlotte, North Carolina, abandoned the so-called SuperSIV after banks began rescuing their own funds, led by London-based HSBC.

SIVs in default include funds set up by New York-based Ceres Capital Partners LLC and Cheyne Capital Management (UK) LLP in London.

Whistlejacket Capital Ltd, set up by Standard Chartered, may default after the company's receiver, Deloitte & Touche LLP, froze debts last week.

Agencies

(China Daily 02/22/2008 page17)