Remember I mentioned my boss at Barclays?
I found this little news story mentioning him (Oka Usi).
"The case for Barclays is complicated by the fact that some of the key people involved in setting the Corvus deal have left the firm in less than auspicious circumstances. In particular, the bank’s former global head of credit derivatives, Oka Usi, left the bank together with four of his staff involved in credit structuring and transaction management. These departures followed press coverage of a dinner in July 2001 attended by Usi at London restaurant Petrus, in which he and these same colleagues spent £44,000 on vintage wine. While Barclays has confirmed that New York-based Usi was the senior official responsible for the HSH Nordbank deal, it says his departure had no connection whatsoever with the performance of this transaction"
This story was quoted from this website:
Nuclear Phynance forumQUOTE
Barclays fights CDO lawsuit
Nicholas Dunbar
Practitioners in structured credit are bracing themselves, as a legal battle breaks out over collateralised debt obligation (CDO) losses incurred in the 2001–2 credit downturn. The battle – which is likely to be fiercely fought – is between HSH Nordbank, the German landesbank, and derivatives giant Barclays Capital, the investment banking arm of the UK bank.
HSH Nordbank, created out of the merger of Hamburgische Landesbank and Landesbank Kiel in 2003, has issued legal proceedings in London’s High Court to recover losses made on a $151 million actively managed CDO investment sold by Barclays to LB Kiel in December 2000. HSH Nordbank says it is also considering legal action regarding a further $420 million Barclays CDO investment sold to Hamburgische Landesbank.
HSH Nordbank is well regarded in its core business of shipping finance, German real estate and corporate lending to north German small and medium-size enterprises (SMEs). With a balance sheet of e172 billion, the bank has chosen to diversify its loan exposures by investing in structured credit, with a e8 billion portfolio managed by Martin Hauplaub, the bank’s head of portfolio management and investment. Hauplaub and his team are well known to London-based structured credit salespeople and marketers, and have a reputation for being choosy about investments.
Because of this savvy reputation, the lawsuit has come as a surprise to London bankers. A Barclays spokesman dismisses the claim as ‘without merit’. However, HSH Nordbank sources insist that while it is used to taking losses in structured credit, Barclays’ behaviour in the marketing, management and pricing of the deal was at odds with acceptable market practice.
Although the full story may have to wait until the first court hearing in February 2005, some details have already emerged about the nature of the dispute, which hinges upon a series of 16 synthetic CDOs arranged by Barclays between 2000 and 2002, with a total volume of $15 billion. The current legal proceedings focus on one member of this series, called Corvus, sold to LB Kiel. The threatened proceedings involve Corvus and another earlier member of the series, called Nerva.
Both Corvus and Nerva had a number of features in common. They were arranged by Barclays as synthetic CDOs, with Barclays as default swap counterparty, and were to be actively managed by Barclays, which in the case of Corvus, had the right to replace credits with those of ‘equal or better credit quality’, according to Fitch, which rated the deals. There was also a hybrid element in that the default swaps could be closed out by Barclays and replaced by physical assets.
Both CDOs were specifically set up to invest in publicly rated asset-backed securities (ABS), with allocations to residential and commercial mortgage-backed securities (MBS), real estate investment trusts (REITs) and CDOs. Non-ABS securities were limited in number, and emerging market debt was excluded. While both Nerva and Corvus had a similar weighted average portfolio rating of BBB-/BB+, the investment-grade tranches of Corvus had a significantly greater credit enhancement than Nerva, starting at 8.5% as opposed to 5% respectively.
At least in terms of credit ratings, there is no doubt that Corvus has performed particularly badly since it was first issued. Fitch says almost 29% of the $1 billion reference portfolio was described as credit impaired as of September 2003. As a result, the class A super senior AAA tranche of Corvus – which initially had a 25% credit enhancement – today enjoys a BB junk rating, while the more junior tranches are effectively worthless. The situation with Nerva is thought to be even worse.
Dialogue
According to HSH Nordbank, most of the $151 million Corvus investment bought by LB Kiel was in the class A tranche, with a minority in the junior B, C and D tranches. What kind of dialogue took place before the sale? Pending the court case, HSH Nordbank remains tight-lipped on this issue, save to say it was looking for diversification, and that Barclays made promises concerning the quality of active management – promises that HSH Nordbank says were not fulfilled.
Barclays sources say this version of events underplays the level of involvement and sophistication displayed by LB Kiel. The bank insists the tranches it sold to LB Kiel were the subject of heavy negotiation with the German bank. The Barclays sources talk of active dialogue in Germany and London over a lengthy period of time about what the structure needed to look like, and the particular characteristics that suited LB Kiel’s investment profile. The sources add that HSH Nordbank’s willingness to invest in lower tranches of the Corvus capital structure demonstrated an appetite for risk.
The case for Barclays is complicated by the fact that some of the key people involved in setting the Corvus deal have left the firm in less than auspicious circumstances. In particular, the bank’s former global head of credit derivatives, Oka Usi, left the bank together with four of his staff involved in credit structuring and transaction management. These departures followed press coverage of a dinner in July 2001 attended by Usi at London restaurant Petrus, in which he and these same colleagues spent £44,000 on vintage wine. While Barclays has confirmed that New York-based Usi was the senior official responsible for the HSH Nordbank deal, it says his departure had no connection whatsoever with the performance of this transaction.
It is Barclays’ management of the deal over the period December 2000 to early 2002, which was handled by Usi’s trading desk in New York, that draws most criticism from HSH Nordbank officials. These sources point to the portfolio substitutions made by Barclays during the first nine months of Corvus’ existence – during which time, it is claimed, as much as 90% of the original portfolio was replaced. And these replacements are controversial, because they are dominated by CDO tranches originated by Barclays during the same period – tranches that enmeshed Corvus in a web of leveraged crossholdings. Fitch says these crossholdings played an important role in Corvus’ subsequent ratings downgrades.
Why, for example, did Corvus invest in a Barclays CDO called Taunton, which invested in another CDO called Flavius, which invested in Savannah II, which in turn invested in two further Barclays CDOs called Dorset and Tullas that were also held by Corvus? HSH Nordbank sources say some of these CDOs appear not to have been sold to third-party investors. Moreover, some tranches appear in so many different places that the total holding exceeds the original size of the tranche at origination – suggesting Barclays’ trading desk was taking a short position, say the sources.
Equally controversial, say the HSH Nordbank sources, were the decisions made by the Corvus portfolio manager to invest in non-Barclays CDO tranches, principally US manufactured housing and aircraft securitisations – sectors that were also prevalent in the Corvus CDO crossholdings. Both these sectors have badly under-performed since 2001. But why, ask these sources, did Barclays make the obvious mistake of continuing to add aircraft securitisations to the Corvus portfolio after September 11, 2001?
These allegations, implying that instead of managing the Corvus portfolio for its client’s benefit, Barclays used the portfolio as a dumping ground both for self-originated assets it couldn’t sell and for similarly toxic assets it bought cheaply in the market, have the potential to be extremely damaging.
Understandably, the bank is keen to refute these allegations. According to Barclays sources, there was no conscious intention on the part of senior Barclays management who were responsible for managing the portfolio, to put anything that was toxic, or that they felt would decline in value, into the portfolio.
As for the web of CDO crossholdings in Corvus, Barclays is equally robust in its self-defence. It says it created the CDOs to repackage assets held on its books, only to be caught out by a decline in the credit markets – which caused the bank itself to lose money. Rather than being dumped in the Corvus portfolio, the CDOs were chosen because they offered better diversification than existing credits in the portfolio, such as telecom bonds.
A Barclays spokesman comments: “The portfolio guidelines were clear about what the acceptable investment criteria were. They were complied with at all times. Do we feel good about the performance of these CDOs? Absolutely not. Have we also shared in the pain that our investors have felt? Yes, we have.”
At the heart of Barclays’ counter-attack against HSH Nordbank is the argument that the market, rather than Barclays itself, was primarily responsible for the losses incurred. The spokesman says: “We don’t feel it is appropriate for an investor to hold us accountable when those losses are due to market events. HSH knowingly made leveraged investments in credit instruments prior to what turned out to be the worst credit markets downturn in decades.”
That isn’t to say Barclays doesn’t concede some flaws in its structuring and management of HSH Nordbank’s investment. Sources at the bank acknowledge that there may have been some structural things that after the event it wishes it had done differently. The sources concede that Barclays may not have been perfect in seeing the dislocation in certain sectors, and that there may have been elements of over-concentration in terms of portfolio choice.
These acknowledged flaws have led the bank to propose a sharing of losses with HSH Nordbank, which it says have been rebuffed. A Barclays spokesman says: “We have attempted to reach a commercial resolution here. We have not met with the appropriate levels of realism from our counterparty that is appropriate for us to structure a resolution.”
Other investors in similar Barclays CDOs are believed to have settled with Barclays – notably the European Bank for Reconstruction and Development (EBRD), although neither the EBRD nor Barclays will comment on this. However, HSH Nordbank remains adamant that Barclays has yet to come up with what it calls a serious offer. Barclays sources counter this by pointing out that contractually, it owes its client nothing at all.
With neither side willing to budge, a very public court battle now seems inevitable.