More Wobbles In The Loan Dominoes

Sydney Morning Herald

Friday April 11, 2008

Michael West mwest@fairfax.com.au

Merrill Lynch has done it again.

At least one other high-risk margin lender, backed by Merrill, has the wobbles and is attracting some scrutiny from regulators amid the fall-out from the Opes Prime debacle.

This time, it is Sydney's Lift Capital. But there is no need to panic. No sign of shenanigans. It's simply that stockbroker clients who give business to Lift and others like it are pulling back their counterparty risk thanks to Opes.

Like Opes, Lift lends money to over speculative stocks. It also encourages clients to borrow against their property to buy shares. Unlike Opes, there's no suggestion of irregularities, just that the model is on the nose.

According to Lift documents, its clients appear to pledge their securities to Lift and Lift has the right to repledge them to other parties, in this case, Merrill.

Lift principals have been unavailable for two days and Merrill is ducking for cover.

It's not good news for the US bank, which was hoping for good publicity yesterday. It's credit markets team has pulled off the first debt raising from an Australian real estate investment trust in the US credit markets since the meltdown last year. With Deutsche and Citigroup, the bank has raised $US1.1 billion ($1.183 billion) for Frank Lowy's Westfield Group via a 10-year note. But that's hardly the story. The story is panic. Cool heads with a bit of lazy cash will clean up in this climate.

Although Merrill was able to deftly exit most of its position in Opes shortly after ANZ called in the receivers last month, blame ANZ, and salvage most of its $400 million loan in the process by thumping Opes' securities into the market quickly, observers are asking what was it doing in the first place. Some of the bank's funding is believed to have been struck at just 42 basis points over the swap rate (ANZ later pushed its up to 75 basis points - still peculiarly low).

They must have taken the view it was relatively low-risk lending - despite the high-risk nature of the underlying stocks - because they could flog the stuff into the market at any time under the securities lending agreement they had struck with Opes. One source said Merrill's exposure to Lift was about $650 million of loans on $800 million worth of stock. There was a margin call from Merrill Lynch on Lift or an associate, said the source, and an intermediary was looking to raise $50 million to fund the call.

According to an excerpt from a Lift product disclosure statement the lender appears to have marketed to its clients to gear up their superannuation.

It is believed the regulators are investigating any margin lender that uses this high-risk model.

Melbourne's Chimaera Capital is another. It lends on just about any stock in the All Ordinaries and lends stock out for shorting.

Although there is nothing inherently wrong with the Merrill and ANZ jumbo loan model used by Opes and others, the issue comes down to disclosure, as usual. Whether, that is, investors were sufficiently made aware of the risks, particularly unsophisticated investors who had been switched into one of these firms by their stockbroker without being told they could lose the lot, and they did not hold title over their securities.

In the case of Chimaera, it is not known if this pledging occurred. Chimaera principals have been uncontactable for two days.

© 2008 Sydney Morning Herald

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