Who knew about Barclays $1bn snafu last week?
On Friday, BARC’s balance sheet underwent a little unwelcome expansion: a $970m position comprising corporate bonds (including such choice credits as GM) CDO tranches and revolving credits surfaced on the books.
Bidding opens today on the firesale of the position, which the bank is naturally rather keen to (re)dispose of.
S&P LCD reports on a dispute between BARC and a fund managed by Black Diamond Capital Management:
Black Diamond said last week that BDC terminated a derivative facility with Barclays because Barclays did not return excess collateral that was due on Oct. 7 and then failed to cure a default stemming from the bank’s failure to return the collateral. BDC Finance on Oct. 17 sued Barclays in the New York State Supreme Court, alleging that Barclays failed to deliver to BDC no less than $302 million of posted collateral and interest, according to court filings.
The Black Diamond fund in question was a synthetic CDO, the assets of which comprised a series of total return swaps (TRS) written on various assets on BARC’s balance sheet. Those assets being the things BARC is now trying to sell.
The existance of those swaps, of course, hitherto effectively wrote the assets out of regulatory existance on the balance sheet: BARC has not had to account for them before.
The swaps naturally required collateral posting, which the Black Diamond fund had to put up with BARC. Alas, as spreads came down, collateral haircuts fell, and it seems BARC did not return the money to Black Diamond as you’d expect it was want to do. And so Black Diamond terminated the TRS (shuttering, we presume, the CDO) suddenly writing the $970m position back into regulatory existance at BARC.
This is bad for several reasons. BARC will have to take a writedown on the position. It is selling the assets into a collapsing market, so it will likely be an unpleasant affair.
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