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Opinion

Macaskill on markets: Long-term structurers are back in the limelight

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

Goldman Sachs partner Addy Loudiadis could have been forgiven for hoping to have heard the last about her part in structuring currency and interest rate swaps for Greece.

The deals caused a furore when they were made public soon after Greece joined the euro, but the debate then died down until the recent renewed focus on the dire state of the country’s finances.

Loudiadis was made a Goldman partner in 2000, in large part because of her prowess in putting together derivatives packages for government and corporate borrowers. She later stepped back from co-heading European investment banking and became chief executive of Rothesay Life, a UK insurance company owned by Goldman.

This move offered a less intensive intra-day workload, while continuing to exploit her expertise. The shift bore fruit with an innovative £1.9 billion ($2.9 billion) shift of pension liabilities for RSA Insurance Group last July. The deal was the biggest pension buyout trade, although it was surpassed in size by a comparable £3 billion longevity swap for BMW announced by a Deutsche Bank subsidiary this February.

The structuring of the RSA deal by Loudiadis via a Goldman subsidiary underscored the role investment banks play in helping clients to tackle problematic issues such as financing long-term pension liabilities – issues that are becoming increasingly pressing as people live longer and assumptions about the reliability of long-term equity investments are questioned.

Investment banks with the ability to write very long dated derivatives have proved to be the main source of packages that blend capital markets trades with insurance to tackle pension funding problems.

Corporates and insurers are understandably suspicious of dealers offering very long dated pension-linked trades. Counterparty risk is always an issue and potential clients are wary of the margins that investment banks try to embed in their trades. But the main attempt to set up an independent source of complex cross-market pension liability advice and structuring failed.

Roberto Mendoza – a former JPMorgan banker who had a short stay at Goldman Sachs and was made a partner the same year as Loudiadis – co-founded Integrated Finance Limited (IFL) in 2003 in a bid to provide a blend of advice and risk-taking for corporate and sovereign clients away from an investment bank umbrella. The track record of Mendoza and his two IFL co-founders augured well for development of a new source for long-end structuring advice.

Peter Hancock is a former head of fixed income and CFO of JPMorgan and one of the driving forces behind the development of the OTC derivatives markets. Robert Merton boasted a Nobel Prize in economics and even his tarnished reputation as one of the principals of failed hedge fund LTCM demonstrated that he had experience at the sharp end of finance.

The trio combined contacts with senior corporate and public decision makers with a detailed understanding of cutting-edge market tools, but they were still unable to close significant deals. Banks were unwilling to outsource trades that involve assumption of long-end risk, and IFL did not become a one-stop shop for pension restructuring.

Mendoza and Merton now maintain the relatively low profile of semi-retired financiers, with some director appointments and advisory work. Hancock has re-emerged in a leading role, however. He was recently appointed to a new job running risk and finance for AIG – a Herculean task but one where his understanding of the motives and wiles of investment bankers might end up working to the benefit of US taxpayers, who are still supporting the troubled insurance firm.

Hancock is not a natural seeker of the limelight but he can expect close scrutiny of his decision-making as he manages AIG’s risk due to the continuing taxpayer exposure to the group. Bankers who put together complex structured trades for corporate and sovereign clients can also expect growing attention to their deals – and their margins – in the future, as Loudiadis is now finding out.

That might add a personal element of caution to the reputational risk assessment that senior bankers should make on behalf of their firms before closing complex structured trades. As Goldman’s currency and interest rate swaps for Greece demonstrate, a structuring package that looks like a home run for a dealer can bring unwelcome attention many years after it is closed.

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