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Opinion

SIVs: Protium backfires on Barclays

The bank finds that it can’t have its cake and eat it.

When Barclays Capital revealed its Protium transaction in 2009 many in the market smelled a rat. The Cayman-based off-balance-sheet vehicle to which $12.3 billion of the bank’s most toxic assets had been consigned looked suspiciously like the kind of financial engineering that had rendered the assets so toxic in the first place.

By hiving off $2.3 billion of US RMBS, $1.8 billion of whole loans and $8.2 billion of monoline-wrapped assets into a fund and financing the deal with a new 10-year $12.6 billion loan at 275 basis points over Libor the bank reckoned that it was going to be able to release $3.9 billion for growth over Protium’s lifespan. Critics accused Barclays of using smoke and mirrors to make the risk on these assets simply disappear.

Not so, Barclays declared. Protium enabled it to "derecognize" the assets for accounting purposes (marking the new loan at fair value rather than to market) but the assets would stay on balance sheet for regulatory purposes. Thus the toxic portfolios could be managed down without the bank taking the full mark-to-market hit. "We are comfortable making the loan because we have confidence in the cashflows," said finance director Chris Lucas when the deal was announced.

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