A small group of structured-credit professionals, of all people, may have come up with a workable and politically acceptable way to get bad assets off the books of big holders of mortgage-backed securities. New York–based Dynamic Credit Partners in February helped the Dutch Ministry of Finance bail out ING Group, removing a $39 billion portfolio of MBSs from the Dutch banking and insurance group’s balance sheet.
Rather than shackling taxpayers with the toxic holdings, however, Dynamic designed a deal in which ING will sell most of the assets to the Dutch government at a 10 percent discount to face value, though “nominal ownership” stays with ING. The crux of the arrangement is that it is classified under international accounting standards as a sale, thereby releasing ING from having to meet the capital requirements with which it would otherwise be saddled.
It may seem like sleight of hand, but Tonko Gast, a co-founder of Dynamic, says the fact remains that the assets are worth more than their mark-to-market value would suggest. “What was important for the Dutch government was to have us roll up our sleeves and analyze the underlying assets, using conservative assumptions, to come up with an appropriate economic value,” explains Gast, who co-founded Dynamic in 2002 with James Finkel to invest in structured credit. They retooled their firm to do investment consulting instead when it seemed there was little to buy after the structured-credit market collapsed last year. Enter the Dutch and ING.
The February deal may offer a template for other government/private sector partnerships that hope to revive the banking sector and restore normalcy to the credit markets.
Events may help accelerate interest in such arrangements, as thousands of mortgage-backed-bond portfolios that until now have been rated triple-A, or top-tier, but whose market value is clearly not triple-A, are inevitably downgraded this year, given falling values and the lack of liquidity. Gast and his team say that they expect two thirds of such assets, whose face value totals more than $1.2 trillion, to be downgraded soon to junk status, or below investment-grade, pushing the amount of capital banks would be required to hold in reserve, by Dynamic’s estimate, from about $30 billion to more than $700 billion.
