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Bidders Steamed Over Whistlejacket Process
Asset Backed Alert, Harrison Scott Publications Inc. (May 1, 2009)

Buysiders are expressing frustration over how dealers handled this week's auction of assets from the failed Whistlejacket Capital structured investment vehicle. About 15 winners emerged on the April 29 bidding deadline, absorbing roughly half of the SIV's $5 billion-plus portfolio. But much of that buying was carried out by a just a few large investment banks that managed the offering process, including Bank of America and Goldman Sachs.

Meanwhile, many insurers, asset managers and other traditional investors didn't even bother to participate. The reason: They figured any bids submitted for the most desirable portions of the portfolio would just serve as a reference point for the banks to formulate slightly higher offers of their own.

The situation began shaping up more than a month ago, when the dealers sought preliminary bids for Whistlejacket's portfolio - consisting largely of asset-backed securities, mortgage bonds, collateralized debt obligations and corporate debt. At the time, the inquiries looked like an effort to gauge how the sale might unfold.

Instead of using the information to ensure a smooth auction, however, investors alleged the banks' intent all along was to come up with prices that would position themselves as sure winners. The apparent plan was to corner any upside on the positions by bidding slightly more for the assets, then holding them until market conditions improve - allowing them to be sold at profits.

This isn't the first time such complaints have surfaced. As pressures stemming from the credit crisis have forced a growing number of portfolio liquidations, buysiders have increasingly griped that dealers have used bidding information to step in front of other investors.

While the practice would seem likely to produce higher prices for sellers, investors complain that it places investment banks outside of their traditional roles while potentially turning off bidders. "The market has changed from dealers trying to bring buyers and sellers together to dealers trying to make as much money as they can," said one investor who didn't pursue Whistlejacket's holdings. "There is just not much incentive for getting involved in this type of structure. The process doesn't make sense to bring out the best bids."

Another grievance: Because the banks snatched up large batches of securities, better offers for smaller portions of those blocks were sometimes turned down. There's also a general sense of disappointment, given the fact that secondary-market buying opportunities have been sporadic in recent months.

What's more, investors complain that the banks' bidding strategies undermined what would have been an opportunity to set dependable market prices for the types of structured products in Whistlejacket's portfolio. Because the auction was by far the largest secondary-market offering in recent memory, the thought was that it would give industry participants a rare reading on the values of the otherwise hard-to-price securities. "I see it as a unique opportunity to get a tremendous amount of transparency," one trader said the day before the bidding deadline

Estimates of the size of the Whistlejacket portfolio range from about $5 billion to $6 billion, all of which was offered in the action. About $2.5 billion of the bonds sold, fetching an average price of 62 cents on the dollar. The sales are scheduled to close next week. The holdings that didn't sell are being transferred to a fund set up by Goldman. Holders of paper issued by Whistlejacket will receive cash payouts from the auction's proceeds, and/or shares in the Goldman vehicle.

Along with BofA and Goldman, RBS Greenwich and some other big banks were in the auction's dealer network. But aside from BofA and Goldman, it's unclear which of them were also buyers. Whistlejacket collapsed after its original sponsor, Standard Chartered, opted to pull support for the vehicle amid deteriorating market conditions at the beginning of 2008. At the time, the SIV had $7 billion of assets. It was eventually placed under the control of receivers from Deloitte, which arranged the auction.

Whistlejacket's investments include bonds from a swath of issuers, including GE Capital, HBOS, Merrill Lynch, Royal Bank of Scotland and Sallie Mae. Its biggest positions in single structured-product deals are:

-$140 million of CDO paper issued by William Street Funding in 2006.
-$113.3 million of CDO paper issued by HBK Investments in 2007.
-$107 million of CDO paper issued by KKR Financial in 2007.
-$99.7 million of CDO paper issued by C-Bass in 2007.
-$95.5 million of aircraft-lease bonds issued by AerCap Ireland in 2007.

SIVs sought to capture arbitrage profits by purchasing a range of credit products with proceeds from sales of lower-yielding asset-backed commercial paper and medium-term notes with top ratings. The market for the vehicles, which once topped $350 billion, began to crash in 2007 as credit-crisis-related worries rendered them unable to roll over maturing obligations. They are now all but extinct. v



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