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Sachsen LB: Ormond Quay conduit fund - SIV/conduit with US MBS exposure

2007-08-08

Count of distinct funds: 1
Capital base: EU 17.3 billion
Loss: ?

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stories: ft.com

This fund, a conduit fund run by Germany's Sachsen LB state bank, rapidly fell apart due to its exposure to US mortgage securities. The fund role (as with all such funds) was to serve as a related entity (off balance-sheet, presumably) to produce low-risk earnings on short-term deposits by using them to fund higher-interest longer-term investments.

The German savings bank association bailed out the fund:

The rescue was triggered when commercial paper investors refused to refinance Ormond Quay and Sachsen LB was unable to provide the credit facility it had pledged.

Notably:

The rescue was an embarrassing step-down for the bank, which only one week ago publicly reassured investors of its position in the market, following speculation about Ormond Quay. On August 10 Sachsen LB said it saw "no indications" for increased probability of default for the ABSstructures managed by its subsidiary.

We are unclear at this time how much leverage was involved in the Sachsen fund (this Economist article, which mentions Sachsen with prescience shortly before the swoon, discusses the basics of conduits and SIVs).

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Important: This fund is on our list of hedge funds that have "imploded" (see also ailing lenders). However, please note that "imploded" is a somewhat subjective. The "imploded" list contains hedge funds (or other unregulated and autonomous speculative investment funds) which have gone through some sort of permanent adverse change. This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid mark-downs in net asset value; or abnormal "bail-out" by corporate parents or peers in order to avoid write-downs and provide liquidity. The funds are of any type and sector.