Standard Chartered's structured investment vehicle (SIV) has been put into receivership less than two weeks after the Asia-focused bank said it would take the fund's assets on to its balance sheet.
The move was triggered because the assets of the SIV, called Whistlejacket, had lost half their value. The bank said the slump in values was "very recent".
The breach of the net asset value trigger broke one of the conditions of Standard Chartered's liquidity support, announced on 31 January. The bank said it would discuss options for providing liquidity with the receiver, which will be appointed by the SIV's trustee, Bank of New York.
Richard Meddings, Standard Chartered's finance director, said: "We continue to have confidence in the quality of Whistlejacket's assets. We remain willing to have discussions with the receiver, once appointed, and hope to find a viable solution to ensure flexibility for Whistlejacket."
About 7 per cent of Whistlejacket's exposure was to US monoline bond insurers, which have been hit hard by fears of ratings downgrades. The monolines' troubles are understood to have damaged investor sentiment towards Whistlejacket's assets in recent days.
Bruce Packard, an analyst at Pali International, said: "It is slightly embarrassing but I don't think people have an issue with Standard Chartered's management. People do understand that there is inherent uncertainty with SIVs and they trust management to do what they can with whatever funding position they are presented with."
Standard Chartered said it did not expect the receivership or any arrangement it comes to over liquidity to have a material impact on the bank's earnings or capital position this year.
SIVs grew up during the credit boom. They sell short-term debt called commercial paper to buy longer-term, higher-yielding, assets. Standard Chartered follows HSBC and Citigroup in supporting SIVs after investor confidence in the funds was damaged by US sub-prime mortgage defaults.
Standard Chartered said on 31 January that it would take Whistlejacket's $7.15bn (£3.7bn) of assets on to its balance sheet because the SIV was unable to fund itself fully in the market. The move was designed to prevent a fire sale of assets that could be triggered by the slump in asset values unless Standard Chartered provides liquidity support.
Standard Chartered's announcement came as AIG, the world's biggest insurer, admitted its auditors had criticised the company's internal controls for financial reporting of the fair valuation of credit default swap obligations. AIG also increased estimates of losses from insuring mortgage-related products to $5bn from $1bn. Its shares fell 11.7 per cent yesterday.
Willem Sels, a credit strategist at Dresdner Kleinwort, said: "This one [Whistlejacket] and AIG don't particularly give confidence to investors about the length of the write-down process and when we are finally going to see the bottom. Surprises are not what we need at this time."
G7 finance ministers said at the weekend that they expected further big write-downs from the credit crunch and urged financial institutions to admit to losses quickly.
Whistlejacket is an independent fund managed by Standard Chartered. The fund's board had been trying to manage its liquidity by selling assets, using repurchase agreements, and encouraging investors to exchange their investments for representative slices of its assets. Core assets fell to $7.15bn by the end of January from $18.2bn at the end of August. Standard Chartered shares fell 3 per cent. The bank announces 2007 results on 26 February.Reuse content