Alternate title: How Mitteleuropa led to the creation of the Abacus CDOs.

The German bank IKB, together with ACA, was one of the investors in Abacus 2007-ACI, the subprime-referencing synthetic CDO at the heart of the SEC’s civil fraud suit against Goldman Sachs.

And IKB, along with many of the German Landesbanken, began to invest in collateralised securities, especially subprime-backed stuff, from 2001 onwards. That was the year the European Commission abolished state guarantees for publicly-owned banks, which had traditionally allowed the institutions to borrow in capital markets at a lower cost than commercial rivals.

The loss of the guarantees meant the Landesbanks had to find new sources of revenue, and high-yield assets such as subprime securities proved irresistible. IKB, in a similar position, created Rhineland Funding and Rhinebridge — two ABCP conduits — to invest in credit-backed securities.

Like most conduits they collapsed during the financial crisis, and IKB was bailed-out by the German government and a consortium of banks — making it one of the first victims of the subprime crisis.

So perhaps, given IKB’s appetite for yield, it should come as no surprise that Goldman says it was actually a request from the German bank that led to the creation of the first Abacus CDO.

From Goldman’s defence documents:

IKB invested in multiple ABACUS transactions through Goldman Sachs, including ABACUS 2004-1, 2005-3, 2006-11, 2006-15, 2006-8 and 2007-AC1. (See GS MBS 0000018045 – 18046; Tourre Tr. Vol. 1, 16.) In fact, IKB made the reverse inquiry that led to the first ABACUS transaction, ABACUS 2004-1. (See Tourre Tr. Vol. 1, 16.) In late 2006 and early 2007, Goldman Sachs was working with IKB on a number of transactions, including multiple ABACUS transactions.

Related links:
Germany’s Bank-Asset-Berg - FT Alphaville
Let it fail, Mitteleuropa edition – FT Alphaville
Don’t mention the… subprime exposure – FT Alphaville

This entry was posted by Tracy Alloway on Tuesday, April 20th, 2010 at 8:24 and is filed under Capital markets. Tagged with Abacus, CDOs, germany, goldman sachs, IKB, Landesbanken, subprime. Edit this entry.