Conduit Distribution Pros Face Downsizing


CORRECTION: Credit Suisse insists that it has no plans to downsize or eliminate its asset-backed commercial paper distribution desk, contrary to what appeared in the Oct. 9 article "Conduit Distribution Pros Face Downsizing."

A wave of staff reductions is looming for dealers of asset-backed commercial paper.

While professionals who distribute commercial-paper conduit offerings have been hit by some of the same broad shakeouts as their peers amid the global financial crisis, industry players say they're now under consideration for more targeted cuts. Many are pointing to Citigroup as a candidate to move first, perhaps sacrificing its status as one of the busiest shops in the business.

Sources said that other institutions with smaller dealer desks, including Credit Suisse and Deutsche Bank, could pull back as well. But whether that means a downsizing of their dealer operations, or their outright elimination, remains to be seen.

The expectations stem in part from capital-reserve formulas that will take hold with the Financial Accounting Standards Board's new FAS 166 and 167 rules at yearend. More generally, dealers are feeling pressure from more than two years of contraction in the conduit market, from peak outstandings of $1.2 trillion in August 2007 to about $500 billion now.

While conduit-dealer desks have shrunk to some extent during that time, there's a sense that those shops still employ far too many professionals for the amount of securities in the market.

Many dealers even staffed up in late 2007, after the market's decline had already begun. And in general, they've been hesitant to trim their operations - although it's unclear why. "It's been kind of shocking how many people are still hanging on," said a conduit-paper trader.

The new FASB rules could be what ultimately forces some banks' hands, by imposing stricter balance-sheet and cash-reserve guidelines for both conduit-funded receivables and liquidity facilities supplied to commercial-paper vehicles the institutions run. For a big credit-card lender like Citi, for example, its own conduits would present a less appealing means of funding - thus detracting from one of the main sources of business for its dealer desk.

There have even been predictions that Citi will eventually unwind its Dakota and Palisades conduits in response to the FASB directives, or fold them into other vehicles. Under that theory, the bank would find more attractive funding through other sources, such as issues of unsecured bonds. Citi declined to comment.

Dakota, which helps fund Citi's bankcard activities, has $11 billion of its paper in the hands of investors. Palisades, geared toward private-label accounts, weighs in at $8.5 billion. "Those businesses just don't make that much sense on balance sheet," said one bank's conduit-distribution chief, referring to the new accounting rules.

Meanwhile, some big dealers could emerge unscathed from a staffing standpoint. In particular, sources are pointing to Bank of America, Barclays, Goldman Sachs and J.P. Morgan.

That's largely because the banks derive most of their dealer assignments from outside conduit operators that are less likely to cut back on their issuance activities. In fact, Goldman doesn't even run any conduits.

The shops may also be unwilling to risk reputations they currently hold as top conduit-paper dealers. BofA owes its standing in the market partly to its takeover of Merrill Lynch earlier this year. The same goes for Barclays, which took over Lehman Brothers a year ago. J.P. Morgan, viewed as one of the most solvent investment banks, has been building up its distribution capabilities for the past two years.

As for Citi, other banks aren't necessarily rooting for it to retreat. "I have been hearing Citi [would cut its dealer operation] for years, but they place a lot of CP and they're good at it," one conduit operator said, adding that the institution needs any source of funding it can get.

The makeups of banks' conduit-dealer desks vary widely. Larger institutions may assign an entire floor of professionals to the task, although in many cases those individuals also cover other products. The upshot is that a decision to cut back might not lead to layoffs, but would instead mean re-assignments of personnel. Either way, "there has to be a consolidation," one industry participant said. "The street is over-resourced."

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