04/16/2010

. . . As Institution Winds Down 'Bad Bank'

Bank of America has disbanded its special sales team, which it put together at the height of the credit crisis to dump devalued structured products.

Members of the so-called structured portfolio group, who report to Geoffrey Greener, will soon return to their previous seats on the bank's regular trading desks in New York. Greener, meanwhile, is being reassigned to an undisclosed new post.

The moves mark an end to a massive selloff of troubled structured products that were sitting on BofA's balance sheet. They also signal that the structured portfolio group succeeded in unloading a critical mass of that paper, some of it acquired via the bank's yearend 2008 takeover of Merrill Lynch.

At the same time, improving credit-market conditions have made it much easier to sell structured products than it was not long ago. And that's something BofA plans to continue doing on a much-reduced scale. "Those assets are barely as distressed as they once were because prices have risen so much," one trader said.

After the credit market took a turn for the worse in late 2008, BofA cordoned off billions of dollars of structured products and other distressed securities in a special-purpose vehicle that served as a sort of "bad bank." The Charlotte institution then set up the structured portfolio group on the ninth floor of its investment-banking headquarters at One Bryant Park in Midtown Manhattan.

The team's sales came mainly last year. Among them: a $2.5 billion portfolio of collateralized loan obligations and $1 billion of securities underpinning a defunct structured investment vehicle called Victoria Finance.

In dismantling the sales team, BofA is following in the footsteps of several other big banks. UBS, for instance, made a similar move months ago.

J.P. Morgan, meanwhile, has gradually sold pieces of a large portfolio of distressed paper it picked up via its May 2008 purchase of Bear Stearns. But it had the luxury of waiting longer for a market recovery, thanks to substantial cash reserves. The investments it has shed include interests in collateralized debt obligations and unusual asset-backed securities.

For many market players, the big question now is what Citigroup will do. The bank's balance sheet is still weighed down with troubled structured products, including billions of dollars of securities it took on from seven SIVs that collapsed under its control. Citi has sold little of that paper so far, in part because it was able to rely on the U.S. government to remain solvent.

As of December 2007, Citi's SIVs had more than $60.3 billion of asset-backed commercial paper and medium-term notes outstanding, according to Moody's and S&P.

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