another broker in peril

  1. 15 Posts.
    Merrill Lynch has done it again.

    At least one other high-risk margin lender, backed by Merrill, has got the wobbles and is attracting some scrutiny from the regulators amid the fall-out from the Opes Prime debacle.

    This time, it is Sydney-based Lift Capital.

    Like Opes, Lift lends money to clients to buy speculative stocks outside the ASX Top 300. It also encourages clients to borrow against their property to buy shares.

    According to Lift documentation, its clients appear to pledge their securities to Lift and Lift has the right to repledge them to other parties, in this case, Merrill.

    Lift principals have been unavailable for two days and Merrills is ducking for cover.

    It's not good news for the US bank which was probably hoping for good publicity today.

    BusinessDay notes its credit markets team has pulled off the first debt raising from an Australian REIT in the US credit markets since the meltdown last year.

    With Deutsche and Citigroup, the bank has raised $US1.1 billion for Frank Lowy's Westfield Group via a 10-year note (coupon 1.125%).

    But that's hardly the story.

    Although Merrill was able to deftly exit most of its position in Opes shortly after ANZ called in the receivers late last month, blame ANZ, and salvage most of its $400 million loan in the process by thumping Opes' securities into the market quickly, observers are asking what was it doing in the first place?

    Some of the bank's funding is believed to have been struck at just 42 basis points over the swap rate (ANZ later pushed theirs up to 75bps - still peculiarly low).

    They must have taken the view that this was relatively low-risk lending - despite the high-risk nature of the underlying stocks - because they could simply flog the stuff into the market at any time under the securities lending agreement they had struck with Opes.

    In any case, Merrills has completely gone to ground.

    One source said its exposure to Lift was $650 million on stocks loans of $800 million.

    Although the ``approved securities list'' on the lift website shows ASX top 400 stocks - less risky (at least on the website) than the Opes list - it does appear that Lift clients pledge their securities to Lift, and in turn, Lift has the right to repledge them, presumably to Merrills.

    This from the Lift Product Disclosure Statement:
    ''You agree that the Relevant Loan Securities and New Rights will be held in the name of Nominees on the terms set out below.
    You acknowledge that Nominees is a nominee company appointed by the Lender from time to time acting as your bare nominee.''

    11.2 Pursuant to clause 11.1:
    (a) You agree to transfer the Relevant Loan Securities and New Rights you own to Nominees;
    (b) If you do not yet own the Relevant Loan Securities or New Rights, you will have Nominees acquire the Relevant Loan Securities or New Rights on your behalf;
    (c) You accept that Nominees will hold the Relevant Loan Securities and New Rights on your behalf in accordance with the terms of this Agreement''.

    And, ''The Lender may assign or grant or permit to exist any Security Interest over the Lender's rights under this Agreement, without prior notice to you or the Guarantor ''.

    More worrying even that these excerpts from the Lift PDS is that Lift appears to have marketed to its clients to gear up their superannuation.

    "Encompassing a suite of products and services, the SuperLIFT facility is a flexible, comprehensive platform designed specifically to provide leverage for superannuation entities including DIY or self managed super funds and small APRA funds.''

    It is understood the regulators are now investigating any margin lender which uses this high-risk model.

    Melbourne-based Chimaera Capital is another.

    Chimaera lends on just about any stock in the All Ordinaries index and lends stock out for shorting as well.

    Although there is nothing inherently wrong with the Merrill and ANZ jumbo loan model used by Opes and others, the relevant issue comes down to disclosure as usual.

    Whether, that is, investors were sufficiently made aware of the risks, particularly unsophisticated investors who had been switched into one of these firms by their stockbroker without being told they could lose the lot, and they did not hold title over their securities.

    In the case of Chimaera, it is not known whether this pledging occurred.

    Chimaera principals have been uncontactable for two days.

    [email protected]

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