By Jennifer Yousfi
Following a recent precedent set by Citigroup Inc. (C) and HSBC Holdings PLC (HBC), will rescue its K2 fund, an $18.8 billion structured investment vehicle (SIV), brought low by the subprime credit crisis.
Dresdner is Germany's third-largest bank and a wholly owned subsidiary of Allianz SE (AZ). The bank plans to offer a credit line to bail out the struggling SIV fund, which has shrunk from $31.2 billion since July 2007.
"This is a potential threat to Dresdner Bank," Thilo Mueller, managing director of Frankfurt-based MB Fund Advisory, told Bloomberg News. "There is little liquidity for some of these assets and with comparative assets continuing to fall, you need to book further write-downs."
Dresdner is the last in long list of banks that includes Citigroup, HSBC, Bank of Montreal (BMO) and WestLB AG to pledge support for foundering SIVs with a total of $140 billion in assets so far. Data from Moody's Investors Service suggests that SIVs, which rely on short-term borrowing to buy higher-yielding assets, have lost $100 billion in value from $400 billion since August.
Despite $2.2 billion (1.5 billion euros) in write-downs at Dresdner to date, Allianz was able to report strong earnings. Full-year operating profit increased 5.1%to $16.144 billion (10.915 billion euros) and net profit gained 13.5% to $11.782 (7.966 billion euros).
Strong growth in the group's insurance divisions was able to offset a steep profit drop in banking, Forbes reported. But the troubles with its K2 fund have led management to pursue operational changes and reassure investors there won't be similar trouble in the future.
"Allianz plans to exit K2 and the SIV business in general," Chief Financial Officersaid yesterday (Thursday) in an interview with Bloomberg News. "The SIV business has no future."
Allianz ADR shares fell 0.69% [or $0.12] to close yesterday at $17.32.
News and Related Story Links:
- Money Morning:
Citigroup Moves $49b in Assets to Own Balance Sheet; Could Be Last of the "SIV Problem"