Last month Opes Prime collapsed in a heap of fraud and accounting manipulation. See Opes Prime: Collapse Down Under.

Yesterday The Age was reporting More wobbles in the loan dominoes.

Merrill Lynch has done it again.

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

This time, it is Sydney’s Lift Capital. But there is no need to panic. No sign of shenanigans. It’s simply that stockbroker clients who give business to Lift and others like it are pulling back their counterparty risk thanks to Opes.

In one day flat the story has changed from “There Is No Need To Panic” to Lift Capital goes under. Well that settles that: The new battle cry is “It’s Too Late To Panic Now”.

Lift Capital has appointed administrators, joining Opes Prime and Tricom among brokers to be crunched in the recent sharemarket turmoil. As reported on BusinessDay yesterday, Lift operated like Opes, lending money to clients to buy speculative stocks outside the ASX Top 300. It also encouraged clients to borrow against their property to buy shares.

Unlike Opes, there’s no suggestion of irregularities, although the model is clearly on the nose. Lift might have to sell its loan book. There are now some 1,600 clients wondering what’s become of their shares and managed funds.

“It is too early to speculate on the ultimate return to creditors and investors. However, it appears that the underlying value in the shares is good and it is expected that a reasonable return will be achieved,” Tony McGrath says in the statement.

Indeed, the administrators expect “a significant surplus of funds” will be available once the unnamed (Merrill Lynch) secured creditor has been repaid. Merrill Lynch spokesperson Danielle Mapes said the company had no comment on the report of Lift’s demise.

So, to recap Lift’s Opes-like activities: according to the documentation, Lift’s clients appear to pledge their securities to Lift and Lift has the right to repledge them to other parties – in this case, Merrill.

Although Merrill was able to 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 to the margin lending community is believed to have been struck at just 42 basis points over the swap rate (ANZ later pushed it up to 75 basis points – 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.

Merrill Lynch is now involved with two Australian stockbrokers that have gone bust. This one on fears of counterparty risk. Counterparty risk was a big part of the problem at Bear Stearns as well. And mistrust in conjunction with fears of counterparty failure is why the Term Auction Facility Has Failed.

Mike “Mish” Shedlock
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