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And Who or What the Hell is Titlos PLC Anyhow?

Submitted by Marla Singer on 02/15/2010 15:24 -0400

As Zero Hedge readers are no doubt aware, we have spent a great deal of time exploring the many complex and creative structures employed by financial institutions to avoid (not evade, mind you) regulatory burdens. This is never more true than in dealing with capital or borrowing requirements defined by one or another sovereign or regulatory entity. As an example, Basel I requirements, or related capital and reserve requirements, provide significantly reduced capital requirements on certain assets when insured against default via Credit Default Swaps. This means that the regulator is giving banks that buy protection a gift in the form of reduced capital requirements and therefore increased leverage. We explored this in the context of AIGFP's "Foreign Regulatory Capital Portfolio" of CDS products last year in "Is The Fed Facing Margin Calls From European Banks?" but it is becoming increasingly obvious that the lessons learned therein apply equally to sovereigns like, say, Greece.

There we observed:

Taken together we read the thrust of this section to mean that a number of European banks, seeking to limit their regulatory capital requirements under Basel I (read: seeking to increase their leverage) bought swap protection on their assets from AIG. These obligations still sit with AIG and, in the event credit markets sink materially, AIG is likely to take losses on these instruments.

Not surprisingly, this particular species of regulatory arbitrage (from Basel I to U.S. [non]regulation of CDS contracts) is but one in a long line of methods to permit entities that range from large banks to moderately sized central banks to avoid (again, not evade) complying with onerous regulations like borrowing limits. Of course, we just highlighted a more recent example this afternoon in "Is Titlos LLC (Special Purpose Vehicle) The Downgrade Catalyst Trigger Which Will Destroy Greece?". (Is it unsavory for us to wonder why no investor managed to realize that "Titlos," at least in its latin form, bears the secondary definition "an inscription, giving the accusation or crime for which a criminal suffered"?) In this connection, we are intensely interested in hearing from readers if they can identify any of Titlos' (short for "Total Loss?") noteholders. Likely, they can be identified when they begin standing on the ledges of tall buildings.

In the instant case, a dedicated Special Purpose Vehicle (you thought they vanished after Enron, did you?) is formed to permit a series of complex transactions that end up having the ultimate effect of throwing several billion Euro at Greece to avoid, among other things, bumping the retirement age for public employees up a year or two, courtesy of a series of (probably very upset) investors- all without technically tripping the letter of European deficit limits.

Really, and in a world where NOL carry forwards can count towards Tier I capital, this sort of thing should surprise exactly no one. In this context, the next time someone claims that nothing about sovereign debt incidents could possibly be catching, it might be wise to point out to them that just a wider public appreciation for the starkly routine use of SPVs by sovereigns in this way could cause significant damage.

While AIGFP (in retrospect) can even seem like a very small "unregulated, off balance sheet" tangle when held up against the likes of Fannie and Freddie, the widespread use of the AIGFP methodology is significant. This is not new news. When the Joint Economic Committee chaired by Robert Bennett released a report on the "Economics of the Debt Limit" in 2003, the phrase "accounting maneuvers" didn't even have the good graces to hold off until the second paragraph to make an appearance. Back in December that phrase had morphed into "extraordinary accounting tools." Whatever one calls it, what seems obvious is that a hot, bright beam of sunshine is about to fall on the "extraordinary accounting tools" of a number of sovereigns.

Of course, some noteholders have probably taken advantage of the fact that, despite public protestations against any Greek "bailout," debt instruments like the Greek bonds might be used as collateral to borrow from the ECB at sub-one-percent rates. They might be in for a rude surprise, as if the ratings on these instruments slip below Moody's A3 or so they are disqualified as sufficient ECB collateral. (It isn't immediately clear to us what remedy the ECB might have, or if eligibility is only determined at the time of collateral pledge, but these sorts of details make for excellent, and perhaps unprecedented, speculation).

As it happens, Greece is probably just the most egregious technical offender- if one is to believe the many allegations (some pretty credible) of GDP manipulation by the jurisdiction going back as far as fiscal memory will bear. The basic format of Titlos is common. So common that the formation documents are boilerplate samples pulled from what looks like mortgage CDO shelves. Zero Hedge has acquired copies of company #6810180 [Titlos'] formation documents for your perusal. Leading off the Memorandum of Association is:

The Company's objects are:

To invest in or acquire, whether directly or indirectly, mortgage loans secured on residential or other properties within the United Kingdom or elsewhere, or in securities (of any type) secured on, derived from, linked to or other referable or related to (whether directly or indirectly) any such loans, and to issue securities in payment or part payment for any real or....

Well, you get the idea. Could it be that Greece's Central Bank floated what amounts to a regulation avoiding (not evading, mind you) loan for €5 billion or so with an off the shelf CDO entity? The irony threatens to throw one into anaphylactic shock. But then, it seems pretty clear when one examines the director's histories for the SPV's organizers. We stopped counting after the 50th instance of some derivation of the word "mortgage" therein. Granted, this isn't surprising for a trustee (Wilmington Trust SP Services) that...

...operates as a securities and structured finance management specialist, providing business finance and administration of asset security for special purpose vehicles.

But it is interesting that the issuers elected to use such a firm in the first place. We said "interesting," you will note, and not "surprising."

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Mon, 02/15/2010 - 16:29 | 231756 bugs_

"Special Purpose Vehicle" should trigger several
"Mark Markopolos" style red flag audit cyborgs.

Tue, 02/16/2010 - 04:23 | 232260 carbonmutant

All Special Purpose Vehicles should be subject to recall.

Mon, 02/15/2010 - 16:32 | 231758 credittrader

We have been toying with how the RegArb 'uncertainty' has been impacting sovereign risk over the last year or so...lots of talk of the EU banks themselves buying Sovereign protection as an 'ugly' basis hedge on their Super-Senior RegArb trades. Certainly helps explain the sheer size and consistency of net notionals rising in DTCC data for sovereigns even as risk was being compressed like crazy last year!

Marla - nice job on this!

Mon, 02/15/2010 - 21:46 | 232105 ZeroPower

I enjoy your posts, thanks.

Mon, 02/15/2010 - 16:34 | 231762 MsCreant

The sub-prime sovereigns and their liar loans.

Same as the housing/mortgage industry in the US, writ large. If we get this template in our head, we will be surprised by nothing that is getting ready to be uncovered.

ZH, thanks for all you do.

Mon, 02/15/2010 - 18:40 | 231913 Dirtt

Like holding a Vaseline-covered watermelon out at sea. Hard for me to imagine that they let it get so out of control. But when Paris Hilton was getting paid $1 million per to stiff parties around the world and when NYC unveiled the $1000 hamburger....well anyway.

When they lose the grip I think we'll be able to fit them into neat categories. The ones that flee. The ones that fall on their sword. The ones that are pushed onto said sword. The ones that get away with murder.

And last but not least. The ones that are fed to the lions...a plethora of Grand Juries

Mon, 02/15/2010 - 20:10 | 231996 Careless Whisper

Lloyd is a savvy businessman.

GoldmanSachs is America's Most Innovative Company.

Tue, 02/16/2010 - 02:04 | 232229 Problem Is

"The sub-prime sovereigns and their liar loans."

It Is A Symbiotic Relationship

For every liar loan, there exists a usurious lender...

Mon, 02/15/2010 - 16:58 | 231793 Comrade de Chaos

my bet that the note holders are SWISS, FRENCH and GERMAN entities. I saw a 40-40-20 breakdown somewhere.

at any rate, the EU plunge team has been working overtime in the last 12 weeks:

http://www.economist.com/markets/indicators/displaystory.cfm?story_id=15503310

Swiss took the initiative, probably to make sure that piping will be cleared from stoppages after the Greek fiesta.

p.s. no pun intended anyone, it seems we all are in the same... shitboat.

Mon, 02/15/2010 - 16:59 | 231796 Anonymous

how the hell did finance become so complicated ?

Mon, 02/15/2010 - 20:16 | 232003 Anonymous

It is not that it is complicated because it needs to be.

It is complicated because it needs to be to cover up the outright theft and corruption.

Anywhere from mortgages, to credit cards, to city finance, to pensions, insurance, investing, even to the budgets and funding in Governments around the world, this is now true.

"Accounting and Finance" is used to confuse, and to obfuscate.

Finance has nothing to do with math and actual service or the lending of money or the making of money.

It is about fees to be charged to fleece the sheeple.

Feed sheeple hopium and they will pay fees and exorbitant interest.

The financial system needs a complete overhaul and hopefully we will find capitalism somewhere "in there" again.