Creators of First and Last SIV Return After Crash With U.K. Bankby and
Sossidis, Partridge-Hicks get approval for U.K. lender
First Global Trust says it's `a simple, narrow wholesale bank'
Nicholas Sossidis and Stephen Partridge-Hicks, the bankers who created the model for structured investment vehicles that later collapsed during the global financial crisis, are back.
Sossidis and Partridge-Hicks own First Global Trust Bank Plc, a London-based firm that was authorized to provide banking services a month ago after a three-year approval process, U.K. Companies House and Financial Conduct Authority records show. The new lender is funded by Gordian Knot Ltd., their firm that once managed billions of dollars through a SIV until that vehicle’s 2008 collapse, the documents show.
“FGTB is a simple, narrow wholesale bank,” the lender’s website says. “We will only accept deposits or investments from professional, wholesale investors. Our business model doesn’t cater for retail deposits or current accounts.”
Upstart finance firms are seeking to capitalize from turmoil at European lenders, which continue to struggle with the enduring fallout from the crisis and the raft of litigation, probes and new rules that have followed. The crash was exacerbated by the collapse of the $400 billion market for so-called SIVs, complex, unregulated investment vehicles that swooned when the U.S. mortgage market imploded and imposed losses on debt investors.
“Gordian Knot is composed of innovative guys,” said Joseph Mason, a finance professor at Louisiana State University in Baton Rouge. “They’re creative, they’re thinking about new ways to expand financial products. Some of those work over time, some of them don’t.”
This time around, the pair is operating through a regulated bank rather than the shadow banking system.
Sossidis, 60, and Partridge-Hicks, 58, set up First Global Trust Bank, known as FGTB, in 2011 and began the process of applying for a banking license two years later, the documents show. The FCA and the Prudential Regulation Authority approved the firm on April 4 to sell wholesale banking products, or services that banks provide to large corporations rather than to individual consumers, according to the documents.
Robert Wigley, who helped lead European operations at Merrill Lynch & Co. until its crisis-era takeover by Bank of America Corp., is chairman of the venture. Wigley has served on the boards of several U.K. companies since exiting Merrill Lynch and is a non-executive director of the Qatar Financial Centre Authority. Angus MacLennan, once a senior executive at Fortis Bank NV before stepping down in 2009, is chief executive officer. MacLennan has held director roles with Vocalink Holdings and a U.K. subsidiary of Arab Banking Corp., according to his LinkedIn page.
First Global Trust’s website doesn’t provide details about the specific products or lending the bank will provide. MacLennan declined a request for an interview from Bloomberg News, saying it was too soon to discuss the venture. Sossidis and Partridge-Hicks didn’t respond to e-mailed requests for comment.
FGTB relies on Gordian Knot for its “day-to-day financial resources,” along with book-keeping and other services, the documents show. The London-based investment firm had lent the bank 873,000 pounds ($1.3 million) as of the end of April 2015 and agreed to provide up to $10 million in funds, according to the documents.
While today Gordian Knot is just another finance firm in London’s Mayfair district, it was once at the heart of the credit crisis through its management of a SIV called Sigma Finance Corp. SIVs borrowed through short-term loans and used the proceeds to invest in longer-term assets, often securities tied to mortgages.
Sossidis and Partridge-Hicks created the first SIV while working at Citigroup Inc. in the late 1980s before going out on their own with Gordian Knot. The bankers named their firm after the legend that Alexander the Great used a sword to slice through an impossible knot after learning that whoever could undo it would be the next ruler of Asia.
Alexander’s “decisive action” appealed to Sossidis and Partridge-Hicks, according to the firm’s website. The legend served as a metaphor for “radical solutions to complex problems,” the website says.
By 2007, there were 36 SIVs with about $400 billion of assets in what had become part of an unregulated, fragile “shadow banking” system that masked risk, according to the U.S. Financial Crisis Inquiry Commission’s report. Gordian Knot’s Sigma Finance SIV was among the biggest, with assets of more than $50 billion at its peak, according to a 2010 statement from the vehicle’s receivers at Ernst & Young LLP.
The SIV market began to crash in 2007 as the U.S. mortgage market imploded. Sigma’s assets slumped in value and became harder to sell, while investors willing to lend to the firm disappeared. It collapsed into receivership in 2008 with a “very large insolvent deficit,” owing more than $6 billion to secured creditors while secured assets were about $414 million, the receivers said in 2010.
While SIVs were just one of many kinds of financial vehicles that foundered in the period before the global financial crisis, the collapse of the market spooked investors, spread panic to other assets and helped usher in the crash, analysts said.
“SIVs were one of the factors in the collapse of the greater structured credit market,” said Edward Grebeck, CEO of Tempus Advisors LLC, a Stamford, Connecticut-based debt-consulting firm. “The faulty SIV structure was one of the first blow-ups in the credit crunch, and it led to a great loss of liquidity in other securitized assets throughout the entire asset-backed market.”
Gordian Knot’s vehicle was the last of the SIVs. It was also the end of an era for Sossidis and Partridge-Hicks: in the decade through September 2008, the firm had paid out more than $200 million in dividends to shareholders, company documents show. They continue to run an investment fund called Theta Corp., which deals in credit derivatives.
Months after Sigma’s collapse, as the crisis still raged, Sossidis and Partridge-Hicks made their next trade. According to Gordian Knot’s financial statements for 2009 and 2010, they set up Phoenix Finance LLC, which borrowed about $51 million from an emergency lending facility set up by the Federal Reserve and used the cash to purchase asset-backed securities, according to U.K. company documents and data from the U.S. central bank. Regulators had set up the program to “increase the flow of credit to households and businesses,” according to the Fed’s website.
That same year, Sossidis and Partridge-Hicks made a presentation to the Federal Reserve Bank of New York in which they outlined a philosophy for the future of banking, according to a 2010 New York University paper on monetary policy. The duo proposed that the world needs a “parallel banking system” made up of regulated “narrow banks” that use a combination of equity and short- and medium term loans from investors to buy securities originated by traditional lenders, the paper shows.
“Gordian Knot Ltd. makes no claim and has no pretense about conquering anything,” according to the firm’s website. “Our aim is simply to make money for investors with minimal risk. And if the banking system becomes more efficient as a consequence, that’s good for everyone, and we’re pleased to have played our small part.”