Royal Bank of Scotland became the latest bank to admit discomfort from the credit crunch as it parted company with the head of its once-booming collateralised debt obligations unit.

Rick Caplan, managing director and co-head of CDOs at RBS Greenwich Capital in the US, has left the bank, along with six of his colleagues.

RBS aggressively and profitably marketed CDOs - packages of sub-prime mortgages and other asset-backed securities - both originating deals and then selling them on. The sudden loss of appetite for these products and resultant collapse in business has forced RBS to trim the department from 24 people to 17.

It is not clear whether RBS has sustained losses. The trading book of its global banking and markets division was worth £16 billion at the half-year, although CDO trading was a small part of this total.

BACKGROUND

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BACKGROUND

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Mr Caplan was previously at Citigroup, where he was co-head of credit derivatives and once advised Enron on some of its financial structures. He appeared before a US Senate committee investigating the ensuing scandal. Citigroup was accused by senators of helping Enron to disguise debts through billions of dollars of sham transactions, while the bank argued that the transactions were a legitimate way for Enron to raise money.

The RBS departures come after the resignation last week of Ed Cahill, who headed the CDO business of Barclays Capital, along with partings from Bear Stearns, Citigroup and HSBC. RBS confirmed its departures yesterday, saying that it was scaling back the CDO business “to bring it in line with the realities of market volumes”. This month it had said that first-half revenues from CDOs were down 23 per cent.

RBS does not expect demand to recover soon. “We believe we have the business sized appropriately to meet the demand we forecast going forward,” it said.

Plunging CDO values have sparked casualties all over the globe. Yesterday Basis Yield Alpha Fund (Master), a $700 million (£347 million) fund invested in CDOs, was placed in provisional liquidation. Investors are not expected to recoup much of their investments.

In the latest fallout from the credit crisis, Cheyne Capital, a London hedge fund, was trying furiously yesterday to put together a rescue plan for its £3.3 billion special investment vehicle, Cheyne Finance. The SIV, arranged in 2005 by Morgan Stanley, told investors that it was trying to restructure its investment portfolio after heavy losses on mortgage-backed securities triggered an orderly liquidation of the vehicle. Cheyne said that it had exhausted all available credit facilities but had raised enough cash and other funds through asset disposals to meet its liabilities until November.

Morgan Stanley, Merrill Lynch and Lehman Brothers helped Cheyne Finance to raise funding, stoking speculation that they may be exposed to the beleaguered vehicle. Lehman Brothers said that it had no exposure to Cheyne Finance. It is understood that Morgan Stanley is not exposed. Merrill Lynch did not comment.

The developments came as Ben Bernanke, the Federal Reserve Board Chairman, said he was “prepared to act as needed” to minimise the damage the credit crunch might inflict on the US economy.

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