Standard Chartered faced the prospect of a fire sale at its $7.1 billion (£3.6 billion) Whistlejacket structured investment vehicle (SIV) yesterday, after receivers were called in to manage it. The move scuppered the bank’s plan, announced last month, to bail out the SIV after the market for its short-term debt dried up.

Analysts feared that if Whistlejacket sold its assets cheaply, it could compel other SIVs to revalue their assets and they, in turn, could become forced sellers.

Willem Sels, a credit strategist for Dresdner Kleinwort, said: “There’s some sort of self-fulfilling prophecy or spiral in these types of things.”

Standard Chartered’s problems came as ratings agencies said that increasing numbers of collateralised debt obligations (CDOs) – an asset class favoured by SIVs – were defaulting on their payments to investors.

CDOs are funds that contain slices of bonds, some of which are backed by risky American mortgages.

SIVs are off-balance sheet vehicles that issue short-term and medium-term debt. The cash raised is used to buy longer-term assets, such as CDOs.

SIVs ran into trouble during the credit crunch last year, when the value of their underlying investments plunged and investors who bought SIVs’ short-term debt fled the market.

Whistlejacket holds only a small amount of US sub-prime mortgage debt. Richard Meddings, Standard Chartered’s finance director, yesterday insisted that Whistlejacket’s assets were high-quality, but shares in the bank fell 3 per cent to £15.20 on the announcement.

SIVs have capital investors, who put in cash that is leveraged with money raised as short-term debt. Yesterday it emerged that the value of Whistlejacket’s assets had fallen to less than half of the amount of start-up capital.

The fall below 50 per cent is a trigger for calling in receivers, which will be appointed by Whistlejacket’s trustees within a few days.

Mr Meddings said that he would discuss rescue options for the SIV with the receivers. However, sources close to the bank acknowledged that there was a risk that the receivers would order the sale of Whistlejacket’s investments at knockdown prices.

Wheels come off Standard Chartered Whistlejacket vehicle

1 SIVs invest in long-term securities, financed by short term debt issues

2 All SIVs invest in asset-backed securities such as mortgages, credit cards, or student loans

3 A sponsoring bank, such as Standard Chartered, gets a fee for managing the SIV as well as making profits from the difference between the short-term borrowing rate and long-term returns

4 SIV debt is kept off balance sheet because the bank does not assume the credit risk of the underlying obligations

5 However, success relies on short-term funding costs remaining lower than long-term returns

6 The credit crunch has ended short term borrowing by SIVs, eroded long-term returns and reduced the quality of SIV assets

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