A fair whack of the past fortnight’s financial market panic can be sourced to BNP Paribas. The problem wasn’t so much that this major French bank had several hundred million dollars at risk in the US sub-prime crisis, but that it took a week to fess up to it after previously assuring the market it had “absolutely negligible” exposure.

The financial markets in volatile times depend very heavily on trust. It was the evaporation of trust sparked by Paribas that made last week as bad as it became.

David Coe’s Allco Finance Group is a long way from BNP Paribas in size and importance, but over the past fortnight it’s made up a troika of financial engineers with Macquarie Bank and Babcock and Brown that collectively represent the market’s view of the more debt-exposed end of the local finance business. RAMS, it turned out, represented something further again along the curve.

While AFG’s share price was taking a thrashing, the company reassured the market on August 2 and again last Thursday that all was hunky dory, that it had no “direct” exposure to the US sub-prime mess, that it’s funding position was strong, that its Mobius mortgage platform was not affected “by the issues associated with US sub-prime mortgages”.

Well, perhaps not with US sub-prime mortgages, but it turns out Mobius has plenty of bad local loans instead about which it has perhaps been less than totally upfront.

It’s taken a Standard & Poors negative credit watch report to give a more detailed picture than that provided by AFG to the ASX. Ian Rogers’ The Sheet had the story on August 6:

Asked at a credit market conference last week whether Australia had sub-prime lenders of the type that were getting into trouble in the United States, Standard & Poor’s executive Leah Rhodes said the average arrears rate on portfolios securitised by local non-conforming lenders was 14 per cent.

The non-conforming lender with the best arrears rate was Pepper Home Loans, with seven per cent of its loans 30 days in arrears. The worst was Mobius, part of Allco Finance Group, with a 23 per cent arrears rate.

No, 23 per cent isn’t a nice figure. The SMH’s Stuart Washington picks the issue up today, going a touch further with an AFG contribution:

One of Mobius’s mortgage-backed securities has the worst industry statistics for overdue repayments, with more than 10 per cent of its loans regarded as technically in default. In a move not reported in Allco’s half-year report, Allco tipped in $4 million to prop up returns to investors from the fund because of losses for the quarter to December 31.

The particular Mobius vehicles in a spot of bother are two tranches of something called the Mobius NCB-03 Trust. As S&P explains:

One of the originators, HLP Mortgage Co Pty Ltd, was placed into administration in early 2007. HLP-originated loans account for just over two-thirds of the current portfolio, but contribution more than 80 per cent of loans greater than 30 days in arrears….around 16 per cent of the loans are in the 90-plus day category.

There’s no need to look overseas for a sub-prime mess. So the question for investors is: Did AFG engender less than total trust by not mentioning its Australian problem, while assuring the market it had no US sub-prime exposure?

STOP PRESS: And as Crikey was about to be published, Allco has made a statement to the ASX “refuting” the SMH story and claiming all is fine with Mobius and its underperformance has been appropriately reflected in Allco’s results. So there.