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Poor risk management blamed as ATB takes a $30-million hit

Geoffrey Scotton, with files from Kelly Cryderman, Calgary Herald, and the Edmonton Journal
Calgary Herald

Friday, October 03, 2008

Alberta Treasury Branches' poor risk management practices prompted a $253-million writedown and cost $30 million in actual losses from its holdings of now-toxic non-bank asset backed commercial paper -- putting all Albertans at risk, Auditor General Fred Dunn said Thursday.

"ATB needs to substantially improve its systems to manage treasury risk," said a twice-yearly audit report released by Dunn.

"ATB needs to develop and implement investment business rules, develop a comprehensive liquidity contingency plan and improve the effectiveness of its asset liability committee. This is important because all Albertans have a stake in ATB's success."

At issue are ATB's $1.15-billion holdings in asset backed commercial paper, a peculiarly Canadian variety of financial instruments that are among a group for which markets dried up in August 2007. These problems were triggered by a collapse in the subprime mortgage market south of the border, which has produced the U.S.-led global credit crisis.

In a laborious, months-long process, the provincially owned ATB, along with other financial institutions in Canada and elsewhere, fashioned a restructuring of the $35 billion in investments, but reduced the current value of the holdings.

ATB president and chief executive Dave Mowat told the Herald the financial institution has made significant changes since last year and continues to implement improvements and safeguards. The AG's report also noted ATB had investigated the credit worthiness of some asset backed commercial paper as early as March 2007 as questions about subprime mortgages began to emerge and divested $300 million of ABCP before the August debacle.

"When this happened a year ago, we took a look at our own policies and made some immediate changes," said Mowat. "Then we asked KPMG (LLP), which has some treasury specialists, to come in and look at our systems again and the AG gave us a third set of eyes. There was a lot of convergence on everything we heard," Dunn added.

"We take it very seriously. We know we have to get more sophisticated and we are."

Premier Ed Stelmach said Thursday the financial markets collapse in the United States has had many repercussions here, including a tightening of credit, which could have an impact on major development projects.

"This issue in the U.S. has a bit of a negative effect for us here in Alberta and across Canada," said Stelmach. "We're hearing from the small business sector that it's very difficult to get long term, predictable financing."

Dunn suggested that the fact other major banks and financial institutions also purchased what were at the time triple-A rated investments was immaterial. Canadian institutions cumulatively held almost $35 billion of the paper at one point.

Dunn said Edmonton-based ATB, "a sophisticated and large organization" with more than $24 billion in assets, should have known more about what it was buying. "Both its gains and its losses belong to all Albertans," he said.

Liberal Leader Kevin Taft took a similar tack.

"While many financial institutions did get drawn into the ABCP issue, we have to remember that a lot of them didn't," said Taft. "An organization like ATB, publicly owned, should have been astute enough and careful enough not to be drawn in."

ATB is backed by, and operates under the financial guarantee of the province of Alberta and delivers a significant portion of its profits to the province's general revenue fund.

As Dunn's report noted, ATB has taken a more than $253-million provision in its financial statements to cover potential losses on ABCP and lost $30 million in profits because of the ill-fated investment.

The Calgary Herald 2008

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CanWest Interactive, a division of CanWest MediaWorks Publications, Inc.. All rights reserved.


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