Wednesday, April 02, 2008
EDMONTON - While the United States announces new measures to revamp its
financial system and a restructuring plan is unveiled for Canadian
retail investors stung by debt vehicles, people are questioning how
responsible investors should be for their own misfortunes.
In the U.S., Treasury Secretary Henry Paulson has introduced reforms
that would give its central bank, the Federal Reserve, more power over
that country's financial industry, which has been reeling in the wake of
the subprime mortgage housing disaster and the asset-backed commercial
paper (ABCP) crunch.
At the same time, Purdy Crawford, the man in charge of cobbling together
a plan to rescue Canadian holders of frozen non-bank ABCP, got a rough
ride from retail investors who seem inclined to take their chances in
court rather than get a portion of their money back now or wait seven
years for full restitution.
So far there have been two general sentiments about the whole financial
mess. A number of people feel financial institutions should not be
bailed out by governments with taxpayer money for participating in, and
in some cases creating, what has resulted in the worst housing and
financial crisis in decades. At the same time, many observers feel
people should have to live by the rule "Investor Beware," whether they
are homebuyers who took on mortgages they knew they couldn't pay off, or
people who invested in asset-backed vehicles they didn't understand.
I have as little sympathy for homeowners who were lured by low "teaser"
mortgage rates as I do for people who buy a houseful of furniture and
"make no payments for a year," then have their sofa set repossessed.
However, I do feel for investors who trusted the advisers at their
financial institutions, salespeople who said and perhaps even believed
that ABCP was as solid an investment as a high-yield bond.
Many people write asking advice about various investments advertised in
newspapers, on radio, or touted by cab drivers and brothers-in-law.
Many of these investment tips come with enough red flags that the usual
caveat "if it seems too good to be true, it probably is," sounds enough
of a warning bell.
But our financial institutions should be held to standards above those
of people outside the industry. That isn't to say banks should have to
hit clients over the head with warnings that shares in the New Sarepta
Tire and Girdle Factory -- with apologies to my former colleague and
cartoonist John Yardley Jones -- could go down in value and even become
worthless. But if a banker can't explain an investment instrument with
more clarity than the infield fly rule in baseball, it probably
shouldn't be offered to retail investors.
The resounding complaints at Purdy Crawford's public gathering this week
were not only that the proposed plan to rescue non-bank ABCP would cost
members of the Retail Customers' Group much of their retirement savings,
but also that his committee's plan was way too complicated to
Years ago I questioned the wisdom of many hedge funds, citing their lack
of transparency and convoluted use of derivatives, but their high
minimum investment requirements kept most everyday investors safely
away. I was repeatedly told by banks that derivatives were valuable
catalysts of liquidity needed to keep financial markets flowing and
But with no system to publicly track and expose the movement of assets,
you wound up with something like Portus Asset Management, where money
from investors mysteriously became diamonds in the hands of a fund
In recent weeks, we've heard from people who unwittingly parked money
from the sale of one house into non-bank ABCP while awaiting purchase of
another house, only to have assets frozen.
If one sensed a twinge of greed behind their investment motives, perhaps
if they seemed willing to risk having their children go without shoes
while mom and dad tried to win the lottery, they would receive little
Or if these investment offers came from a flyer in the mail addressed to
"occupant" or an e-mail message from Nigeria requesting the number of a
bank account in which to deposit lottery winnings, you would shake your
head at the lack of due diligence.
But the optics in this case is that good people placed trust in a
product unfit for public consumption, not unlike tainted blood
transfusions or poisoned pet food or toys with lead.
The normal course would be to get the product off the shelf, put in
checks and balances to make sure another like it cannot appear again,
and have the offending parties compensate the victims.
The problem here is that some unwitting larger parties passed the
tainted goods to unwitting smaller parties, like Canaccord Capital and
Credential Securities, who can't afford to fully compensate their
victims. In the meantime, nothing's being done to keep another tainted
product from going on the shelves.
Ray Turchansky, a freelance writer and income tax preparer, writes
Wednesdays and Saturdays in The Journal. He may be contacted at
© The Edmonton Journal 2008
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