Investors Scrutinizing the Regulators

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Investors deserve protection from subpar 'products'
Committee hears accounts of huge losses


Ray Turchansky
Freelance

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 understand.

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 accessible.

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 manager.

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 sympathy.

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 turchan@telusplanet.net


The Edmonton Journal 2008

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