Investors Scrutinizing the Regulators

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Canada's small asset-backed investors take on big banks
By Bernard Simon in Toronto

April 1 2008 03:00 | Last updated: April 1 2008 03:00

Pressure is mounting on Canadian and foreign financial institutions to bail out close to 2,000 small investors in frozen asset-backed commercial paper as the price for restructuring Canada's non-bank ABCP market.

Several ABCP holders yesterday threatened to vote against a restructuring plan for the C$32bn ($31bn) market rather than agree, as the plan provides, to drop all litigation against the institutions that sold them the paper and other market participants.

"I have a lot to gain by voting 'no' because I can sue," one investor said at the first in a series of meetings across the country to drum up support for the plan ahead of a vote scheduled for April 25.

The small investors' support has become critical since 20 ABCP conduits were put under court protection last month.

Under Canada's bankruptcy law, at least 50 per cent of all note-holders in the conduits must approve the plan, no matter what the size of their holdings.

The almost 2,000 retail investors in the Canadian vehicles make up only about 1 per cent of the face value of the conduits' liabilities, or about C$330m. But they far outnumber the bigger holders, such as pension funds and public and private companies.

Under the plan, ABCP would be converted into various classes of longer-term securities. Ideally a secondary market in these securities would emerge.

The panel overseeing the restructuring and JPMorgan Chase, its adviser, warned that the collapse of the plan would have consequences far beyond the investors' own losses.

Andrew Kresse, managing director at JPMorgan Securities, said: "There are some residual risks to global markets and asset providers." He was referring to about a dozen foreign banks, notably Deutsche Bank, that provided liquidity to the conduits.

Mr Kresse added that a fire sale of the conduits' assets would also drive down the price of similar instruments elsewhere.

The retail investors have become increasingly vocal and well-organised in recent months, with the help of a group set up on Facebook, the social networking site.

Many say they were assured by their investment advisers that ABCP was a safe and liquid investment. "I told [my adviser] to put it in cash," said Brian Hunter, a Calgary oil and gas engineer who invested C$658,000 of his retirement savings in ABCP and who formed the Facebook group.

Some banks and credit unions have already fully compensated clients for their ABCP investments. An estimated 1,400 of those who have not been reimbursed are clients of Canaccord Capital, one of Canada's biggest non-bank securities firms.

Canaccord has reportedly indicated that it cannot afford to bail out clients.

Purdy Crawford, chairman of the restructuring committee, told yesterday's meeting: "We will explore everything that's feasible to help the retail investors. We're focused on what we can do for you people."

He declined to give details, but cautioned the disgruntled investors: "Canada is a country of compromise."

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