April 9 2008 03:00 | Last updated: April 9
Reid Moseley was unhappy with the meagre C$13-a -month interest his
C$50,000 nest-egg was earning on deposit at one of Canada's big banks.
So the retired Calgary schoolteacher complained early last year to a
friend who was an investment adviser at Canaccord Capital, a non-bank
"He said: 'I've got this nice little 30-day rollover thing'," Mr Moseley
recalls. "He told me it was as good as gold. He said it would pay a lot
better than $13 a month."
Mr Moseley transferred his funds to Canaccord, but within only a few
months he was to become a casualty of the global credit-markets meltdown
that began with the implosion of the US sub-prime mortgage market.
Mr Moseley is one of 1,400 Canaccord clients whose savings, worth a
combined C$269m, found their way into Canada's non-bank asset-backed
commercial paper (ABCP) market. Another several hundred small investors
put their money into ABCP through other firms.
The C$32bn market has been frozen since August by the so-called
"Montreal accord". Now, by a quirk of Canada's bankruptcy laws, Mr
Moseley and his peers have the power to pass or to block a planned
restructuring that will almost certainly see them take losses on
investments even as they forfeit their right to sue.
Their vote, scheduled for April 25, will have repercussions far beyond
an apparently remote corner of Canadian finance. If a deal is not
reached, the conduits are likely to be forced into a firesale of
structured finance assets on still weak global markets.
One market would be particularly badly affected by a "no" vote in
Canada: that for complex structured products built out of pools of
corporate credit derivatives, or so-called synthetic collateralised debt
Collapse of the conduits' trades here would seriously disrupt trades
held by banks, hedge funds and investors otherwise unconnected with the
More than half the conduits' total assets are invested in leveraged bets
on the safest, or most senior, slices of synthetic CDOs. Leverage levels
of between 10- and 40-times mean the conduits' C$17.2bn-worth of
investments gives them exposure of almost C$217bn, according to a report
from JPMorgan, advisers to the restructuring effort.
Anger among retail holders about how they ever ended up with such
exposure erupted at a series of meetings with small investors last week.
It appears to make a "no" vote more likely unless the banks and other
large investors involved - who stand to lose much more than the retail
investors - were to come up with a compensation scheme to buy passage to
Mr Moseley, for one, intends to vote against the proposal, which would
convert ABCP into longer-term floating-rate notes with the goal of
preserving value and spurring a secondary market.
Banks, he says, will be swayed by the principle he would apply to his
modest retirement business trading military insignia: "If I can pay a
small amount of money to save a large amount, that seems logical. I
can't see why the big banks wouldn't pay us out to save their asses."
Purdy Crawford, chairman of the restructuring committee, told reporters
after the fractious final meeting in Vancouver that a top-up plan for
small investors was on the cards. Observers say a payment of a few tens
of millions of dollars at most to save possibly a few billion for the
bigger investors seems like "a no-brainer".
That would also avoid the potential for lawsuits by small investors,
which would raise potentially embarrassing questions about whether such
exposures were ever suitable.
Retail appetite for ABCP was propelled by Ottawa's decision in October
2006 to clamp down on mushrooming "income trusts"; a structure that
allowed companies to avoid tax by converting to trusts and paying out
most, if not all, of their cash flow as dividends.
With the income-trust door closed, banks and financial advisers
increasingly promoted ABCP as a safe, high-yielding alternative.
Colin Kilgour, a consultant, notes: "There are several unique elements
of the Canadian ABCP market."
An important idiosyncratic problem in Canada was that the trusts need to
prove a "general market disruption" to qualify for support by liquidity
The banks behind the liquidity facilities maintained no such event had
occurred as the much bigger ABCP market operated by the five big
Canadian banks has continued to function.
Mr Kilgour says third-party conduit sponsors have a greater presence in
Canada relative to other markets. Canaccord largely blames its clients'
misfortune on banks that channelled the ABCP. It has enjoined Scotia
Capital, the Bank of Nova Scotia's investment banking arm, to lawsuits
brought against Canaccord by its clients.
Canaccord alleges Scotia misrepresented ABCP and failed to warn of
risks. "At all material times, Scotia Capital actively and aggressively
marketed . . . ABCP to Canaccord by means of frequent or daily written
and oral solicitations and communications," says a court document.
Canaccord says Scotia marketed ABCP even as the bank began to unwind its
own exposure last summer. It also accuses Scotia of failing to disclose
that ABCP spreads were widening due precisely to liquidity problems.
Bank of Nova Scotia said it "acted simply as a placement agent for
professional dealers, such as Canaccord. The agent is not expected to
carry a fiduciary duty".
A "no" vote by retail investors would leave them able to sue but could
also result in claims and counter-claims among all the big players.
Small investors' claims could get lost among a flood of much bigger
Mr Moseley has little quarrel with his investment adviser friend - "I
don't think he was a party to all of this" - or with Canaccord.
He blames the banks and authorities in Ottawa: "Government literally
gives crooks in pin-striped suits a licence to burn people."
Copyright The Financial Times Limited 2008