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ABCP rescue plan called 'unfair'


Monday, April 21, 2008

I have to admit MEGO at the mention of ABCP.

For those who aren't up on Internet shorthand, MEGO stands for "my eyes glaze over." ABCP, of course, is asset-backed commercial paper, the stuff that has been giving conniptions to banks bosses, corporate suits and hundreds of small investors since last August.

ABCP isn't what we in the newspaper business call a sexy story. But there's a heck of a lot of money on the line - $32 billion - not to mention the reputations of some of the biggest financial institutions in the country.

ABCP is short-term IOUs issued to investors by banks and special-purpose trusts. The notes are backed by underlying longer-term securities based on mortgages, auto loans and other interest-bearing assets. Investors liked the paper because it paid a bit more interest than stodgier vehicles like government bonds.

But there was a nasty surprise waiting for holders of the paper. Last August, investors, reacting to U.S. mortgage market carnage, began refusing to renew existing ABCP from non-bank trusts or to buy newly issued paper.

That liquidity crunch threatened to lead to a fire sale of the underlying assets and huge losses for holders such as the Caisse de dépôt et placement, Quebec's pension fund manager, which was caught with $12.6 billion tied up in the papier maudit (as Globe and Mail columnist Konrad Yakabuski has dubbed it).

That's why the Caisse, along with other institutional investors, have put together a rescue package aimed at converting the ABCP into longer term notes. That plan, quarterbacked by Toronto lawyer Crawford Purdy, is scheduled to go to a vote of investors on Friday.

But on Tuesday, Montreal lawyer James Woods will be in a Toronto court to argue the plan is unfair to four large Quebec companies that have $264 million tied up in frozen ABCP.

The companies - Transat, Jean Coutu Group, Pomerleau Inc. and Aéroports de Montréal - purchased their ABCP from the National Bank of Canada.

They object to the fact the National Bank, along with other dealers of ABCP, has been given immunity to lawsuits under the restructuring plan. Other companies will make similar arguments during the hearing in Ontario Superior Court.

In a written motion to the court, the Quebec companies make some pretty strong allegations about the conduct of the National Bank in the months leading up to the collapse of the ABCP market.

The bank stands accused of failing to warn the companies about the risks lurking behind what was supposed to have been a safe, short-term investment. More seriously, the bank also is alleged to have continued selling ABCP paper to clients even as signs of trouble in the ABCP market grew. The bank should have been all the more aware of those signs because it was "involved in various ways in the administration, management, and promotion of many (ABCP) conduits" and, indeed, was scaling back its own exposure before the market froze up in mid-August 2007, the motion states.

The National Bank has rejected those allegations and insisted it always acted in good faith in its relations with clients, including by helping them deal with ABCP problems by extending credit.

The companies say they stand to lose 25 to 40 per cent of the value of their paper in the restructuring or even more depending on whether they are forced to sell the new notes quickly to raise cash. Total losses for holders of ABCP who are not participants in the restructuring committee or Canadian banks could run as high as $3.8 billion, the motion states. That's a lot of money to be out with no legal recourse.

On the other hand, the restructuring committee has warned if legal immunity is removed, the deal will not be completed, leaving $32 billion in limbo.

I'm not going to try to substitute myself for the judge. But beyond the private interests at play here, there is a public interest in finding out just what happened in the collapse of the ABCP market, including the role of parties like the National Bank and DBRS, the rating service that granted the paper its highest investment grade.

If the restructuring goes through with its legal protection for these and other key players, we'll likely never get the full story behind one of Canada's worst financial meltdowns. And that's a shame.

© The Gazette (Montreal) 2008

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