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Carney backs ABCP rescue effort

Freeze on commerical paper market avoided fire sale


Jacqueline Thorpe

 

Thursday, March 13, 2008

 

Mark Blinch/Reuters

Mark Carney, Governor of the Bank of Canada, speaks before the Toronto Board of Trade on Thursday.

Mark Carney, governor of the Bank of Canada, gave his stamp of approval to "difficult" efforts multiple players have made to hammer out a deal in the non-bank asset-backed commercial paper market.

A deal to end the crisis in the ABCP market was hammered out last December and the Financial Post reported earlier today papers are set to be filed in court this week seeking a judge's approval of the implementation of the restructuring package.

"We favour the process," he said. "It has been difficult, it has been complicated, it's taken longer than people might like but by putting in place the standstill I think the major participants" investors, asset providers, liquidity providers, agents of the paper " avoided the fire sale and very low returns for investors on this paper and set in place a process which has created the possibility of substantially higher recoveries."

Most importantly investors will get a chance to vote on the deal, Mr. Carney said.

"The participants in this process ... Canadian banks, in particular, and the global bank have made serious efforts to find a compromise solution," he said. "That's what you get in the market; you get a compromise between various parties."

Mr. Carney said he was not going to comment on the precise deadline of the deal as he did not know if it was Friday.

Mr. Carney made the comments in an interview with the Financial Post on Thursday after his first major speech on Bay Street in Toronto.

At a press conference after the speech, Mr. Carney said the securities that will come out of the restructuring are unlikely to meet criteria the bank has set out as it considers accepting ABCP as collateral under its proposed new borrowing rules.

The non-bank ABCP has been frozen since August after the U.S. subprime market blew up and financiers were unable to roll the paper over to new customers and return cash to existing shareholders. Court approval would negate possible legal action and should smooth the way for issuing investors new notes and creating a secondary market in the debt.

The ABCP deal would allow the Canadian market to at least partially avoid some of the "mark to market" issues that has been bedeviling global credit markets as banks try to get a handle on the extent of the subprime taint on their balance sheets.

Markets are so illiquid a lot of securities are being sold at ridiculously low prices, which is creating a vicious cycle of forced selling.

In his speech Mr. Carney noted some have questioned the utility of requiring mark-to-market valuations of all assets and liabilities on a corporate balance sheet.

"The point can be made that, in the current circumstances, existing accounting rules provide a degree of precision that is not warranted," he said in his speech.

Later in the interview he added he did not think accounting rules should be suspended in the middle of the game but that investors should should use them intelligently.

"People are marking products relative to some distressed index," he said.

Investors need to make clear judgments on the value of their securities and have sufficient information to do so.

Mr. Carney said he expected turbulence in financial markets to continue for some time but had confidence in the health of Canadian financial institutions.

"It's very robust," he said. "Not surprisingly at times of heightened uncertainty and global financial market volatility we refresh our opinions regularly with respect to that and we are very comfortable with Canadian institutions."

Although credit conditions have tightened since August for consumers but it has not been severe in Canada.

"Availability of credit to households remains quite active," he said. "Household credit continues to grow at double-digit levels."

Mr. Carney said he favoured more competition in the Canadian financial sector.

"The issue is what's the optimal number of domestic and foreign entrants into the market to have an appropriate degree of competition," he said. "There's value in foreign competition, no question."
 

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