Investors Scrutinizing the Regulators

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Retail investors' day will come

Large investors risk the wrath of the overlooked


Sean Silcoff

Monday, March 31, 2008

History is littered with examples of the smartest people doing the dumbest things, particularly in the sphere of high finance. So perhaps it is unfair to expect better from the group of senior lawyers, investment bankers and investment pros working to save Canada's collapsed third-party asset-backed commercial paper (ABCP)market.

For seven months, the messy and complex rescue process stumbled along under the secretive direction of a committee of large investors (call them The Committee of Smart Persons), prodded by the Bank of Canada. They worked tirelessly on a rescue plan that, to all involved, seemed an ingenious and unprecedented triumph -- "the art of the possible," says Bay Street legal elder statesman Purdy Crawford, the sage who chairs the committee.

Somehow, these financial artists got everyone onside before putting the ABCP trusts into creditor protection on March 17, in order to restructure the paper into safer, long-term notes.

Everyone, that is, except the little guy. In the course of hatching the plan, the committee completely ignored retail investors. They weren't consulted or involved. It was assumed they would go along with whatever the big, smart and powerful fixed up.

"Retail investors should focus on the merits of this plan relative to the alterative that's available to them," Stephen Halperin, a partner with law firm Goodmans LLP and advisor to the committee, stridently told the Financial Post last week. Translation: Here, eat this. Trust me, it's good for you.

This shows not only ignorance and arrogance on the part of the committee and its advisors. It is also bad planning.

The little guy has nothing invested in the process, no willingness to just fall in line --and all the power.

As it turns out, the little guy -- more precisely, about 1,600 individual investors stuck with about $400-million of ABCP when the market froze last August -- is none too happy. These investors are being asked to vote on April 25 on a proposal that will leave them with notes worth maybe 40 to 60 on the dollar once they begin trading. If they support the plan, they could also lose the right to sue the brokers some say improperly sold the ABCP to them.

The level of discontent will be palpable during a cross-Canada road show this week to sell the deal to retail investors.

They couldn't care less about the credit ratings of the new notes, the underlying assets, the margin funding facilities and other fancy details of the restructuring -- they just want their money back.

Each of them gets one vote. That's the same as each of the 14 institutions on the committee and which together own most of the paper by dollar amount. It's 1,600 to 14, and never mind whether the proposal is the best of a bad set of options, which it is. Many small investors are saying "To hell with this," and it won't take much dissent for the Smart Persons to see their hard work go up in smoke.

That would be a disaster. If the plan fails, it could send global markets into another nosedive, as hundreds of billions of dollars in leveraged securities behind the ABCP are quickly sold off.

It should have been quite evident to the Committee of Smart Persons by last December that retail investors would need to be brought onside. Instead, said Mr. Crawford on Friday, the issue "only surfaced in the last two or three weeks." It's "now fairly obvious they have some clout," he said sheepishly.

It is amazing nobody on the committee had the foresight to get these investors out of the way early. Combined, they hold just 1.2% of the $32-billion worth of frozen ABCP. A decent offer last fall -- say, 75 to $1 on the dollar -- could have taken them out of the equation (as National Bank of Canada, with a seat on the committee, did by bailing out its mutual fund clients stuck with ABCP).

Mr. Crawford says there was no registry of holders, so it was hard to find them. That doesn't fly. Committee members -- Crown and arm's-length state corporations, credit unions, public pension funds and private firms -- focused on preserving the value of their own large ABCP holdings and trying to avoid lawsuits. A bailout, apparently in the works, is months too late.

If retail investors were key to the restructuring, they should have been a main thrust of the process from the start. A cheque now would be nice, but they should hold out for an apology.

Copyright 2007 CanWest Interactive, a division of CanWest MediaWorks Publications, Inc.. All rights reserved.


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