Investors Scrutinizing the Regulators

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The small guy cracks the ABCP whip

Fri Apr 4, 2008 5:27pm EDT

MONTREAL, April 4 (Reuters) - Irate investors saddled with some C$350 million of frozen asset-backed commercial paper investments want all of their money back, and signs are that Bay Street will have to placate them to prevent the collapse of its workout plan for all C$33 billion of the strange stuff.

Eight months after the ABCP market choked on credit concerns, a committee headed by lawyer Purdy Crawford that was set up to craft a solution has heard a barrage of complaints about its plan from small investors.

A quick cross-country roadshow on the plan, known as the Montreal Accord, seemed to wear down even the stoic 76-year-old Crawford, who as chief executive of former tobacco and financial services conglomerate Imasco was one of the few business chiefs brave enough to answer his own office telephone.

He prefaced the investor meetings in Toronto, Montreal, Calgary, Edmonton and Vancouver by saying the committee did not create the ABCP crisis, but was working hard to fix it.

That did not stop retail investors from blasting the committee for working behind closed doors to craft a deal that would benefit giant players such as Quebec pension fund manager Caisse de depot et placement while keeping smaller individual and corporate investors out of the loop.

Even though as a group they represent only 1 percent of the value of the ABCP that falls under the plan, retail investors get one vote each just like everyone else, and they far outnumber the big corporate players. For the restructuring plan to pass, a majority of investors at an April 25 meeting need to vote for it.

But by voting in favor of the deal, small investors would give up the right to sue their brokers and banks in return for a promise to get an unknown amount of money back sometime down the road.

"You're putting a gun to my head, and I think that is not the right approach," investor Mark Wasserman told the committee in Montreal.

The Caisse, which is Canada's largest pension fund and holds C$12.6 billion of nonbank ABCP, has led the rescue posse since the dark day in mid-August when big international banks balked at backing the paper.

The once top-rated short-term debt instruments suddenly became illiquid, bad news for investors who thought they had safely parked their money in something they could easily switch into cash.

Under the Crawford committee plan, the short-term ABCP would be converted into longer-term debt, which means investors could have to wait up to eight years to get their money back.


Small investors, and corporations holding hundreds of millions of dollar in ABCP, much of it needed for working capital, can be forgiven for feeling the workout plan has the interests of the biggest players most at heart.

Some 1,400 retail clients of Canaccord Capital Inc who invested in ABCP are among those hoping to come in from the cold.

For the big players, there is plenty of incentive to get the small investors onside.

Colin Kilgour, hired by Canaccord as an independent adviser to its clients, figures about C$20 billion of the frozen ABCP is leveraged, perhaps by up to a factor of 10, or C$200 billion.

"If the thing blows up, it will affect global credit markets," Kilgour told Reuters.

Failure of the workout plan could result in the Caisse being forced to write down half of its ABCP holdings, or some $6 billion, Kilgour said.

There also has been speculation that the Caisse may want to help buy out the small investors to coax them into voting for the workout plan on April 25, a deadline some observers expect will likely be extended.

Caisse spokesman Gilles des Roberts would not comment on those reports or on potential writedowns, but he said any investment made by the pension fund has to be in the best interest of its depositors above all else.

"We are convinced that the Montreal Accord is the best solution for the ABCP situation," he said.

Meantime, small investors are trying the best they can to have their voices heard.

Janet Carey, a widow living in Kitchener, Ontario, said she invested C$160,000 of proceeds from the sale of her 89-year-old mother's home in ABCP at the urging of her Canaccord broker.

Touted as triple-A rated, the paper garnered only about 33 basis points of interest more than what the funds were already earning, only to be frozen just weeks after the investment was made.

"We were blamed for investing in something which I think in a lot of cases I'm not even sure the brokers understood," Carey told Reuters. "To me, it's just a betrayal of the small guy."

($1=$1.01 Canadian) (Reporting by Robert Melnbardis; Editing by Peter Galloway)

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