Investors Scrutinizing the Regulators

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Individuals hold $32-billion deal in their hands

ABCP resolution creates discontent among investors


By David Akin

Canwest News Service with Reuters/CNS Files


Wednesday, April 02, 2008


OTTAWA — An angry showdown between Main Street and Bay Street could force some broad changes in the way millions of Canadians invest their money, say federal politicians.

“We got into this mess because the regulators were sleeping at the switch,” said Conservative MP John Williams, a former accountant. “It’s the dot-com era all over again.”

Politicians from all parties say they’ll hold off a review until the battle over more than $32 billion worth of frozen investments in securities, known as asset-backed commercial paper (ABCP), has been resolved, but they broadly agree some change is required.

“The integrity of Canadian capital markets is critical for all Canadians. We have to safeguard (that) integrity,” said John McCallum, the Toronto-area Liberal MP who served as minister of national revenue and as chief economist at the Royal Bank of Canada.

At town hall meetings across the country this week, including one today in Vancouver, angry mom-and-pop investors are threatening to derail a deal known as the Montreal Accord that promises to ease the problem but only if every investor agrees to substantially different terms than those they agreed to when they made the original investment.

“We stand to lose an awful lot on a personal level,” said investor Walter Kushnir at the Toronto meeting. “Our families stand to lose an awful lot.”

Family secret

Layne Arthur does not have the heart to tell his dad what has happened to the proceeds from the sale of his family farm.

He invested the cash — about $434,000 — into non-asset-backed commercial paper, and has now joined the ranks of 1,800 to 2,000 retail investors fretting about what will come of their investments.

“It was a third-generation farm that I sold,” Arthur said Tuesday outside a meeting room in a downtown Calgary hotel, the fourth stop of the cross-country tour by Bay Street lawyer Purdy Crawford and his “restructuring” committee attempting to salvage value from the failed financial products.

“I haven’t had the heart to tell my dad. It would break his heart,” he said.

The committee held Edmonton and Calgary meetings on the tour that includes distributing tonnes of telephone book-sized information books, explaining the market for ABCP and the rescue plan. The tour concludes today in Vancouver.

Arthur, who also attended the investor meeting in Edmonton in the morning, is not only frustrated by the losses he and others will likely take because of the frozen market, but also because he thinks major institutional investors — as well as Crawford’s committee — are making it difficult for retail investors to unite.

“Theyaredoingtheirdamnesttomake sure this thing passes” said Arthur, part of a group trying to unite the individual investors by gathering their names and handing out information outside of the meetings.

Arthur, an ex-trucker, said the group has asked Crawford’s committee, Cannacord Capital Inc., and Credential Securities Inc. for a list of retail investors holding ABCP, but to no avail.

“They are also doing a very good job of making it difficult for retail investors to have a collective, unified voice,” he said.

Investment uncertainty

Market watchers say that uncertainty has already hurt the investments of millions of other Canadians by depressing share prices.

“It all has to do with confidence in our market,” said Fred Ketchen, managing director with ScotiaMcLeod. “This is a tough one. Emotion could drive the voting.”

About 1,800 individual investors hold an estimated $350 million worth of ABCP investments. The balance of the $32 billion in ABCP investments is held by about 200 financial institutions.

If they vote against the deal, the 1,800 retail investors essentially will have decided they would be better off using the courts to get their money back rather than abide by terms of the Montreal Accord.

Under terms of the deal, investors would have to waive the right to sue but could get most of their investment back. But it might take as long as eight years to get back money they thought they had invested for, in some cases, as little as 90 days.

“You know what? I don’t want my money, when I’m 80, I want it now,” said investor Hy Bloom in Toronto.

But for this deal, every investor gets one vote, no matter how much was originally invested. And that gives ordinary investors some rare clout.

But it’s not just individual investors. Municipalities, such as the City of Hamilton, pension funds such as the Ontario Teacher’ Pension Plan, and the giant credit union Caisse de depot et placement du Quebec all have millions of dollars they thought were as good as cash tied up in asset-backed commercial paper. But they may not see it for years, if it all.

The Ontario government has more than $700 million tied up in ABCP investments, or about eight per cent of its overall cash reserves.

If those organizations have to write off all that money, it could affect municipal or provincial services or, so far as the Caisse goes, affect the way it serves its millions of members.

If the court-supervised Montreal Accord is rejected, market watchers believe a judge would order everyone, including retail investors, to go back to the table to hammer out a better agreement.

And then, if a deal still cannot be reached, the $32-billion ABCP market could collapse, likely resulting in dozens of lawsuits.

© The StarPhoenix (Saskatoon) 2008

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