Investors Scrutinizing the Regulators

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Fox Guarding the Hen House




Here's hoping report clears up financial quagmire

Dec 09, 2007 04:30 AM

Ellen Roseman

Last June, an investor called Ron believed the stock market was overvalued and asked his adviser to sell most of his mutual funds.

"The timing seemed excellent as the market correction arrived shortly after," he says.

But Ron failed to discuss with his adviser what to do with the sale proceeds.

The money ended up in a 30-day money market investment, which was called Rocket Trust on his monthly statement.

The adviser said Rocket Trust notes had a AAA rating, better than many government bonds.

But after 30 days, the adviser called to say the funds weren't available and had to be rolled over for another six months.

"I was fine with this. The stock market was still unstable and I was looking for a safe haven," Ron says.

"But after doing a bit of research on Rocket Trust, I see it's part of the Coventree asset-backed commercial paper (ABCP) quagmire.

"How worried should I be that I am exposed to ABCP?"

This Friday, a blue-chip committee will report on its efforts to restructure Canada's $35 billion market in non-bank ABCP mostly in trusts run by independent issuers such as Coventree Capital Group of Toronto.

The original October deadline was extended. Everyone hopes that Montreal lawyer Purdy Crawford and investment bank JPMorgan Chase will be able to wring concessions from international banks and get the market moving again.

Small investors like Ron can hardly be blamed for not knowing what they got into.

The information memorandum about Rocket Trust, available at Coventree's website, is 18 pages of bafflegab, clarifying nothing. There was no indication that any assets were linked to the U.S. subprime mortgage market.

It was easier to rely on the AAA rating conferred by Dominion Bond Rating Service, whose report is also at Coventree's website.

Only after the crisis blew up did it become widely known that DBRS was the only bond rating agency that would rate such debt. The other agencies, such as Moody's and Standard & Poor's, stayed away.

DBRS said the Rocket Trust notes had liquidity lines to cover market disruptions a strength. It also said the liquidity lines were limited to market disruption a challenge.

With such equivocation, how could investors or advisers rate the rating agency's AAA rating?

Only later did it become known that the liquidity backstop for these securities was less complete in Canada than elsewhere.

International banks had to buy back the assets only if there was a market disruption severe enough that commercial paper issuers could not issue anything at all. That never happened.

Ron bought his Rocket Trust notes from Credential Securities, a firm that is owned by the credit union movement in Canada.

Credit unions market themselves as more ethical and customer-friendly than banks. But even they are not immune to the money market contagion.

A merger between two of Canada's largest credit union organizations, Credit Union Central of Ontario and Credit Union Central of British Columbia, has been held up because of their holdings of ABCP.

Though the amounts were small ($161 million for Ontario and $23 million for B.C. out of total assets of $7.5 billion), no one could put a price tag on the ABCP portfolios because the market is frozen. So the merger has been put off from the original date of Oct. 1, 2007.

Meanwhile, Coventree has had to make major cuts in its workforce to trim costs. Its stock is trading at just $1 or 94 per cent below its 52-week high of $16.30.

All eyes will be on Montreal this week when the committee releases its report. Let's hope the uncertainty that has lingered since August will finally start to clear up.

Ellen Roseman's column appears Wednesday, Saturday and Sunday. You can reach her by writing Business c/o Toronto Star, 1 Yonge St., Toronto M5E 1E6; by phone at 416-945-8687; by fax at 416-865-3630; or at by email

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