Dec 09, 2007 04:30 AM
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
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
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
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
Small investors like Ron can hardly be blamed for not knowing what they
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
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
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