By John Greenwood, Canwest News Service
January 21, 2009
TORONTO — After a marathon 17-month
restructuring process, many holders of $32-billion of frozen ABCP on
Wednesday exchanged their stalled paper for new long-term bonds they
hope will allow them to redeem at least part of their investment when
they mature in nine years.
Thanks to the collapse of the market for asset-backed commercial paper
market in 2007, the story of the 20 issuing trusts that created the
market and their exposure to the credit default swap market is now well
known. But some questions surround the rapid rise of the group of bond
insurers that, thanks to the fact they were not regulated and therefore
unhindered by red tape, managed to provide guarantees on about $200
billion of corporate debt through the use of credit default swaps with
very little collateral to back it up.
Many point the finger at the Office of the Superintendent of Financial
Institutions, which regulates banks and insurance companies. OSFI has
consistently denied any responsibility.
Speaking at an industry conference on Wednesday, Mark White, a senior
director at OSFI, said it is not his group's job to regulate trusts,
even ones that operate as insurance companies.
Asked by a reporter if there was any discussion between OSFI and other
regulators prior to credit crunch about the emergence of bond insurers
and their extraordinary growth, White declined comment, saying he was
not employed at the regulator at the time.
The Ontario Securities Commission, OSFI and the securities industry's
self-regulatory body launched investigations in the aftermath of the
meltdown of the ABCP market, but the likelihood of any serious penalties
now is limited because the restructuring included a provision for legal
immunity for all the players in the ABCP market. Not only are the firms
that made and sold the paper exempt from lawsuits under the deal, they
are also protected from being fined.
Some observers are angry about that.
"I think (that by failing to do their job) the regulators in Canada made
possible the sale of this toxic product into the market," said Diane
Urquhart, an independent analyst working for some of the noteholders.
At the start of the credit crunch, ABCP markets around the world fell
apart but only in Canada were investors left holding the notes, a unique
twist caused by faulty legal agreements in the paper that enabled
so-called liquidity providers to avoid their obligations.
According to Urquhart, the faulty liquidity agreements resulted in a
About 170 individual investors will get all their money back after the
restructuring, but the rest of the note holders are not so fortunate.
More than 200 institutions and companies holding more than 98 per cent
of the frozen ABCP will get restructured bonds maturing in about nine
years. Observers say it is unclear if there will be a secondary market
for the bonds.
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