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 "made-in-Canada problem."

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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