April 14, 2008
Asset-backed commercial paper, or ABCP.
Even the name of this type of financial instrument was fashioned to
create the impression of solid and secure value, which we now painfully
know was never justified.
Yet rating agencies endorsed ABCP with ratings far higher than it
deserved. Brokers flogged it to unsuspecting investors as a safe
investment that would earn more than truly safe instruments like
government treasury bills. And companies and banks that issued ABCP saw
an opportunity to raise low-cost money through risky vehicles.
It is hard to blame investors who got badly burned by this scheme for
thinking of it as a tacitly contrived, greed-driven financial conspiracy
operating on a grand scale.
But a more useful and productive interpretation of the ABCP debacle
would be that it reflects the kind of market failure that occurs in the
absence of proper regulatory oversight. Had regulators ensured a proper
assessment of the these instruments, their use never would have become
as widespread as it did.
Another lesson that has emerged from the ABCP crisis is that regulations
of the various parts of the financial system must be knitted tightly
together because distinctions among the players – bond and stock
issuers, banks, brokers, security exchanges and rating agencies – tend
to blur in highly integrated financial markets.
But co-ordinated regulation is especially difficult in Canada, where the
constitutional division of powers over financial matters is poorly
suited to the complexities of modern finance. At a time when the world's
seven richest countries are looking for ways to collaborate in
strengthening regulatory oversight of integrated, international capital
markets, Canada is the only country that does not have a national
securities regulator; instead, it has separate provincial regulators.
Federal Finance Minister Jim Flaherty has said, with some justification,
that these provincial securities regulators deserve some of the blame
for the ABCP problems in Canada. One more reason why this country needs
a national securities regulator.