April 14, 2008
should be mixed feelings about the engineering that magically turned
Canada’s troubled asset-backed commercial paper (ABCP) trusts into
insolvent corporations in order to land court protection from creditors
and litigation. Despite valiant attempts by Purdy Crawford’s
Pan-Canadian Investors Committee, which expected to unfreeze the
$32-billion ABCP market months ago, this restructuring has turned into a
fiasco expected to cost more than Stelco’s $200 million CCAA. Some
investors are crying foul over what they see as an attempt to cover up
ethical abuses, if not fraud. And while the sheer number of dollars
involved goes a long way toward justifying the CCAA, something has to be
done better to address the stink.
ABCP is short-term paper issued to fund investments in longer-term
assets such as car loans, mortgages and various types of credit
receivables. The Canadian market has relatively little direct exposure
to sub-prime U.S. assets. But it was highly invested in credit default
swaps providing excessive leverage. As a result, whenever investors were
paid out, new paper had to be issued to new holders. That "rollover"
process was backed by banks, that agreed to provide liquidity during
“general market disruptions.”
The so-called safety net earned Canadian ABCP a good credit rating, but
didn’t kick in when the market froze during the credit crunch last
summer. The banks collected fees when times were good, but during an
obvious crisis they insisted a general market disruption had not
occurred because ABCP was still rolling over in other parts of the world
(where asset backers didn’t have the Canadian out).
Maybe nobody understood the real risks. Dealers, however, have been
accused of knowingly unloading ABCP after being made aware that the
market was cooling fast. ABCP was clearly billed as a highly liquid cash
investment, and risk-averse buyers were sold something similar to a GIC
that came without the guarantee.
Investors are angry. But the effort to restructure the market has
stifled the finger pointing, and nobody appears to be investigating who
knew what and when. Now, the CCAA filing has limited potential
litigation, perhaps for the greater good, perhaps not. But after the
accountants finish fixing the books, there should be a public reckoning.
Confidence in our financial system is as important as its stability.
comments and questions by email to