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Faces of the ABCP crisis

As Purdy Crawford hits the road to sell his ABCP workout, hard-hit individual investors just want their money back


John Greenwood And Grant Surridge
Monday, March 31, 2008
 

Steve Bosch/Canwest News Service

Yulan Wong, a retired real estate agent, has $300,000 invested in frozen ABCP.

Nearly eight months after $35-billion of asset-backed commercial paper seized up, the faces of the losses are becoming clear.

Individual noteholders from across the country are now coming out of the woodwork, and networking on Facebook, to tell their stories of devastating losses from risky investments that few people really understand.

There are an estimated 1,600 of these retail investors, according to insiders. They are frustrated and angry and in no mood to make concessions. Yet the future of a crucial restructuring of the asset-backed commercial paper market rests in their hands.

Having frozen the market for these notes back in August to plot a rescue plan, the banks and financial institutions involved announced their solution earlier this month: New notes would be created and the entire restructuring placed in bankruptcy protection. This would allow the group to move through its final, delicate stages without external distractions such as lawsuits.

The final vote for the restructuring plan will take place on April 25. It must be approved by a majority of noteholders. Since there are only around 200 corporate and institutional investors, the fate of the biggest workout in Canadian corporate history may now rest in the hands of the little guy.

Much hangs in the balance. A "no," vote means the restructuring fails and the trusts that issued the stalled notes go into receivership, possibly triggering a financial meltdown, analysts warn.

If the restructuring is approved, the markets would carry on and the notes unfrozen. But according to a recent RBC Capital Markets research report, some of the notes may have lost 80% of their value.

And there's a trade-off: A clause in the deal would provide legal protection to all the banks, investment dealers and others who created and sold the ABCP. If investors agree to the restructuring, they must also promise not to sue to get their money back.

Beginning today in Toronto, Purdy Crawford, the Bay Street lawyer who heads up the investors committee, will be travelling to major Canadian cities to persuade investors to sign on to the plan. He faces an uphill battle.

'LITTLE GUYS SPEAK-OUT'

The committee that has put together a plan to restructure the market for the asset-backed commercial paper in Canada, frozen since August, today begins hawking its merits to those who will vote on it on April 25. What the committee, headed by Purdy Crawford, didn't reckon on are the 1,600 or so small retail investors who are faced with potentially losing their life savings.

The Financial Post's John Greenwood and Grant Surridge look at six of their stories.


Ron Lawley will never look at investment dealers the same way again. A retired computer technician, Mr. Lawley lives in Nanaimo, British Columbia, where until recently he and his wife enjoyed a modest but satisfying lifestyle. Then came last summer's credit crunch, and for the first time Mr. Lawley learned the term "asset-backed commercial paper." The education, he says, came from his broker, who informed him last September that he owned about $210,000 of the stuff, but not to worry, that it was only a "glitch" in the market that was making his money --about one-quarter of his savings --inaccessible.

"This is absolutely ridiculous," he said in an interview. "I'm 72, I've worked all my life, I've never had a day without a job and this is how I get treated. This stuff should never have been sold to people like me."

Ron Lawley, a retired computer technician has $210,000 in ABCP.

He is especially upset about the way he came to own an asset he still doesn't fully understand. Having told his broker to put his money in government bonds, he was surprised to discover unfamiliar names of these notes on his statement. Last week, someone sent him a copy of the nearly 400-page document that outlines how the ABCP restructuring will work. "I'm not even going to read it." he says. "I just want my money back." John Greenwood


It was August when Brian Iler first read about ABCP while he was on vacation. While technical, the stories said people lost money. The Toronto-based lawyer felt sorry for them.

When he got home there was a letter from his broker. It was to say his account held about $229,000 of ABCP. "I was totally shocked," recalls Mr. Iler, who says he told his broker he wanted secure investments.

After asking questions, he eventually got hold of a DBRS report that "clearly describes a very risky investment."

For his part, the broker insisted he had followed instructions and that all would be fine in the end. But, at 62, Mr. Iler figures he may end up having to delay retirement .

What bothers Mr. Iler most, however, is the way retail investors have been treated. He reckons the little guys only ended up with the power in this restructuring because the banks were so focused on finding a solution that worked for them that they failed to see what was given away.

"When the penny dropped, there must have been someone with a lot of egg on his face," Mr. Isler says. J.G.


Yulan Wong was successful as a Vancouver real estate agent before she retired, but now she counts her pennies when she goes to the supermarket.

About two years ago, her broker started putting Ms. Wong's savings into ABCP, saying it was for "diversification."

"She said it was guaranteed by the Royal Bank of Scotland and Barclays Bank," Ms. Wong says.

Ms. Wong, who is 62, says she has about $300,000 tied up in illiquid ABCP. Just over half the money in Ms. Wong's account was savings she planned to live on. The other half belongs to her niece. When her parents died several years ago, Ms. Wong became her guardian. "I told her I don't have the money, I can't give it back to you," she says. "It's caused a lot of stress in the family."

"I've worked very hard all my life, I've never complained. But this is too much."

Unable to persuade her broker to buy back the investment. Ms. Wong is pinning her hopes on a bid by small note-holders to try to force a better deal from those trying to restructure the market. J.G.


"You can't get your money, man. It's frozen." That's what Reid Moseley's friend and broker told him last August when he went to withdraw the cash he had temporarily parked in ABCP while waiting to close the purchase of his dream home in the Calgary suburbs.

The 61-year-old retired teacher and father of four says his broker said there was no risk, that he would get a better return than with Treasury Bills. He figured it was a no-brainer -- better than having his $50,000 nest egg sitting in the bank not earning interest.

Now he's had to take out a $30,000 line of credit to pay the bridge-loan tied to his new home. It's sucking up capital from his hobby business selling antiques, and he doesn't know how much he will get back.

He doesn't blame his broker for the fiasco, but is furious the major banks will not come to the rescue of small investors who ended up with money in investments those banks were supposed to back in a crisis.

Reid Moseley, a retired teacher, has $50,000 invested in ABCP

Mr. Moseley feels cut off from a restructuring process conducted behind closed doors by lawyers and bankers who don't know what it is like to be in his situation. "That $50,000 represents my life and my wife's life work in terms of what we were able to put aside," says Mr. Moseley. Grant Surridge


Nick Kovics was specific in the instructions he gave his broker about the $100,000 he decided to invest. "This is money I cannot lose," he says. "This is my safety net." The 34-year-old chemical engineer and part-time MBA student had always managed his own investments, but on the recommendation of friends, he went with a broker who told him that putting the money in asset-backed commercial paper was safe.

He first heard about the frozen ABCP by reading the newspaper. Even when his broker confirmed the situation he was not initially worried. But he got anxious as as each extension and deadline passed. "It's got me nervous now." He's wondering when and if he'll get his money back.

Unlike other investors who are close to retirement, Mr. Kovics can afford to wait out a lengthy lawsuit. He'll vote against the proposal unless all his money is returned.

Nick Kovics, a chemical engineer, found out he had $100,000 in ABCP.

But what's most galling for Mr. Kovics is that he invested the money at the end of July, two weeks before the market for the paper froze up.

He says that as a young investor, he has always been willing to take on risk and has managed his portfolio through bear markets before. The first time he chose to trust some money with a professional, he is suffering what may be his biggest loss ever. "The irony is unbelievable." G.S.


Mike and Wynne Miles are anguishing over how to vote on the ABCP restructuring plan. In their late 50s, the couple has a significant portion of their savings tied up in the paper. Since both are self-employed, they have no pension, and they have two kids they're putting through university. They say their broker didn't even tell them he was putting their retirement money into ABCP.

Now they worry that if they vote for the deal, they'll forfeit their right to sue and be forced to wait years to get their money back, with no interest earned in the meantime.

"We can't afford to wait that long," Ms. Miles says softly. The couple are also terrified of what voting "no" might mean: That the deal collapses and they lose everything.

The couple plans to fly to Vancouver this Wednesday to hear Mr. Crawford pitch the restructuring plan to investors, although they are worried they won't know what to ask.

 

Mike and Wynne Miles have a significant amount of their savings tied up in ABCP.

Mr. Miles also questions the money being spent trying to fix the ABCP mess. "All sorts of people are being paid to fix this thing, and it's the same people who broke it in the first place." G.S.

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