August 13, 2008
The head of a committee overseeing the restructuring of $32-billion of
frozen commercial paper says the investment dealers that sold the paper
may be under pressure to "put more on the table" after U. S. regulators
forced a slew of U. S. banks to buy back more than $40-billion of
similarly flawed securities.
Shannon Stapleton, Reuters File Photo
New York Attorney-General Andrew Cuomo
has accused U. S. banks of misrepresenting their investments as
"safe" and "liquid" when they were not.
In a telephone interview, Purdy Crawford said he believes "there are
similarities" between the blow-up in the U.S. market for
auction-rate securities and the one in Canadian asset-backed
commercial paper (ABCP), particularly in the way retail investors
said the expensive settlements being negotiated south of the border
may motivate banks that sold ABCP in Canada to resolve the legal
disputes around the workout and make it happen sooner, rather than
"I'm not sure [the U. S.
settlements] will motivate banks to put more on the table. They
might and they might not," Mr. Crawford said.
So far, Canadian regulators have left
it up to the industry to sort out the ABCP problem, and the industry
would be loath to see a U. S.-style solution, which could happen if the
Today marks the one-year anniversary of the collapse of the ABCP market,
which seized up after Coventree Inc., the biggest sponsor, failed to
find buyers for maturing notes and banks that had agreed to provide
emergency liquidity opted not to step up.
In the wake of the meltdown, a group of financial institutions put
together a plan to rescue the frozen paper by restructuring it into
longer-term notes. It is now tied up in court and the outcome is
anything but certain.
Even if the restructuring happens, the lion's share of the losses --
some of the notes are expected to trade at 20% of face value -- will be
borne by investors, rather than the financial institutions that created
and sold the ABCP.
Only retail investors will get all their money back, but the buyback
offers put forward by Canaccord Capital Corp. and Credential Securities
are contingent on the workout going forward.
"This has been one of the most difficult years we have ever had," said
Wynne Miles, an investor in Victoria who has "a significant amount" of
her savings in ABCP. "It's hard for people to imagine the toll that the
frustration and stress had on myself and my husband."
The US$330-billion market for auction rate securities seized up in
February after financial institutions stopped buying them. Like ABCP,
auction rate securities are complex debt instruments originally intended
for sophisticated investors. New York Attorney-General Andrew Cuomo has
accused the banks of misrepresenting the investments as "safe" and
"liquid" when they weren't. On Monday, Morgan Stanley became the latest
to announce a settlement with regulators, offering to repurchase
US$4.5-billion of stalled auction rate securities.
Meanwhile, the ABCP restructuring has been almost completely free of
regulatory intervention and is languishing in court. The latest hold up
is a challenge by drugstore chain Jean Coutu and other corporate holders
who say they want the same treatment as retail investors. They say they
were victims of investment dealers and shouldn't be forced to suffer
losses as a result. The case is now before the Ontario Court of Appeal,
but many observers predict that it will eventually be heard by the
Supreme Court of Canada sometime in the fall. Mr. Crawford said he is
"optimistic" that the restructuring will win court approval.
Many of the institutions backing the deal are said to be negotiating
with the corporate noteholders, trying to persuade them to drop their
objections. But the companies are holding their ground, sources say. If,
as Mr. Crawford suggests, the banks agree to put more on the table,
there may be grounds for hope that the companies will drop their appeal.
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