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Renewed Heat On ABCP?
A year on, dealers may be under fire to 'put more on the table,' Crawford says

John Greenwood

Wednesday, 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 are treated.

Mr. Crawford 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 later.

"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 workout fails.

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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