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Written by editor
Sunday, 16 November 2008
If individual investors weren’t so
worried about the state of their
finances, they’d be better able to
appreciate the rich irony behind the
process that left millions of their
dollars in limbo.
Since
August 2007, $35 billion invested in
asset-backed commercial paper have
been frozen, $300 million held by
some 2,500 individual investors.
When most of these investors put
their money in ABCP, few realized
the risk they were running in the
complex instruments that were a
mixed bag of debt obligations,
including residential mortgages.
Many
put their money in what they thought
were low-risk investments. They
didn’t know what they were getting.
They trusted their investment
advisers who now admit they didn’t
know what they were selling. As
such, they didn’t know the paper
wasn’t suited to small investors
unable to afford such risk.
So the
irony? The Investment Industry
Regulatory Organization of Canada,
which as the name implies is the
self-regulating body, spent six
months investigating where the
process went wrong. In releasing the
results of that investigation, the
organization’s president, Susan
Wolburgh Jenah, said the findings
came as a bit of a shock.
“We
were really surprised to learn, as
we went through this exercise, that
notwithstanding the label
‘asset-backed commercial paper,’
there really are very significant
differences between third-party (ABCP)
and the bank-sponsored ABCP programs
which had previously existed.”
Yet,
as former investment adviser Larry
Elford of Lethbridge points out in
his ongoing campaign for change in
the investment industry, it was
Wolburgh Jenah herself in 2006 who
signed off on legal exemptions that
gave dealers, such as those at
banks, permission to ignore existing
disclosure laws designed to protect
investors. At the time, Wolburgh
Jenah was vice-chairman of the
Ontario Securities Commission.
The
exemption granted to Bank of
Montreal and others relieved the
financial institution of the
prospectus requirement. Rather than
having to provide investors a full
prospectus that would have spelled
out specifically what the investment
entailed, the exemption stated it
was “sufficient” that the short-term
debt instrument had a solid credit
rating from a recognized agent.
It had
that, all right. Literally one
rating from one agency. Two other
agencies refused to rate
asset-backed commercial paper.
Flash
forward a couple years and a lot of
uproar over how an industry that’s
trusted to look out for clients’
interests could help move a risky,
complex product into the wrong
investors’ hands, and suddenly
Wolburgh Jenah is wearing a
different hat and singing a
different tune, calling for more
transparency which would have helped
retail clients and investment
professionals know what they were
dealing with.
The
lack of transparency, said the
organization’s report, was that
investors and brokers relied too
heavily on the positive rating the
agency DBRS gave to third-party
asset-backed commercial paper. Funny
how that happened.
“In
layman’s terms, you don’t have to
follow the law,” says Elford, who
has taken his case for a broken
investment industry to a
Parliamentary committee.
A
final insult to individual investors
who were assured their money was all
but guaranteed in ABCP, the
regulatory’s report concluded there
is no need for more rules to
regulate this system that so clearly
failed investors.
Fair
enough. What’s needed is
enforcement, not exemptions to duck
rules meant to prevent the
$35-billion mess still slowly
wending its way through deal making
and leaving so many people’s money
in a frozen wasteland. The irony is
rich. The payback from these
investments won’t be.
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