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Sunday, 16 November 2008

At least the irony is rich

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.

see also: "Do you swear to spin the truth, the whole truth, and nothing but the truth?"