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PETER HADEKEL
Freelance
Friday, December 05, 2008
When the market froze up last year
for third-party asset-backed
commercial paper in Canada, it was
an early canary in the coal mine.
It turned out to be a harbinger of a
much bigger credit crisis to come.
More than a year later, the
$35-billion ABCP market is still in
deep freeze, despite the so-called
Montreal Protocol that sought to
revive it.
The accord aimed to convert the
short-term paper (backed by
mortgages, car loans, credit card
receivables and the like) into
longer term notes that could trade
in a secondary market. But the deal
has been held up by lengthy legal
wrangling.
Investor frustration is running high
and the damage is substantial.
The delay has been blamed, in part,
for liquidity pressure at Quebec's
pension fund manager, the Caisse de
dépôt et placement, which had a
$13-billion portfolio of ABCP on its
books.
Many corporations that put their
cash into ABCP have yet to be made
whole by dealers that sold them the
paper.
Now, we're finally seeing some
attempts at investigating how this
scandal occurred.
The chairman of the Ontario
Securities Commission, David Wilson,
said this week that regulators in
Ontario and Quebec are looking into
what happened and whether
enforcement charges will be laid.
Jean St. Gelais, head of Quebec's
Autorité des marchés financiers,
said in a September speech that the
regulatory agency was investigating
the sale and distribution of ABCP in
Quebec and would examine whether
administrative or legal sanctions
should be taken.
A spokesperson at the Autorité said
yesterday that the agency is still
gathering information on what
happened and has not begun any
formal investigations.
"We're not there yet," said
spokesman Sylvain Théberge when
asked if charges could be laid, "but
it's not excluded."
At the very least, a crackdown on
marketing and sales practices is in
order in the financial industry -
one that puts full disclosure at the
top of the agenda.
And if companies and executives
broke the rules in the way they sold
the dubious ABCP notes to
unsuspecting investors, then they
should suffer the legal consequences
Canada may not have had a subprime
mortgage scandal, but ABCP has
turned out to be our own version of
toxic paper.
"The liquidity crisis was fuelled
largely by a lack of transparency in
the ABCP scheme," noted an August
judgment from the Ontario Court of
Appeal. "Investors could not tell
what assets were backing their
notes."
The notes shared "an Achilles heel,"
the court found. "Because of their
long-term nature, there was an
inherent timing mismatch between the
cash they generated and the cash
needed to repay maturing ABCP
notes."
In October, the investment
industry's self-regulatory body
weighed in with a report on what
happened.
The 113-page report by the
Investment Industry Regulatory
Organization of Canada found there
was insufficient disclosure, and a
lack of due diligence in the way
ABCP was sold.
The real question is whether there
was widespread infringement of the
know-your-client rule that's sacred
to the trust between a client and a
financial adviser.
In April, when investors attended a
meeting of the ABCP restructuring
committee headed by lawyer Purdy
Crawford, they gave the committee an
earful.
Many had been led to believe their
investment was safe. Some were
elderly people who had their life
savings at risk. They thought they
were buying a savings product, when
in fact they were buying a risky
investment.
Much of this had to do with the
solid-gold credit ratings wrongly
affixed to ABCP by bond-rating
agencies that have forfeited their
trust.
Since then, dealers have implemented
or committed to compensation plans
for clients amounting to almost $500
million. Some have made special
lending arrangements to support
corporate clients in ABCP.
But the full legal price hasn't yet
been paid by greedy financial
industry people who either did not
do their homework or knowingly sold
unsuitable investments to their
clients.
There's been a lot of talk about the
need for more regulation in the wake
of the global financial crisis.
A good start would be to hold people
in the financial industry
accountable for their actions.
phadekel@videotron.ca
© The Gazette (Montreal) 2008
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