ABCP Catch 22 In Canada

The asset backed commercial story in Canada takes a new twist every few weeks. I last wrote about the crisis on March 1, 2008 in Bank of Montreal Misses Margin Calls.

A short synopsis is that Canadian investors thought they were buying short term high quality commercial paper were actually buying subprime mortgage garbage from the US. In a complicated sets of twists and turns, the paper has been frozen since last August, as the value of the paper plummeted.

Bailout plan after bailout plan missed deadlines. All of the bailout plans have revolved around converting short term paper to long term paper, and even then with a loss. The amount frozen is approximately $33 billion. Following is a report on just one piece of the frozen debt.

On March 20, the Vancouver Sun reported Investors face a Catch-22 on ABCP.

Investors in British Columbia who put their money - and faith - in a Vancouver brokerage house, are now caught up in a financial nightmare. Canaccord Capital Inc. put about 1,400 clients, many of them from B.C., in ill-fated asset-backed commercial paper. Those investors, and their almost $270 million worth of savings, have been stuck in a legal limbo since the paper was frozen last August.

And now with a proposal to resolve the ABCP freeze expected to be sent to note-holders next month, the investors are faced with a Catch-22.

Under the plan, reached March 17, the short-term paper would be converted into new notes maturing as late as 2017. Once trading resumes, the new notes will likely trade at 60 cents to 80 cents on the dollar, according to analysts. For that discount, investors may have to give up the right to sue the banks, rating agencies and investment dealers who got them into the mess in the first place.

Or they could hold what were supposed to be short-term investments for eight years and hope to regain the full amount of their investment at that time.

The alternative is to vote against the plan, see the value of the notes drop even further, yet retain the right to spend thousands of dollars in legal fees, and years in court, to try to get their money back.

It's a lose-lose situation for investors who thought they were in risk-free, conservative investments.

The interesting twist is that the plan requires voter approval and it's one vote per person affected. The Sun notes that "retail investors hold only a small portion of the total amount in jeopardy, they outnumber the approximately 100 institutional investors at least 15 to one."

I can't help but laugh at this: "Last week, Canaccord hired an ABCP expert to advise its clients on the proposal."

Gee... Any idea what that "expert" is going to say? I think I do, and here it is with my translation as to the real meaning at the same time.

Expert Statement: "We recommend taking this deal as a fair and honest solution. It's the best we can do under the circumstances and it's time to put this behind us and move forward."

Translation: "You are damned if you do and damned if you don't. Either way you are damned. However, we recommend you take this deal right away because it protects us from further liability. Please sign on the dotted line now and we will throw in a free toaster."

Question: Why is Canaccord hiring an ABCP expert now instead of before investing in this stupid scheme?

Answer: They had no idea what they were doing then. They know full well what they are doing now... trying to protect their own hide. So they hired an expert that is all but guaranteed to give the answer they want to hear.

Coastal Community Credit Union Woes

On March 22 the Vancouver Sun wrote about Worried Investors at Coastal Community Credit Union.

Baumel, of Qualicum Beach, is one of an unknown number of credit union members across Canada who were put into ill-fated asset-back commercial paper through Credential Securities Inc., the credit unions' investment dealer. Yet now that the paper has gone bad, Baumel said the credit union is not willing to give him his money back.

Baumel is in real estate, so he has enough risky investments. That's why he wanted his savings to be in something 100-per-cent safe. At first it was in an account at the credit union, but that earned no interest, so the credit union -- Coastal Community Credit Union -- advised him to go to Credential. There he put his money in what he believed was a high-interest savings account.

But when Baumel went to withdraw $100,000 of his $365,000 portfolio last August to lend to a colleague as part of a business deal, he was given the bad news -- the money had been frozen.

Baumel had never heard of commercial paper, but if he had been told he was in asset-backed or mortgage-backed investments, he says he would have turned it down. He already had enough exposure to that risk with his real estate investments, Baumel said.

What makes Baumel "profoundly disappointed" is that despite the fact he told Credential to invest in something that was 100-per-cent safe, he ended up with ABCPs. And the credit union has refused to assure him he won't be out of pocket when the issue is resolved, Baumel said.

Other than Credential, Canaccord is the only investment dealer known to have not yet made a deal to indemnify its clients. While it is unknown how much Credential customers hold, Baumel was told that his credit union has about 12 clients in his situation, with a total of between $2 million to $3 million invested.

New Plan For Small ABCP holders

On March 28 Reuters reported Plan in works to help small Canadian ABCP holders.

A relief plan to assist individual owners of frozen Canadian asset-backed commercial paper is in the works, but it is moving more slowly than participants hoped, Canaccord Capital Inc Chief Operating Officer Mark Maybank said Friday.

"A lot of people are working very diligently ... we continue to work with others to put together that plan," Maybank said in an interview. "It's not finished, it's certainly taking longer than we or anyone else would like, but we think we're getting closer."

Some retail investors are upset with a proposal to restructure C$32 billion ($31.4 billion) of asset-backed notes that were issued by various non-bank-sponsored trusts. This segment of the commercial paper market collapsed last summer.

Retail noteholders, most of them Canaccord clients, outnumber institutional investors with big holdings, so they could kill the seven-month-long ABCP restructuring effort next month if a majority votes against the proposal.

The relief plan could offer extra liquidity to small ABCP investors who receive new, restructured notes. But it is "doubtful" the plan will be finalized before public information meetings on the main restructuring proposal begin next week, Maybank said. He declined to name the other parties in the talks. The Globe and Mail newspaper said "a group of Canadian financial institutions" was involved.

Small investors face tough choices as they ponder the restructuring proposal: receive new notes and wait years to recover their funds; sell the new notes at potentially steep discounts in a secondary market; or vote against it and try to recover their money through litigation.

Some 1,400 of an estimated 1,800 retail noteholders are clients of Canaccord. The investment dealer has said it cannot afford to buy out their ABCP positions, totaling about C$270 million.

Another 335 investors, who are with Credential Securities Inc., an investment dealer for various Canadian credit unions, collectively own C$48 million of the seized-up paper.

Credential said this week that it is exploring avenues to ensure that its investors "receive the maximum possible value from their investments." One option under discussion calls for retail investors' holdings to be bought for a set percentage of their initial investments.

"It depends a bit on the type and nature of the client, different clients have different needs, but we would be able to guarantee a certain percentage," Canaccord's Maybank said. "That would certainly be one of our preferred ways to go forward."

The cost of settling with individual ABCP investors is low in the grand scheme of the restructuring, so large stakeholders will probably step up, a bank analyst said Thursday. "We believe that small investors have less than C$500 million of the total balance but the majority of the votes," BMO Capital Markets analyst Ian de Verteuil said in a research note.

Assuming that a successful ABCP restructuring allowed 85 percent recovery on the paper, the cost of settling with small investors would only be C$75 million, de Verteuil said."We have no idea who will bear the costs of settling this situation but are confident that some of the larger stakeholders will," the analyst wrote.

Canaccord promises to make a deal with angry investors

On March 28 Canaccord promises to make a deal with angry investors.

Canaccord Capital Corp. said it's willing to come to an agreement with clients who were told the asset-backed commercial paper they bought was guaranteed. And for any other clients, the Vancouver brokerage is trying to set up a pool of funds that will enable investors to sell their notes at a set price.

Canaccord has 1,400 clients who have invested almost $270 million in the ABCPs. Last week a number of those clients complained to The Vancouver Sun that they had been sold the investments as equivalent to guaranteed investment certificates.

Mark Maybank, Canaccord's chief operating officer, said to suggest the notes were sold as GICs was "patently untrue."

"It's a higher yielding money market product," he said. "It does not have the word 'guaranteed' in it."

But if clients were told it was a guaranteed investment then that's a breach of the rules governing brokerage houses and Canaccord is willing to talk about possible remedies with them, he said.

Ron Lawley, a 72-year-old retiree from Nanaimo, has more than $200,000 tied up, which he says he told his broker to put into Canadian treasury bills. He's been writing and telephoning Canaccord compliance since December, without any resolution to date, though he remains hopeful.

But he won't take anything less than all his money back plus interest, he said.
"And if I don't get that, I am definitely going to be voting no on this accord," he said.

Angela Speller, who has her life savings in ABCPs at Canaccord, said she has not received a response from Canaccord to her complaint earlier this month.
"[But] I would like the entire sum of money," Speller said. "After all I didn't put my money in anything that was risky. I was told it was triple A."

Magic Words

Ron Lawley used the magic words: "T-Bills". If it can be proven that is what he said, his broker should be in deep trouble for not doing what was stated. The question is whether or not it can be proven what Lawley said. Nonetheless, I suspect Lawley will be believed unless a phone recording proves otherwise.

On the other hand, Angela Speller used the wrong words: "AAA". There is no guarantee on "AAA" and that may prove to be a very expensive lesson depending on what Canaccord decides to do with "small investors".

85% Recovery Rate Doubtful

Odds of an 85% recovery rate that was mentioned earlier are extremely doubtful. Besides, 85% "recovery" some 7-9 years down the road in 2015-2017 is simply not 85% recovery no matter how much whitewashing is done.

It will be interesting to see just what is offered to small investors and in what timeframes. To secure the necessary votes to unfreeze this mess some concessions do appear likely for "small" investors. "Small" may simply mean just small enough to secure enough votes to get this deal passed. Anyone too big, is likely going to be very unhappy with the result.

No matter what the offer, this setup seems more like a No Win Situation or a Hobson's Choice (accepting the offer or eventually getting nothing after years of legal fees), than it does a Catch 22.

Thanks to Deb Wot, a teacher in the Canadian Northwest Territories, for helping compile links used in this article. Deb's blog is Making Sense of my World.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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