ABCP's of stealing $32 Billion. Case study 2 for inquiry

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Breaking News from The Globe and Mail

ABCP players to seek bankruptcy protection
TARA PERKINS


Saturday, March 15, 2008

The committee working to untangle $33-billion of frozen commercial paper plans to ask an Ontario judge Monday to grant bankruptcy protection to the 20 trusts that issued the paper, as it works to restructure them.

Investors ranging from major corporations to provincial and territorial governments and private individuals have been stuck holding the paper since last August, when the U.S. subprime mortgage crisis tossed financial markets into a tailspin, causing the market for Canadian third-party asset-backed commercial paper to come to a screeching halt.

Three days after it nosedived, a group of major players, led by the Caisse de dépôt et placement du Québec, announced a plan to restructure the market. It involved converting the short-term paper into longer-term debt. To give the group time to hammer out the details and put the plan in place, the players agreed to a standstill period that essentially froze the market.

The committee, which has missed self-imposed deadlines, failed to unveil its final plan to investors yesterday, even though an agreement that was helping to keep the market frozen was to expire at midnight. A committee spokesman said they remained confident that the market would not descend into chaos.

The committee plans to file an application in Ontario Superior Court to put each of the 20 trusts under the protection of the Companies' Creditors Arrangement Act, a law that's normally used by companies that are trying to restructure under bankruptcy protection. CCAA prevents creditors from seizing assets and halts lawsuits against the company.

If the trusts are granted CCAA protection, the standstill agreements that are keeping the market frozen will remain in place “and provide note holders an opportunity to consider fully the committee's proposal in an informed way,” said Purdy Crawford, the Toronto lawyer who was parachuted into the situation months ago to lead the committee and to broker a solution.

Investors have been anxiously waiting for news. Garry Webber, a 59-year-old pastor in Calgary, says much of his retirement savings have been tied up.

“It's a significant chunk in my RRSP, which is what I'm ideally depending on for my future,” he said. “I had gone into the pastorate from business with the expectation of prudently investing my money. You don't get a whole lot as a pastor, but it would supplement what I did get.” One of the committee's major headaches in recent months has been securing bank support for a $14-billion emergency line of credit that would provide some security to the restructured market. The Canadian banks had been asked to commit to $2-billion, and a source said yesterday that the committee failed to meet its deadline yesterday because one of the banks wasn't yet ready to sign on the dotted line.

The situation is being closely watched by the Bank of Canada and finance officials.

As the restructuring drags on, it's still not clear exactly how much money Canadian investors will recoup. While the committee had hoped that those who hold the long-term notes until they expire would receive most of their value back, it's believed that investors who need to sell the paper quickly once the market's unfrozen could lose one-third or more.

With reports from Boyd Erman and Kevin Carmichael

© The Globe and Mail

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Liberals demand review of ABCP crisis
Duncan Mavin, Financial Post
Published: Friday, March 14, 2008


Liberal finance critic John McCallum has filed a notice of motion that proposes to give retail investors in Canada's asset backed commercial paper market the chance to have their complaints heard in Ottawa.

The notice of motion, filed Thursday, asks for hearings on the ABCP crisis, "including hearing from severely affected Canadians."

If the hearings take place as proposed by Mr. McCallum, they will try to find out whether regulators and other stakeholders could have done a better job in anticipating the crisis and reducing its costs.

The notice also asks "what action the federal government, federal regulators and other stakeholders are taking so as to reduce the likelihood of experiencing a similar crisis in the future."

Canada's $33-billion ABCP market has been frozen since last summer when investors found they could not roll over the paper as planned.

A group of investors, banks and lawyers working on a restructuring are due to release details of their proposals on Friday.

Earlier this week, the Financial Post reported that the crisis in the non-bank asset-backed commercial-paper market could be nearing an end. Sources told the Post that the committee tasked with restructuring the notes plans to file papers in an Ontario court, seeking a judge's approval to implement a restructuring package agreed to in late December. Those plans have left some small investors concerned that their interests will be steamrollered by those of much bigger players.

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Here is a back and forth between member of the facebook dicussion group on the ABCP crisis.

If I am correct in my understanding, the banks who were to be the backup guarantor to these things are now refusing to back these things up..........they are saying there has been no market disruption, which is a fair bit like lying through their teeth........... while investors are stuck with this bad paper.
This issue needs intervention by the government of Canada at the highest levels to restore confidence.........or else our five most solid Canadian banks look a lot like confidence artists.

discussion below:

I'm a little confused. Please help me.

This Pan-Canadian committee, which is made up of Canada's
Big Banks (most of them) and our favorite investor dealer, among others, has managed to freeze $33B in accounts for almost 7 months because these same Big Banks are arguing that a 'general disruption' has NOT occurred?

Because if a general disruption had occurred, they would be on the hook to provide liquidity? They sold this promise of liquidity to others for a fee, right?

-Jim

response..........That's correct. The banks took the position back in August that a general market disruption had not occurred, because bank-sponsored ABCP was still trading. Which it was - until yesterday. Perhaps this accounts for the silence from the Committee. If they were aware that BMO was about to run afoul of its sponsored ABCP, maybe discussions are now focusing on the repercussions from that, such as the potential requirement to now provide liquidity for the non-bank ABCP.



second question...........Sorry for being a little thick here Daryl, correct me if I'm wrong.

$33B in accounts have been frozen for almost 7 months. The banks are claiming a 'general disruption' has NOT occurred because their own paper is still trading.

If a 'disruption' had occurred, some of these banks would be on the hook to provide liquidity to Non-Bank ABCP's because they sold this liquidity as insurance to someone, somewhere, for a fee.

Now these same banks are major participants in this Pan-Canadian Committee to restructure Non-Bank ABCP because if this standstill agreement falls apart, they are on the hook for even more losses, because now they have pay up on the insurance they sold.

Am I out of line to suggest that this Pan-Canadian committee '7-10' proposal and their 'credit facility' in nothing more than a bold and brazen attempt to by the Big Banks and Caisse to limit their losses and shift the liabilities for their bad insurance underwriting to unsuspecting individuals (and companies) with the fewest resources to defend themselves?

This may be legal, but it is a long, long way from being ethical.

-Jim in The Hague

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Larry Elford

Statement to the Scotiabank Annual General Meeting
By Reid Mosley, appointed proxy representative of Scotiabank shareowner Diane Urquhart

March 4, 2008, Edmonton, Alberta, 11: 45 a.m. Mountain Time

Audio statement is at the following webpage starting at time 1:44:15

http://events.onlinebroadcasting.com/sc ... ,20,2,lo,2

My name is Reid Moseley and I am one of 1400 individuals, who is suffering financial distress due to Non Bank Asset Backed Commercial Paper. Most of us are customers of Canaccord Capital and the Central Credit Unions, but these firms were retail sub-agents for Scotia Capital who sold them this flawed savings product. Many of us own Structured Investment Trust III, where the Bank of Nova Scotia is the issuing and paying agent.

The Montreal Accord solution of restructured long term notes is not going to help us. Scotiabank's participation in the $14 billion margin facility organized by Purdy Crawford is simply offering a lifeline for possible recovery of our money in seven years time. For this, your bank is getting 1.6% more annual fees and market rates of interest.

Scotiabank has the expertise and duty to know it was selling a flawed savings product to unknowing retail investors. Scotiabank executives took large bonuses from profits made. But, you did not administer and sell a savings product that performed according to its stated return and safety.

Most of us were shocked when our cash was not there to buy houses, to buy businesses, to settle estates for the care of our loved ones, and to pay for living expenses. We parked our cash for just 60 days, and now our plans are destroyed. In some cases, this is our life savings from our jobs or businesses we built.

Purdy Crawford has admitted to our group this week that he expects the restructured long term notes to trade at significant discounts to what we invested. No-one guarantees that we will get our money back in seven years.

National Bank bought, at full value plus accrued interest, the Non Bank ABCP of its retail customers in mutual funds and brokerage accounts. Scotiabank and other major banks appear to have bought the Non Bank ABCP owned by their direct retail customers. Canaccord Capital and the Central Credit Unions Group are either unable to afford making their retail customers whole, or for legal reasons have decided not to do so, in order to support their claim that they are not solely responsible for our damages. Already, Canaccord has added Scotia Capital Markets as a party to lawsuits brought by two of its retail clients.

I am very concerned that the banks want to create reputation and financial difficulties for their competitors, Canaccord Capital and the Central Credit Union Group. The banks do so, notwithstanding their extensive involvement and responsibility for the defective Non Bank ABCP, that they participated in and sold to Canaccord and the Central Credit Union Group.

Scotiabank needs to join Canaccord and the Central Credit Union Group in supplying cash to buy our commercial paper at par value. Lawsuits are not the answer for our personal financial distress. Lawsuits are well-founded and we will sponsor them, if necessary.

The shareowners of Scotiabank are not winners from the sale of defective savings products into the retail marketplace. Protracted litigation to mitigate Scotiabank losses from their multiple roles in Non Bank ABCP will only serve to damage Scotiabank's reputation to Canadians. Scotiabank either stands behind the savings products it administers and sells, or it does not. Which is it?

For additional information contact:

Spokespeople for Retail Owners of Non Bank ABCP:

Reid Moseley - cell phone 403-660-4888

Brian Hunter - cell phone 403-650-4960

Layne Arthur - cell phone 403-660-4888

Independent Analyst of Non Bank ABCP:

Diane Urquhart - telephone 905-822-7618

[admin]

Subprime Is Really SubCRIME:
America's Deeper Financial Crisis
By Danny Schechter, AlterNet
Posted on February 21, 2008
http://www.alternet.org/story/77375/
At long last, the Democrats are talking about the economy and the need for serious relief and reforms. The reason is simple. The people are feeling the squeeze.

Reports the Baltimore Sun:

"Since January alone, the public's perception about the state of the economy has plummeted -- with just 17 percent calling the nation's economy excellent or good -- down from 26 percent last month. The percentage rating the economy poor has grown from 28 to 45 percent."

Hillary Clinton and Barack Obama now have their instant 10-point plans and programs. They have dipped into John Edwards' tool chest for ideas on fighting poverty and listened to policy advisors who have come up with a laundry list of proposals for stop-gap measures from hikes in the minimum wage and middle-class tax cuts. All of these proposals will take time to implement and probably will be forgotten by the time one of them becomes president, if they do.

Meanwhile the economy is collapsing because of crimes and irresponsibility on Wall Street, and no one is really talking about that. An inequality gap and structural crisis compounded by profiteering in high places goes on and is largely ignored.

The media is not investigating the profiteers and, in fact, continues to contribute to the problem by accepting millions for dubious ads for more loans that end up getting more Americans in debt. Prosecutors are not prosecuting wrong doing. No fundamental new regulations and oversight are being proposed.

The candidates don't even seem to know the extent of damage that is being done by the subprime crisis and its assignees. Andrew Abraham reports:


Bank of America delivered a report last night highlighting the current losses of the "credit crisis." According to the report, the meltdown in the U.S. subprime real estate market has led to a global loss of $7.7 trillion in stock market value since October.

Quoting Bank of America's chief market strategist, Joseph Quinlan, the crisis, which has spread beyond U.S. shores to banks and other sectors worldwide, is "one of the most vicious in financial history."

That number again: $7.7 TRILLION. That phrase again: "the most vicious," that is, worse than 1929 and all the financial crises since.

Who is responsible for this, and who is being made responsible? Why aren't we talking about these massive losses and the growing debt burden? Why is this issue not on the political agenda save for the efforts of a few advocacy groups on the left and Ron Paul on the right?

It was discouraging when our government's leading critic of these practices got so discouraged that he quit last week. David Walker, the comptroller of the currency had warned back in 2005 (as reported in my film In Debt We Trust):


Continuing on this unsustainable path will gradually erode if not suddenly damage our economy, our standard of living and ultimately our national security.

And guess what? Just two years later, our economy was "suddenly damaged." The damage is "affecting our standard of living," and very few public officials or political candidates are connecting the dots. Why not?

When will we condemn the false prophets of the free market and their misguided policies? When will we indict those who cashed in on our country's misery?

Notes scholar Lionel Tiger:


Those who have been operating the managerial levers of the financial system have failed embarrassingly and massively to comprehend the processes for which they are responsible. They have loaned money avidly and recklessly to people who couldn't pay it back. They fudged data to get loans approved and recalculated. Then they sausaged fragile figments of money-reality into new "products" which could be sold around the world to investors eager to enjoy the surprising returns which often accompany theft, managerial incompetence and fraud. When it comes to responsibility for all this, there appears to be no one here but us spring chickens. Not only that, but the overseers of the bitter debacle may lose their jobs for a month but nonetheless fill their wheelbarrows with company money and "severance" when they leave to tide them over until the next corner office becomes available."

And what is to be done about this white-collar crime wave? At long last even shamed executives in the financial industry are joining those of us who long ago charged that subprime is really subcrime. Basil Williams, chief executive officer of Concordia Advisors, a hedge fund, says we need "a safety net for the innocent and a dragnet for the guilty."

Writing in the Record in Bergen County, N.J., he says that the greedy should pay to help the needy:

"The costs can be recouped by going after those who profited handsomely and unfairly from the multitude of transactions that touched the industry, including:



Mortgage brokers who originated loans to those who didn't understand the conditions, couldn't afford them and should not have qualified.


Appraisers who overvalued homes, knowing that the higher the value they gave a property, the more business they would reap from a dishonest broker.


Banks and brokerage firms that purchased, packaged and resold the mortgages for huge fees."

He goes on to discuss ratings agencies and more. This is a litany that the candidates and activists should sign on to.

With millions facing foreclosure, we have to expose those responsible and mount a movement for economic justice. It can be done. It should be done. Who is ready to stand up and organize a national mobilization to stop this outrage? Who is ready to fund it?

Who?

© 2008 Independent Media Institute.
All rights reserved.
View this story online at: http://www.alternet.org/story/77375/

[admin]

Curious optics
Barry Critchley, Financial Post

Thursday, February 21, 2008

With all the regulatory actions launched in the U.S. into subprime matters, the question for Canadian investors is why hasn't the OSC waded in with its own inquiries into how $35-billion of asset-backed commercial paper became stranded, and whether rules, procedures and disclosures were not properly followed.

Of course, we likely wouldn't know if an investigation were underway, as the country's largest regulator likes to keep its activities close to its chest, but there are some curious optics that have come to our attention -- thanks to the research efforts of Diane Urquhart, an independent analyst -- that could explain what's going on.

More than two years back, Purdy Crawford, a lawyer with Osler Hoskin & Harcourt and a veteran of the world of securities regulation,

was named head of the nomination committee to name the next chair of the Ontario Securities Commission.
It selected David Wilson, former CEO of Scotia Capital Markets. Wilson was the first non-lawyer to hold the position at the body that "administers and enforces securities legislation in the Province of Ontario."

On Feb. 22, 2007, Wilson announced Lawrence Ritchie and James Turner as OSC vice-chairs.

"Both Mr. Ritchie and Mr. Turner have outstanding reputations, extensive experience in securities law and a keen interest in policy development," he said, noting both had worked at the OSC.

At the time, Ritchie was a partner with Osler, Hoskin & Harcourt, while Turner was a senior partner with Torys. What the release didn't say was the link between Crawford and Ritchie.

The link: Ritchie is married to Crawford's daughter, Heather.

Fast forward a few months to mid-August, when a liquidity crisis in the global debt markets caused Canada's $35-billion non-bank asset-backed commercial-paper (ABCP) market to seize up.

"The crisis was largely triggered by market sentiment as news of significant defaults on U.S. subprime mortgages spread, and not by the creditworthiness of the underlying assets of the ABCP," wrote Crawford in this paper last November.

Crawford noted that

"a group of market participants -- including financial institutions, institutional investors and international banks -- signed the Montreal Accord on Aug. 16, 2007, preventing the default of most third-party ABCP and the accompanying destruction of value that a 'fire-sale' liquidation would undoubtedly have caused. The Mont-real Accord led to the creation of a 'Pan Canadian Committee' of investors, which I was invited to chair."

A tentative workout plan was reached in December that is slated to be in place by next month. Most of the key details haven't been disclosed.

Back to Urquhart, who has written to the OSC wondering what it was doing on ABCP. The reply, dated Dec. 24, said,

"The OSC is actively reviewing the causes, circumstances and consequences of recent developments in the credit markets ... we are participating with a number of international organizations in assessing the various factors that have led to these developments."

But no enforcement actions. (To date, at least two ABCP-related lawsuits have been filed.)

Urquhart has expressed an opinion regarding the role of the regulator in allowing the issuance of the now-stranded ABCP: The

"securities commissions were enablers of DBRS being the only credit-rating organization providing credit ratings for the non-bank ABCP conduits and of DBRS providing top credit ratings."

bcritchley@nationalpost.com

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The BMO announced today another $130 million writedown, bringing total writedown to date of $210 million, on investments in Apex Trust and Sitka Trust. This is a writedown of -30% of the original face amount for Apex Trust and Sitka Trust. The BMO warns that if there is no restructuring, it may need to right off the remaining $495 million balance of its investments in these two trusts. Apex Trust and Sitka Trust are not on the list of 22 frozen Non Bank ABCP under the Montreal Accord. Nonetheless, these BMO writedowns may be an indicator of the prospects for some of the frozen Non Bank ABCP trusts with underlying super senior positions having exposure to high quality diversified corporate debt within collateralized debt obligations. The leverage in some of these CDO's is causing massive marked to market impairment, despite their super senior positions and reference to high quality credit portfolios.


Globe and Mail - BMO to take $490 million charge, February 19, 2008
BMO also is taking an $130-million charge against its investment in Apex/Sitka Trust, a Canadian conduit for asset-backed commercial paper. This is in addition to an $80-million writedown it took on this investment in the fourth quarter.

The bank, which is scheduled to report its results on March 4, warned that it could face an additional pre-tax charge of about $495- million  its entire net investment in the trust  if talks under way with the aim of restructuring Apex/Sitka do not succeed. It added that it may provide additional support to the trust.

BMO Financial Group Media Release - Update on Apex/Sitka Trust, February 19, 2008

Apex/Sitka Trust

BMO is continuing its discussions with a number of counterparties on
restructuring alternatives for Apex/Sitka Trust. The conduit's underlying
positions are super senior positions with exposures to high quality
diversified corporate debt through collateralized debt obligations. The
ratings on these positions continue to be rated AAA, although they are under
review. Charges taken in BMO's fourth quarter 2007 and first quarter 2008 in
connection with Apex/Sitka Trust total $210 million, leaving BMO with a net
position of $495 million. The charges that BMO has taken reflect its
expectations with respect to the probability of Apex/Sitka Trust being
restructured. If Apex/Sitka is not restructured, it is expected that BMO would
incur an additional charge that would approximate its remaining net investment
of $495 million pre-tax. If BMO determines it is in its interest to do so, it
may provide additional support to Apex/Sitka Trust.


Diane Urquhart
Independent Analyst
Mississauga, Ontario

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Wall Street faces fury over subprimes as
regulators and cities file lawsuits
Published: Monday, February 18, 2008 | 5:30 PM ET
Canadian Press: Mark Jewell, THE ASSOCIATED PRESS
BOSTON - Regulators are trying to punish Wall Street for mortgage finance practices that expanded home ownership
and spread risk among a host of new players - but also may have duped borrowers and investors who supplied cash to
fuel a housing boom that's turned bust.
A handful of state securities regulators and a couple foreclosure-blighted cities have fired the opening shots with
lawsuits trying to prove that investment banks and big lenders are guilty of more than just bad business decisions and
failing to foresee looming mortgage troubles. Some regulators say greed and fraud underlie much of the subprime
mortgage mess that has spread across the broader housing market, triggering a spike in foreclosures.
Aside from the civil cases, the FBI is looking at possible criminal action, focusing on what Wall Street firms knew
about the risks of mortgage securities backed by subprime loans, and whether they hid risks from investors.
Observers don't expect the financial penalties that regulators extract in the civil cases to be massive. But the cases could
turn up evidence that forces Wall Street to defend itself amid growing talk of government help to ease subprime-related
financial strains on bond insurers. Revelations of bad behaviour turned up by the government also could spur private
investors to file even more lawsuits than the hundreds they've already brought to recover losses.
"This could get a lot nastier, for many reasons," said John Akula, a business law lecturer at the Massachusetts Institute
of Technology's Sloan School of Management. "Prolonged close scrutiny often turns up all kinds of dubious practices
that in normal times are under the radar.
"If the government sponsors any kind of bailout with public funds, this may be coupled with an aggressive
prosecutorial agenda in support of efforts to get private parties to kick in."
Although the foreclosure-blighted cities of Cleveland and Baltimore have sued seeking to recover damages from
mortgage lenders, most of the cases filed so far are from regulators alleging violations of state securities laws.
Attorneys general in New York and Ohio are targeting alleged systematic inflation of home appraisals by major lenders
and appraisal firms. Litigation in Massachusetts and other states seeks to demonstrate that investment banks failed to
disclose risks to investors who bought mortgage-related securities and weren't up front about conflicts of interest across
their far-flung financial operations, including trading of subprime investments.
"Over the years, the relationship between lender and borrower and a particular piece of property has been severed," said
Massachusetts Secretary of State William Galvin. "It's clear that it's become a runaway train."
Gone are the days when most borrowers simply got loans from the neighbourhood bank, which used to hold the bulk of
mortgage risk. Now that risk is spread further - mortgages are bundled together and sold to investors. Behind the
scenes, credit-rating agencies offer advice on whether the investments are secure.
Until recently, cash from Wall Street banks and investors extended growing amounts of credit to low-and middleincome
Americans enticed to enter a market when home prices appeared headed nowhere but up.
Lenders wrote $625 billion in subprime mortgages in 2005, nearly four times the total in 2001. The boom brought in
big fees to mortgage brokers, lenders, banks and ratings agencies.
But now that prices are dropping, those players are hurting. Global banks have ousted executives and have written off
nearly $150 billion since mortgage securities began collapsing last summer.
Wall Street faces fury over subprimes as regulators and cities file lawsuits Page 1 of 2
http://www.cbc.ca/cp/business/080218/b021889A.html 2/18/2008
Given the losses, "It's doubtful some of these entities will repeat their performance," Galvin said. "But I think there
needs to be an understanding of how we got where we are, whether that is through regulatory action, or through
Congress."
States have responded by tightening rules governing how lenders and brokers arrange mortgages and are compensated.
But lawsuits and administrative complaints are the main tools regulators use to seek fines against companies accused of
wrongdoing, or to set examples to deter bad behaviour.
"What they can't enforce through regulation, they will try to accomplish through suing," said David Bizar, a Hartford,
Conn.-based lawyer with the firm McCarter & English who defends against subprime mortgage lawsuits brought by
consumers and regulators.
Already, the number of subprime-related cases filed in federal courts is outpacing the rate of litigation that emerged
from the savings and loan meltdown in the late 1980s and early '90s, according to a study released Thursday.
The 278 subprime cases filed in federal courts in 2007 already equals half of the total 559 S&L cases handled over
multiple years, according to the findings from Navigant Consulting Inc.
Criminal action also could be looming. The FBI said last month it was investigating 14 companies for possible
accounting fraud, insider trading or other violations that could result in criminal charges. The FBI didn't identify
companies but said the probe involves firms across the financial services industry.
The FBI is working with the U.S. Securities and Exchange Commission, which has civil enforcement powers. The SEC
said in January that it had about three dozen active investigations under way.
In the rush to sue big business, there's plenty of blame to go around in the subprime meltdown, said Bizar, the lawyer
who has represented lenders in subprime cases. Those include everyone from investors buying mortgage-related
investments without understanding the risks, to credit-rating agencies that failed to alert investors to lenders' precarious
positions as mortgage delinquencies spiked.
But the mess can be blamed more on unrealistic expectations than fraud, he said.
"You had a lot of people reaching to get into homes they couldn't afford, on the theory that it would go up in value,"
Bizar said.
© The Canadian Press, 2008
Wall Street faces fury over subprimes as regulators and cities file lawsuits Page 2 of 2
http://www.cbc.ca/cp/business/080218/b021889A.html 2/18/2008

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the ACBP crisis reminds me of the tainted dog food crisis that came out of China lately.

Both crisis came about due to manufacturers who determined that by "blending" a certain amount of bad product into the manufacture process, they could fill up the quantity of manufactured goods, and hopefully no one would ever know about the blending in of garbage. (or worse)

In the pet food crisis, we all saw the outcome of unregulated manufacturers gone wild. In the ACBP crisis, we are also witnessing similar outcomes. Previous to that we saw 60 or 70 income trust products that fell into similar traps of manufacturer greed. Simulateously we are witness to massive movements of client assets towards "house branded" proprietary mutual funds. Because of an increase in quality of these products? Or because, according to the OSC, there is a revenue increase between "twelve to twenty six times" when assets are converted to house brand funds?

Thankfully, the United States is developed to the point where fraud can be objectively examined, and attempts made to prosecute and correct. Here in Canada, we are still leading the race for last place among developed nations. We allow a small number of wealthy financial interests to control not only the game, but the regulatory process, the rules, the exemptions to the rules, the enforcement or lack of enforcement, etc. The good news is that if you are among the inner circle or a provider of services to same, you will share in $30 to $60 billion in annual spoils. The bad news is that average Canadians pay this amount each and every year in the form of a Canadian discount.

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--------------------------------------------------------------------------------

January 12, 2008
Inquiry Looks at Withholding of Loan Data

Andrew Councill for The New York Times
Andrew Cuomo, the attorney general of New York State, with a deputy counsel,
Benjamin Lawsky, right. Mr. Cuomo’s office has been reviewing how banks
bundle subprime mortgage loans.
By VIKAS BAJAJ and JENNY ANDERSON
An investigation into the mortgage crisis by New York State prosecutors is now focusing on whether Wall Street banks withheld crucial information about the risks posed by investments linked to subprime loans.

Reports commissioned by the banks raised red flags about high-risk loans known as exceptions, which failed to meet even the lax credit standards of subprime mortgage companies and the Wall Street firms. But the banks did not disclose the details of these reports to credit-rating agencies or investors.

The inquiry, which was opened last summer by New York’s attorney general, Andrew M. Cuomo, centers on how the banks bundled billions of dollars of exception loans and other subprime debt into complex mortgage investments, according to people with knowledge of the matter. Charges could be filed in coming weeks.

Related
Times Topics: Mortgages and the Markets
Enlarge This Image

Uli Seit for The New York Times

A foreclosure sign in Queens. The state and others
are studying the role of Wall Street banks in enabling
the mortgage boom that led to a sharp rise in defaults
and foreclosures.
In an interview Thursday, Connecticut’s attorney general, Richard Blumenthal, said his office was conducting a similar review and was cooperating with New York prosecutors. The Securities and Exchange Commission is also investigating.

The inquiries highlight Wall Street’s leading role in igniting the mortgage boom that has imploded with a burst of defaults and foreclosures. The crisis is sending shock waves through the financial world, and several big banks are expected to disclose additional losses on mortgage-related investments when they report earnings next week.

As plunging home prices prompt talk of a recession, state prosecutors have zeroed in on the way investment banks handled exception loans. In recent years, lenders, with Wall Street’s blessing, routinely waived their own credit guidelines, and the exceptions often became the rule.

It is unclear how much of the $1 trillion subprime mortgage market is composed of exception loans. Some industry officials say such loans made up a quarter to a half of the portfolios they saw. In some cases, the loans accounted for as much as 80 percent. While exception loans are more likely to default than ordinary subprime loans, it is difficult to know how many of these loans have soured because banks disclose little information about them, officials say.

Wall Street banks bought many of the exception loans from subprime lenders, mixed them with other mortgages and pooled the resulting debt into securities for sale to investors around the world.

The banks also did not disclose how many exception loans were backing the securities they sold. In prospectuses filed with regulators, underwriters, in boilerplate legal language, typically said the exceptions accounted for a “significant” or “substantial” portion. Under securities laws, banks must disclose all material facts about the securities they underwrite.

“Was there material information that should have been disclosed to investors and/or ratings agencies which was not? That is a legal issue,” said Howard Glaser, a consultant based in Washington who worked for Mr. Cuomo when he was secretary of the Department of Housing and Urban Development in the Clinton administration.

Mr. Blumenthal said the disclosures offered by banks in their securities filings appeared to be “overbroad, useless reminders of risks.”

“They can’t be disregarded as a potential defense,” Mr. Blumenthal said. “But a company that knows in effect that the disclosure is deceptive or misleading can’t be shielded from accountability under many circumstances.”

Under Connecticut law, Mr. Blumenthal could bring only civil charges in his inquiry. In New York The Martin Act in New York gives the attorney general broad powers to bring securities cases, and Mr. Cuomo could bring criminal as well as civil charges.

Mr. Cuomo, who declined to comment through a spokesman, subpoenaed several Wall Street banks last summer, including Lehman Brothers and Deutsche Bank, which are big underwriters of mortgage securities; the three major credit-rating companies: Moody’s Investors Service, Standard & Poor’s and Fitch Ratings; and a number of mortgage consultants, known as due diligence firms, which vetted the loans, among them Clayton Holdings in Connecticut and the Bohan Group, based in San Francisco. Mr. Blumenthal said his office issued up to 30 subpoenas in its investigation, which began in late August.

Officials at Wall Street banks and the American Securitization Forum, which represents industry, declined to comment, as did the due diligence firms. Credit-rating firms would not say if they had been subpoenaed but said that they were generally not provided due diligence reports, even when they asked for them.

The S.E.C. is also examining how Wall Street banks sold complex mortgage investments. The commission has about three dozen active investigations in the area, said Walter G. Ricciardi, the deputy director of enforcement. “We have not yet concluded whether the securities laws were broken,” he said.

Investment banks that buy mortgages require lenders to maintain standards outlining who is eligible for loans and how much they can borrow based on their overall credit history. But as home prices surged, subprime lenders, which market to people with weak credit, relaxed their guidelines. They began lending to people who did not provide documents verifying their income — so-called no-doc loans — and made exceptions for borrowers who fell short of even those standards.

The New Century Financial Corporation, for instance, waived its normal credit rules if home buyers put down large down payments, had substantial savings or demonstrated “pride of ownership.” The once-highflying lender, based in Irvine, Calif., filed for bankruptcy last year.

William J. McKay, who was the chief credit officer at New Century, said the company usually made exceptions so homeowners could borrow more money than they qualified for under its rules. In most cases, the decisions raised borrowers’ credit limits by 15 percent, he said.

New Century measured pride of ownership in part by how well buyers maintained their homes relative to their neighbors, Mr. McKay said, adding that this usually was not enough on its own to qualify a borrower for an exception.

Investment banks often bought the exception loans, sometimes at a discount, and packaged them into securities. Deutsche Bank, for example, underwrote securities backed by $1.5 billion of New Century loans in 2006 that included a “substantial” portion of exceptions, according to the prospectus, which lists “pride of ownership” among the reasons the loans were made.

Nearly 26 percent of the loans backing the pool are now delinquent, in foreclosure or have resulted in a repossessed home; some of the securities backed by the loans have been downgraded.

Mr. McKay defends the lending and diligence practices used in the industry. He said Wall Street banks examined exception loans carefully and sometimes declined to buy them. But they often bought them later among mortgages that New Century sold at a discount, he said.

Some industry officials said weak lending standards, not exceptions, were largely to blame for surging defaults. “The problem is not that those exceptions are going bad — you don’t have a lot of exceptions in the pools,” said Ronald F. Greenspan, a senior managing director at FTI Consulting, which has worked on the bankruptcies of many mortgage lenders. “To me it’s a more fundamental underwriting issue.”

To vet mortgages, Wall Street underwriters hired outside due diligence firms to scrutinize loan documents for exceptions, errors and violations of lending laws. But Jay H. Meadows, the chief executive of Rapid Reporting, a firm based in Fort Worth that verifies borrowers’ incomes for mortgage companies, said lenders and investment banks routinely ignored concerns raised by these consultants.

“Common sense was sacrificed on the altar of materialism,” Mr. Meadows said. “We stopped checking.”

And as mortgage lending boomed, many due diligence firms scaled back their checks at Wall Street’s behest. By 2005 , the firms were evaluating as few as 5 percent of loans in mortgage pools they were buying, down from as much as 30 percent at the start of the decade, according to Kathleen Tillwitz, a senior vice president at DBRS, a credit-rating firm that has not been subpoenaed. These firms charged Wall Street banks about $350 to evaluate a loan, so sampling fewer loans cost less.

Furthermore, it was hard for due diligence firms to investigate no-doc loans and other types of mortgages that lacked standard documentation.

“Years ago, it used to be, ‘Did the due diligence firm think it was a good loan?’ ” Ms. Tillwitz said. “We evolved into the current form, which is, ‘Did I underwrite these loans to my guidelines, which can sometimes be vague and allow exceptions?’ ”

The attorneys general are leaning heavily on due diligence firms to provide information that could prove damaging to their clients, the investment banks.

These firms played such a critical role in the mortgage securities business that New Century set aside up to eight large conference rooms in its offices where due diligence experts reviewed loan files. With billions of dollars worth of loans being traded monthly, these specialists had to keep up with a frenetic pace.

“There was somebody in most of the rooms all the time,” Mr. McKay said.

Federal lawmakers have highlighted due diligence in mortgages as a potential problem. A bill by Representative Barney Frank, Democrat of Massachusetts, that the House passed last year would require federal banking regulators and the Securities and Exchange Commission to create due diligence standards. Another measure introduced by Senator Christopher J. Dodd, Democrat of Connecticut, would subject banks to class-action lawsuits unless diligence was conducted by an independent firm.

In recent months, Moody’s and Fitch have said that they would like to receive third-party due diligence reports and that the information should be provided to investors, too. Glenn T. Costello, who heads the residential mortgage group at Fitch, said his firm would not rate securities that include loans from lenders whose procedures and loan files it was not allowed to review.

[admin]

Investing: Bad paper
Al Rosen
From the November 19, 2007 issue of Canadian Business magazine
I hope you’ve been watching the fallout from the latest Canadian-made financial fiasco. Since mid-August, the market for non-bank asset-backed commercial paper(ABCP)has been frozen, meaning holders of the investments can’t get their money out. The Canadian non-bank ABCP market has been estimated at a total of $34 billion, and some major public companies are large holders of the illiquid paper. National Bank of Canada has roughly $2 billion, Nav Canada has $368 million, Transat has $155 million, and the list goes on. For the time being, enough major players have agreed to stand pat while a national restructuring effort is underway. Nevertheless, those companies now face taking some significant writedowns. A return to liquidity simply will not restore full value to the investments.

ABCP was previously thought to be a highly liquid cash investment that offered a few basis points of interest more than alternatives such as banker’s acceptances. Few holders of the paper, however, understood the significant risk that accompanied the marginally higher investment return.

ABCP is short-term paper issued to fund investments in longer-term assets such as car loans, mortgages and various types of credit receivables. As it turns out, many were also highly invested in credit default swaps providing excessive leverage and risk. For investors to be paid out on their ABCP holdings, new ABCP must be issued(called a rollover).



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Back to my point, it should be noted that the Canadian and U.S. markets have some notable differences. While apparently not much of the Canadian paper had direct exposure to sub-prime U.S. assets(which have been defaulting in record numbers), the opacity of the ABCP caused investors to balk. Basically, no new investors could be found to roll over the paper to fund the longer-term assets. At that point, the safety net should have kicked in, and Canadian and international banks should have provided the funds to keep the process rolling, as many Canadian investors assumed they had agreed to.

Instead, the banks took a page from the insurance industry, similar to when you pay premiums for years, and your insurer screws you over when disaster finally hits. The banks, despite collecting the fees when times were good for providing the liquidity backstops(necessary for good credit ratings on the ABCP), basically told investors to suck it up. But only in Canada, that is.

In Canada, the backstop agreements contained an out for the banks, unlike in the U.S. and internationally. They only had to provide the liquidity in the event of a general market disruption, which they collectively decided had not occurred. Adding insult to injury, some of the Canadian banks that refused to provide the liquidity were the same banks that had sold the ABCP to their customers.

Which brings us to today. It’s three months into the process, and many holders of the ABCP have no idea what it’s worth. Canadian Pacific Railway recently wrote down the value of its ABCP by nearly 15%, Sherritt by 10% and Cameco by 15%. Other holders, such as HSBC Bank Canada, have taken “immaterial” writedowns on their ABCP holdings. Of course, HSBC is being sued by at least one company that says the bank misled it about the nature of the investments, so you might regard the bank’s estimated impact as somewhat tainted.

I happen to think 20% is a reasonable discount to apply in valuing the ABCP today, given the dearth of transparency, the proposed restructuring makeup, and the liquidity needs of some current holders. Applying that to the $34 billion total means that someone is responsible for a $7-billion Canadian-made goof.

So far, DBRS(which provided the top-tier credit ratings on the failed paper)has escaped unscathed. And the regulator of Canadian banks, the Office of the Superintendent of Financial Institutions of Canada, has blamed foreign banks for the freeze-up. My bet is that nobody ever takes the fall for this one, and we continue to pretend nothing is wrong with investor protection in Canada. What’s another $7 billion anyhow?

[admin]

Here is one possible reason why Canada is gaining an international reputation of being the "financial tainted goods" manufacturer of the world:

The Purdy Crawford - Ernst & Young - J.P. Morgan restructuring solution for Canadian Non Bank ABCP is contrary to what is going on in the rest of the world. Everywhere else, "if you sold it and it breaks, you own it." See today's January 6, 2008 New York Times article, "Testing Investors' Faith in State Street," for more on this logical mantra. Where are the participating banks taking back their defective Non Bank ABCP or the underlying assets and liabilities within the frozen trusts? Where are the accommodations that Purdy Crawford says the banks are making in the restructuring offers?

New margin facility credit with high fees and interest costs and first priority to collateral assets appear to achieve the following objectives:
(1) ensure the risks fully remain with the current Non Bank ABCP owners, completely opposite to the mantra, " If you sold it and it breaks, you own it."
(2) have you take on new credit at high fees and interest rates, that is very profitable and low risk to the banks.
(3) have you waive your right to litigation against the vendor group, despite likely marked to market losses in the short and long term.
(4) provide you the hope for less marked to market losses in the future and certainly no assurance that your interest and principal are safe as you were told at the time you purchased the Non Bank ABCP.
(5) possibly give you the opportunity to understate the current market to market losses on your Non Bank ABCP by the collective and unverifiable delusion that the long term notes will be worth their face amount five or more years from now.

This is why it is so important for Non Bank ABCP owners to act collectively to force the underlying material contracts to be released to bona fide alternative solution providers, such as new fixed income buyers making cash or in kind bids, or offers to conduct orderly liquidations of the underlying assets and CDS liabilities within the frozen trusts. Purdy Crawford is playing a game of Russian Roulette with Canada's pension funds and governments, wherein he will delay release of the underlying material contracts until the last minute permitted before the votes, if they are released at all? It certainly appears to me that Purdy Crawford's decisions are based on protecting the bank CDS counterparties and liquidity agreement signatories and the investment bank distributors from litigation. His tactics to persuade the Non Bank ABCP owners to take the proposed restructuring settlement offer of: accepting losses, paying high interest costs and fees for new bank credit and waiving litigation rights, or be left with nothing, begs for an alternative and transparent solution.

Diane Urquhart
Independent Analyst

[admin]

Sunday, December 23, 2007

Wall Street bulls should have known better than to charge into sub prime fiasco

By ERIC MARGOLIS, TORONTO SUN

Western nations have been rightly scourging China for flooding world markets with toxic food, toys, nutritional products, clothing and other tainted goods. China's government closed its eyes to this apparent malefaction.

Meanwhile, Wall Street was exporting toxic financial instruments called sub prime mortgages around the globe. Washington's regulatory monkeys saw no more evil than those in Beijing.

Here's how the sub prime mess developed. A single mother, say in East St Louis, was peddled an initially low interest adjustable mortgage by a flim-flam broker. When rates rose sharply, she couldn't pay and was forced to abandon the home she should never have bought to begin with. Multiply this little human tragedy by hundreds of thousands, and, voila, the spreading sub prime mortgage crisis.

Meanwhile, the world's leading financial institutions built a $500 billion to $1 trillion house of cards based on these sleazy mortgages. They were bundled, chopped up like stolen cars, and peddled everywhere as secure, high-yielding American securities.

Once the sub prime crisis broke, banks holding such paper panicked. Not only couldn't they find any more stupid buyers, the wildly inflated values given to these securities turned out to be totally bogus. This, in turn, gravely undermined the asset base of lending institutions holding this worthless paper.


Britain's Northern Rock (aka "Northern Wreck") suffered a run on the bank and is now clinically dead. CIBC lost up to $2 billion. Two of the world's biggest banks, Citigroup and UBS, lost $9 billion and $10 billion respectively. They nearly capsized, and had to be rescued by Gulf Arabs and Singapore. Merrill Lynch and Morgan Stanley each face $9-10 billion of write-downs. More banks will soon reveal billions of losses, all thanks to "innovate finance."

BLEW IT

How could so many of the brightest Wall Street financiers, who claim unrivaled expertise in managing clients' assets, be so stupid and incompetent?

After the flu and bad taste, few diseases are more contagious than greed. So began the greed stampede as Wall Street bulls charged into the sub prime Valley of Death.

Blame begins with the Bush administration. Faced with hugely expensive foreign wars and the dot com bubble, the White House got the Federal Reserve to lower interest rates to nearly nothing. This produced the monster property bubble that is now bursting. Cheap credit became a dangerous drug, financial "speed" arousing false economic euphoria that helped keep Republicans in power and fueled swarms of unregulated, parasitic hedge funds.

Rock-bottom U.S. interest rates made bankers and investors search out higher paying investments. sub prime mortgages were Wall Street's answer. In a giant Ponzi scheme, new investor money was used to pay off old investors, building a giant pyramid that collapsed this past fall.

The U.S. Federal Reserve, which is supposed to regulate mortgages, failed in its duty. So did other U.S. financial regulators, such as Treasury and the SEC. They, and auditing firms, allowed banks to egregiously misvalue their mortgage holdings and create "conduits" and "off balance sheet" vehicles that were new forms of accounting fraud.

COMPLEXITY

Many bankers and managers simply failed to understand the mind-numbing complexity of financial derivatives. President George Bush lauded "the new finance" as the model of Republican economic policy. It turned out to be the financial equivalent of Iraq. Worryingly, no one knows how much the world's rickety financial structure now depends on these arcane financial alchemies. We enter 2008 threatened by the prospect of new financial earthquakes and recession.

Instead of facing fraud indictment, CEOs of the big peddlers of this worthless junk got millions worth of golden handshakes, or raises. While government was busy prosecuting Conrad Black over a few million dollars, the public was defrauded of tens of billions. No one has yet been prosecuted for these outrageous crimes.

If there was a time for government to justify its existence, it's now. Prosecute the sub prime fraudsters. Forget golden handshakes. They deserve steel handcuffs.

[admin]

--------------------------------------------------------------------------------

December 20, 2007
$9.4 Billion Write-Down at Morgan Stanley
By LANDON THOMAS Jr.
Morgan Stanley reported the first quarterly loss in its 72-year history Wednesday, heightening fears that the financial toll would keep mounting from the fast-spreading crisis in the subprime mortgage market.

The company took a $9.4 billion charge on subprime-linked investments for the fourth quarter, bringing its cumulative charges for subprime mortgages to $10.8 billion. In a stark reflection of its diminished status it also said it would sell a $5 billion stake to a Chinese investment fund to shore up its capital.

Wall Street banks so far have reported more than $40 billion of losses as a result of the crisis in the mortgage market. Worst-case estimates put the eventual bill at $200 billion or more. The tally is likely to rise again Thursday when Bear Stearns is expected to report a quarterly loss.

The developments on Wednesday were a stunning turn of events for Morgan Stanley, an offshoot of the Morgan banking dynasty that has counseled corporate America since the Depression. John J. Mack, the bank’s chief executive, said he took full responsibility and would forgo a bonus for 2007.

Like Citigroup and UBS of Switzerland, Morgan Stanley has turned to a wealthy investor from the East after losing billions of dollars on subprime-tainted investments. Morgan Stanley lost $3.59 billion for the fourth quarter. It said its remaining subprime exposure was $1.8 billion.

The drastic losses may heighten speculation about the fate of Mr. Mack, who returned to the firm in 2005 after the removal of his predecessor, Philip J. Purcell. One of Mr. Mack’s signature changes was to push the firm further into trading using its own capital, an effort to emulate its profitable archrival, Goldman Sachs. His strategy worked for a while but then backfired when trades in tricky subprime-linked securities went wrong, resulting in the biggest write-down in the firm’s history. While Mr. Mack is expected to keep his job, his compensation will plummet — one of the harshest punishments meted out on Wall Street, short of showing an executive the door. Last year, he made $40 million; this year, he will take home about $800,000. His paycheck is particularly humiliating since Lloyd C. Blankfein, the chief executive of Goldman Sachs, is likely to receive a $70 million bonus. James E. Cayne, the chief executive of Bear Stearns, is also expected to forgo a bonus.

In a conference call on Wednesday, Mr. Mack was quick to take responsibility. “The results are embarrassing for me and the firm,” he said.

But he also pointed out that the bulk of the $9.4 billion loss occurred on one trading desk and that other areas of the firm, particularly the investment banking, asset management, retail brokerage and hedge fund servicing businesses, performed well.

As for the investment from China, Mr. Mack framed the transaction not as a desperate act but as a strategic move. And he refused to concede that Morgan Stanley was a weakened firm. “We remain bullish on Morgan Stanley’s significant growth potential,” he said.

Still, the investment shows how reliant Morgan Stanley and Wall Street are on foreign funds and gives additional credence to the joke now circulating on trading floors: “Shanghai, Dubai, Mumbai or goodbye.”

The fund, the China Investment Corporation, has agreed to purchase almost 10 percent of Morgan Stanley; it will have no role in the management of the firm.

Citigroup recently sold a stake to a Middle East fund.

The deal is an abrupt shift in strategy for China’s $200 billion sovereign fund and underlines the extent to which it appears to be under the direct control of the country’s leaders.

Morgan Stanley executives first began discussing an investment with the fund this summer, but it was not until recently that the deal was struck.

For Morgan Stanley, the terms are severe. The firm will pay annual interest of 9 percent on bonds that will be convertible into Morgan Stanley stock in 2010.

The China Investment Corporation is under the control of China’s finance ministry, with some influence as well from the People’s Bank of China, the country’s central bank. There has been discussion in the Chinese government over whether even more foreign currency should be injected into the investment fund, as the People’s Bank of China continues to accumulate $1 billion a day as it buys up dollars to prevent the value of China’s currency from rising in international markets.

The loss at Morgan Stanley highlights a sense of strategic confusion within the firm. Going back to the firm’s early days when it broke off from the Morgan Bank, Morgan Stanley’s strength has been its investment banking and advisory business areas; both did well this year.

Mr. Mack, however, was eager to strike a more aggressive pose when he took over from Mr. Purcell, who had been criticized for his cautious approach. By encouraging his traders to take on more risk, Mr. Mack plunged Morgan Stanley into a complex, sophisticated and dangerous area that has never been a core area of competence for the firm.

In the conference call, Mr. Mack confronted tough questions from analysts.

“How could this happen?” asked William F. Tanona, an analyst with Goldman Sachs. “How could one desk lose $8 billion?”

Mr. Mack, generally a brash, expansive man, struck a chastened tone. He said the firm would be dialing back from making big trading bets.

“We had been sprinting,” he said. “Now we will be jogging. But we are in a risk business, and we will be in the market taking risk.”

Mr. Mack blamed the firm’s inadequate risk-monitoring procedures and said the firm’s risk managers would now report to the chief financial officer, which is the practice at Goldman Sachs. Previously the risk managers had reported to Zoe Cruz, the co-president overseeing trading, who was ousted by Mr. Mack last month, a further indication that the firm’s big bets lacked objective risk oversight.

Investors, while upset over the loss, seemed to be giving Mr. Mack the benefit of the doubt. Shares of Morgan Stanley’s rose $2.01, to $50.08.

“He can’t have another screw-up,” Brad Hintz, a securities analyst at Sanford C. Bernstein & Company, said of Mr. Mack. “But the clients I have talked to have not been calling for his scalp.”

Morgan Stanley had previously said it would take a $3.7 billion write-down from the trading. Now, the total loss from that trading is $7.8 billion. Morgan Stanley reported an additional $1.2 billion in write-offs from nonperforming loans. The total loss wiped out fourth-quarter revenue. For the year, Morgan Stanley has taken nearly $11 billion in trading and subprime-related charges.

Other Wall Street firms have ousted their chief executives after such losses. Charles O. Prince III of Citigroup and E. Stanley O’Neal of Merrill Lynch lost their jobs over escalating subprime write-downs.

By all accounts, Mr. Mack still has the support of his board, which includes four holdovers from the Purcell era. And unlike Mr. Prince and Mr. O’Neal, who were to some extent outsiders, removed from the culture of their respective firms, Mr. Mack, has ties to the firm’s glory days in the 1970s and 1980s and with his ability to charm, he is still liked within the firm.

In addition to keeping his board fully briefed, Mr. Mack has also reached out to the former executives who led the campaign to oust Mr. Purcell. On Wednesday, he called Robert Scott, a retired senior executive of Morgan Stanley, and briefed him on the results.

“We are here to help,” said Mr. Scott, according to a person who was briefed on the call.

For the moment, the board seems to be in no position to force Mr. Mack from his job. Not only is he well liked, but he also has no ready successor and as the protracted search for a Citigroup head demonstrated, there is a dearth of outside executives ready and willing to take on such a job.

Keith Bradsher contributed reporting.

[admin]

I have the following observations on the National Post article "ABCP restructuring will happen one way or another, Purdy Crawford," dated December 15, 2007 and on the White Knight Investment Trust DBRS Description, dated December 11, 2007:

(1) The Pan Canadian Committee asking the banks to take responsibility for as much as $10 billion of collateral calls, suggests to me that the damages in the $33 billion face amount of Non Bank ABCP under the Montreal Accord are about $10 billion or a loss of -30%. -30% is smack in the middle of my estimated loss range of -20% to -40% (or $7 to $13 billion) for the Non Bank ABCP trusts under the Montreal Accord. I made the -20% to -40% estimated loss range in the attached independent research report, "Another Made-in-Canada Defective Investment Product," now updated to December 17, 2007 and consolidated for all of the new developments and research done, since I first wrote this report on September 24, 2007. These loss estimates are before accommodating settlement offers from the vendor group, which I say should occur given that the vendor group had to know about the defects in the Non Bank ABCP in general and may have had specific adverse information at the time of sale that was not known to the Non Bank ABCP buyers. Just because the gatekeepers may have been trusting or asleep, does not mean the vendor group can rob Canada's pension funds, and government and corporation treasuries.

(2) Non Bank ABCP owners are unlikely to accept the restructured long term notes in exchange for their ABCP, unless the banks pay for all or a substantial portion of the credit default swap liabilities and expected U.S. subprime mortgage defaults within the 22 Non Bank ABCP trusts.
Canadian pension fund managers and government and corporation treasurers did not invest in money market instruments for high investment returns, but to achieve capital preservation while they waited for its long term deployment in corporate projects, public infrastructure and services and the purchase of long term investments such as stocks, bonds and real estate. The buyers were told the Non Bank ABCP was safe and had top credit ratings.



(3) The breakdown in negotiations is occurring as the domestic investment bank distributors and the international and domestic banks involved in the manufacturing of the Non Bank ABCP funded trusts duke it out on who is the cause of the crisis and who is responsible for paying the damages to the Non Bank ABCP investors. The international and domestic banks became involved in the manufacturing of the Non Bank ABCP funded trusts by being counterparties to leveraged credit default swaps and signatories to the "no use" liquidity agreements. Top quality assets, bank liquidity agreements and top credit ratings are essential ingredients to make the Non Bank ABCP saleable to Canada's pension funds, government and corporations.

(4) The White Knight Investment Trust DBRS Description dated December 11, 2007 provides some precedent for the accommodations made by bank signatories of liquidity agreements in the Skeena Trust: Royal Bank, Scotiabank, HSBC Bank and ABN Ambro. It says: "Even though all of the Trusts Asset Interests will consist of highly leveraged structured synthetic investments (such as collateralized debt obligations (CDOs)), the Trust is not subject to any collateral calls from the buyers of protection that are swap counterparties to the Trust.

It is somewhat confusing what the exact accommodation from the banks is "Since the Trusts Asset Interests will consist of highly leveraged structured synthetic investments (leveraged super-senior CDO tranches), the Trust could be exposed to a higher severity of loss should losses rise substantially in excess of AAA stress-case scenarios. Losses incurred on the Asset Interests will reduce the principal amount on the Floating Rate Notes" Does this mean there are no collateral calls during the interim of the notes term, but such collateral calls will occur on the maturity date? Who would want to own a note with such high end of period principal risk, when the cash offer in the Skeena Trust is reported to be 98 cents on the dollar?

National Post - "ABCP Restructuring will happen one way or another, Purdy Crawford," dated December 15, 2007, says:
Sources say Mr. Crawford tried to persuade the institutions that sold the CDOs to eliminate the triggers for margin calls but he was unsuccessful.

Under a new strategy, he has asked the big five banks to assume responsibility for the margin calls. That would take of the risk off investors and increase the value of the notes.

Sources said the Bank of Canada has thrown its weight behind the idea and has been "twisting the arms" of the banks to get them to sign on. However the banks are said to be reluctant.

Talks reached an impasse late last week when the banks dug in their heels. They say they shouldn't have to shoulder that responsibility for margin calls because they did not create the problem.

"Various banks have different motives for participating," he said. "All I can tell you is that they are now fully engaged at a senior level."

A source close to the negotiations said the Crawford committee wants the banks to take responsibility for as much as $10-billion of collateral calls.

White Knight Investment Trust - DBRS, dated December 11, 2007 says:

 The Asset Interests of White Knight Investment Trust (the Trust) are term-matched to the notes issued by the Trust.
 Even though all of the Trusts Asset Interests will consist of highly leveraged structured synthetic investments (such as collateralized debt obligations (CDOs)), the Trust is not subject to any collateral calls from the buyers of protection that are swap counterparties (the Swap Counterparties) to the Trust.

 Since the Trusts Asset Interests will consist of highly leveraged structured synthetic investments (leveraged super-senior CDO tranches), the Trust could be exposed to a higher severity of loss should losses rise substantially in excess of AAA stress-case scenarios.

 Losses incurred on the Asset Interests will reduce the principal amount on the Floating Rate Notes (the Notes).

 The Trust is subject to ratings volatility due to its exposure to numerous non-investment-grade credits in the underlying CDS portfolios.

 Enforcement of Events of Default is subject to a number of non-market-standard provisions due to the unique structure of this transaction.


Diane Urquhart
Independent Analyst