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

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Postby admin » Sat Aug 02, 2008 5:19 pm

Subject: Ironstone Trust - Barrick Gold Globe and Mail Article

7/2/2008
Flaherty wades into Barrick's CIBC feud
Dustup threatens to delay ABCP restructuring
JACQUIE MCNISH
May 6, 2008 at 7:30 PM EDT
Finance Minister Jim Flaherty has taken the unusual step of intervening in a sideshow spat
in the ABCP drama, applying direct pressure on Canadian Imperial Bank of Commerce
to settle up with Barrick Gold Corp.
Sources say Mr. Flaherty's phone call to senior CIBC executives last week succeeded in
bringing the bank to the table in a festering dispute with its gold miner client.
After eight months of intense negotiations, the success of the asset-backed commercial
paper rescue now hinges on a legal spat between the two parties that involves less than 1
per cent of the total troubled notes at stake. The dispute centres on $65.8-million of ABCP
notes, which is minor compared with the total $32-billion currently frozen, but the standoff
threatens to hold back the settlement process.
Regardless of the merits of Barrick's case, this much is certain: CIBC's foot dragging has
brought the ABCP restructuring to the brink. If talks fail, Barrick could be in a unique
position to derail the restructuring because its case is widely seen as being strong enough
to potentially block court approval of the rescue proposal at a sanction hearing set for next
week.
As the dispute plays out, it is attracting attention not just because the two parties appear
willing to bring the ABCP bailout to the edge, but also because CIBC has exposed itself to
the very public and angry wrath of a major and long-term corporate client and its globetrotting
chairman Peter Munk.
It's not so rare for companies to get in fights with their banks, but it is almost unheard of
Lawyer Terry O'Sullivan of Lax
O'Sullivan Scott LLP in Toronto
According to people familiar with the discussions, Barrick's
team, led by Lax O'Sullivan Scott LLP partner Terry
O'Sullivan, has demanded full repayment for Barrick, but the
bank has so far refused to yield.
We have been co-operative for months on end, Vince
Borg, a spokesman for Barrick, said yesterday.
It's fair to say, at this stage, that our patience is being
tested, Mr. Borg said. We have been willing to engage in
discussions but any discussions must clearly lead toward a
satisfactory resolution.
Mr. O'Sullivan and CIBC declined to comment.
for a Canadian bank to allow a dustup with such a prominent company to escalate into a
public feud. After telling Barrick to effectively take a hike, CIBC found itself on the wrong
end of a court motion last month.
An affidavit from Barrick treasurer James Mavor alleges that weeks before the market
collapse last August, an executive director of the bank expressly confirmed to Barrick that
its [ABCP] investments did not have exposure to subprime assets. In fact, ABCP issued by
Ironstone Trust is so loaded with the toxic mortgages that the notes are now estimated to
be worth between 5 and 12 cents on the dollar.
Although no one will publicly admit it, sources say a number of CIBC's competitors quietly
bought peace with some of its most prized corporate clients by buying back stranded ABCP
after last August's meltdown.
More than a dozen companies including Barrick, Transat A.T. Inc., Jean Coutu Group (PJC)
Inc. and Redcorp Ventures Ltd., were not so lucky. Bankers to these corporate investors
apparently made a calculated bet that either these clients weren't important enough, or
they lacked the firepower to derail the restructuring plan.
So far it looks like everyone except CIBC made a good bet. When investors were asked to
vote on the restructuring proposal two weeks ago, all but one of the 20 trusts won the
majority support needed to win court approval. The one trust that failed to win sufficient
support was Ironstone.
The combination of the failed Ironstone vote and some of the unique facts of Barrick's case
has put the Superior Court of Ontario's Mr. Justice Colin Campbell, who is overseeing the
court restructuring plan, in a tight legal corner. The centrepiece of the ABCP proposal is a
sweeping legal release that will shield all banks and parties linked to the troubled notes
from any lawsuits. Under the Companies' Creditors Arrangement Act, judges have been
able in previous cases to force legal releases on opposing investors and debtors when it
could be shown that a restructuring plan provided at least some benefit to all parties.
There are other companies, such as Chicago-based Sun-Times Media Group Inc., that own
Ironstone, but these investors don't have much legal ammunition to fight the restructuring
proposal because they own other, healthier ABCP notes that stand to be repaid under the
plan.
Barrick, however, is the one holder that was misfortunate enough to only own Ironstone
notes. That means the mining company stands to get little more than fool's gold under the
proposed restructuring. And that means Judge Campbell is going to be on thin legal ice if
he forces Barrick to give up its legal rights to sue CIBC.
Faced with this legal paradox, Judge Campbell dropped some very strong hints last week
that he wants CIBC and Barrick to settle their differences before he convenes a so-called
sanction hearing May 12.
Other challenges stand in the way of a resolution. The biggest danger CIBC faces is that if it
buys out Barrick, it could face a chorus of objections from other corporate clients holding
Ironstone notes. These investors may not have much of a legal leg to stand on, but any
objections could potentially further slow the restructuring plan.
The other challenge is CIBC's bank partner on Ironstone Trust. Although CIBC structured
and sold much of the Ironstone notes, it was National Bank of Canada that sponsored
the trust when it was launched in 2005. If CIBC is called upon to make Barrick whole on its
soured ABCP investment, it's a pretty good bet that the bank will be asking National to
share the pain.
If that happens, look for the restructuring to drag on beyond the sanction hearing Judge
Campbell has set for next week. CIBC and National have both already written off billions of
dollars of troubled ABCP and other structured financial instruments. Spending more bank
capital on another soured play is not something that either bank will be eager do without a fight.
Which is why Mr. Flaherty might want to put CIBC on speed dial.
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Postby admin » Sat Aug 02, 2008 8:20 am

B.C. Miner sues over ABCP
Silver Standard; HSBC Bank, DBRS named as defendants

John Greenwood, Financial Post

Saturday, August 02, 2008

A small British Columbia mining company has filed a lawsuit against HSBC Bank Canada alleging the investment dealer failed to reveal problems with the market for asset-backed commercial paper that it learned about a month before the $35-billion sector seized up, leaving investors on the hook.

The suit, launched by Silver Standard Resources Inc. of Vancouver, also names the rating agency DBRS Ltd. as a defendant. Silver Standard is one of more than 100 companies caught out when the ABCP market collapsed 12 months ago.

This marks the first time that DBRS, the only agency to rate non-bank sponsored ABCP in Canada, has been targeted in connection with the meltdown.

The documents allege that DBRS was negligent in failing to spot the risks in the paper, much of which garnered its highest score.

DBRS spokeswoman Caroline Creighton said the firm believes the case is without merit.

Ernest Yee, a spokesman for HSBC, denied the allegations. "HSBC will vigorously defend itself against any lawsuit," he said in an e-mail.

The case is garnering attention on Bay Street because of parallels with a high-profile legal battle in the United States between investment firms there and holders of frozen auction rate securities, which have a lot of similarities with ABCP.

Yesterday New York Attorney General Andrew Cuomo said he plans to sue the Wall Street firm Citigroup Inc. for alleged misrepresentation it made to buyers regarding auction-rate securities.

The case comes after a five-month investigation by the New York Attorney General's office. In a letter to Citigroup, Mr. Cuomo claimed the bank "repeatedly and persistently committed fraud by making material misrepresentations" regarding its underwriting and sale of auction rate securities.

Citigroup, the largest U. S. bank, is only the latest financial institution to become entangled in legal wrangling over the collapse of the US$330-billion auction-rate security market.

Auction-rate securities are bonds whose interest rates are set at regular auctions. But as the credit crunch deepened back in February, many of the firms that regularly bid on the bonds suddenly abandoned the market, leaving investors unable to trade their notes.

The New York attorney General and other regulators allege that many investment dealers aggressively marketed auction-rate securities even after they realized the market was in trouble.

Canada's ABCP market fell apart last August after demand for the notes evaporated and the banks that had agreed to provide emergency liquidity declined to step up.

Under a restructuring plan still tied up in court, the frozen ABCP would be converted to long-term notes. Investors will likely end up shouldering significant losses.

What has many holders up in arms is a clause in the restructuring that would shield the firms that created and sold the investments from any legal action.

Despite objections from corporate investors who claim the so-called legal releases are unfair, an Ontario Superior Court judge approved the restructuring earlier this year. That decision is being reconsidered by the Ontario Court of Appeal, which has yet to make a ruling.

jgreenwood@nationalpost.com
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Postby admin » Thu Jul 31, 2008 9:57 pm

Subject: Purdy Crawford was CEO of Imasco, when Imperial Tobacco Conducted
the Illegal Tobacco Smuggling that it Admitted Today
The RCMP made the following announcement today, July 31, 2008, concerning admission of guilt by Imperial Tobacco on illegal tobacco smuggling during 1989-1994. Purdy Crawford was the CEO of Imasco during 1985-1995, which covers the 1989-1994 time period when Imperial Tobacco, a wholly owned subsidiary of Imasco, conducted the illegal activity of tobacco smuggling for the purpose of avoiding the payment of Canadian tobacco taxes. Purdy Crawford is now employed at Oslers LLP and he is the Chairperson of the Pan Canadian Committee, who are the applicants for the ABCP CCAA Restructuring Plan, being administered at the Ontario Superior Court of Justice.
From attached RCMP Media Release dated July 31, 2008:

""The guilty pleas, from Imperial Tobacco Canada Limited (ITCL) and Rothmans Benson & Hedges (RBH), are the culmination of more than eight years of investigative work by RCMP Customs and Excise sections in Ontario and Québec. As part of agreed statements of fact, the two companies admitted to “aiding persons to sell and be in possession of tobacco manufactured in Canada that was not packed and was not stamped in conformity with the Excise Act and its amendments and Ministerial regulations.”

As a result, the two companies have paid the largest fines ever levied in Canada; ITCL has paid a $200-million fine and RBH $100-million.""

"The material time of the charges involved illegal activity between the years of 1989-1994. Then, the contraband tobacco market in Canada involved product being produced in Canada, and shipped to locations in the US near the Canada/US border. From there, it was distributed to smugglers or black market distributors who brought it back into Canada for further illegal distribution."

From attached Reuters, "Federal and Provincial Governments Reach Landmark Settlement with Tobacco Companies, July 31, 2008:

"The Honourable Gordon O'Connor, Minister of National Revenue today announced that the federal and all provincial governments have enter into civil settlement agreements with Imperial Tobacco Canada Ltd. a Rothmans, Benson & Hedges to resolve all potential civil claims they have in relation to the two companies' role in the movement of contraband tobacco in the early 1990s.

The fines in these prosecutions, combined with the civil settlements, will result in the companies paying $1.15 billion to governments."
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Postby admin » Sun Jul 06, 2008 11:39 am

Mr Prime Minister:

I could not agree more with the email sent to you below.

I have worked in the financial industry after leaving the federal public service and over and over I am shocked and dismayed by the abusive practices exercised in the industry which harm the interests and retirement plans of hardworking Canadians.

And with the ABCP debacle, the industry is officially being placed above the law, untouchable and a key formal bellweather signal to continue to perpetrate future abuses on Canadians.

I thought your roots and values were with ordinary hardworking Canadians.

Your actions and that of your Minister of Finance demonstrate that you have been captured by Bay Street and you now remain silent with this and other financial rapes of Canadians.

I thought you were a leader with clear core values. You have been compromised or you have chosen the compromised life.

Please reflect on these concerns. Strong decisive leadership and positive action is urgently required.

Jim.

Best wishes.
Jim MacDonald MBA
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Postby admin » Sun Jul 06, 2008 11:38 am

our government is cracking down on grow-ops and tax-free cigarettes (in the extreme), and this is yet another example of white collar crime going unpunished.

That the alleged perpetrators - banks and financial houses (possibly DBRS - I'm not sure) - are demanding immunity from fraud charges and civil suits speaks for itself. They will refuse to follow through with the deal if they don't get immunity. Logically then if they don't go through with it, they no longer enjoy immunity --- which arguable should never have been offered in the first place.

Yet your government sits there and watches people contract to allow themselves and/or others to commit an alleged fraud involving $32 Billion dollars - standing the law on its head in the process - while you and your Attorney General and the RCMP remain silent - as the world watches - shocked...and you expect my vote in an election.


This is the most appalling, egregious miscarriage of justice that I am aware of in the First World in modern times. And it is on your watch Mr. Harper. I'm betting you will be a pariah at the next G-7(8) - it's just not worth it!
ABCP group expected to move quickly

BOYD ERMAN

Friday's Globe and Mail

July 3, 2008

Investors stuck with frozen asset-backed commercial paper could begin to see their holdings thawed not long after an appeal court ruling that's expected in a matter of days.

The committee overseeing the $32-billion restructuring of the frozen paper is planning to move quickly to close the deal should the Ontario Court of Appeal dismiss a challenge to the fairness of the proposal, rather than wait for any further appeals to run their course, said two people familiar with the strategy.

Lawyers expect the appeal court will decide on the challenge by a group of corporations by the middle of next week.

The committee doesn't want to wait on a possible appeal to the Supreme Court of Canada by the challengers, the people said. That would force the challengers, who include companies ranging from small miner Redcorp Ventures Ltd. to airport manager Aéroports de Montreal Inc., to try to stop the closing of the deal with an injunction.

The plan as it stands calls for swapping the seized-up paper, which investors have been saddled with since last August, for new notes that should trade freely, albeit at a discount [of up to 100% - unless the B o C is the buyer] to their face value. However, the challengers are upset because the plan grants a measure of legal immunity to players in the ABCP business, which the appellants say is unfair and unlawful. (Since fraud can't be proven in Canada at the best of time in Criminal Court because we, unlike the U.S., have to prove "intent" -- because our law and order government won't amend the criminal code to catch the big fish -- you should thank your God that Canadians are so dumb now that they don't understand your strategy -- pray for them because they know not what they do.)

After a lower court approved the plan in early June, the committee held off on closing the transaction because of the pending appeal. However, with the courtroom drama dragging on, the strategy now is to try to get the swap done without further delay. That would be a relief for investors who bought the paper last year, thinking it was a short-term place to park cash, only to find themselves mired in a restructuring that has locked up their money for 11 months....[what this reporter either doesn't know or is afraid to report is that small investors will get $1.5 billion - and the rest is institutional and locked in - he seems to think that doesn't involve employees, pensioners, taxpayers, jobs, business development, suppliers, governments and the list goes on - even reporters are ignorant or corrupt to the point at which I could cry - but not if I were in your shoes of course!]

“The idea is to move to hit the switch and start paying,” [$1.5 billion out of $32 billion - and this so-called reporter missed that???] said one person familiar with the situation.

The legal strategy is based on the view that an appeal by the corporate challengers to the Supreme Court would be a long shot if the plan is upheld at both the lower and appeals court levels. [He doesn't even know that Corporations are "legal people" and that they employ people, have shareholders who are people, pensioners who are people, taxpayers who are people, customers who are people, suppliers who are people who pay taxes - he thinks its OK to shaft "corporations" at the expense of the rule of law or doesn't know any better.

Sadly, neither do most of his readers - and, I suppose, that is your trump card. The rule of law is more than a convenience - this is not France where the people can vote and over-throw its application - or so I thought. But watching you Finance Minister play his little games has been and education - we are now francite in Canada].

Much will depend on the wording of the appeal court's ruling, no matter which way it goes. If it's a split decision by the three-judge panel, that would likely open the door to a Supreme Court bid.

“There are still enough challengers that I think if their appeal is thrown out by the Court of Appeal, I think some of them will still try to get leave to appeal to go to the Supreme Court,” said Colin Kilgour, a consultant who has advised many corporations on their ABCP holdings.

The corporate challengers have yet to decide whether they will push their case to the Supreme Court if need be, said one lawyer working on their behalf who asked not to be identified given that the appeals court has yet to make a decision.

The Court of Appeal hasn't given a timeline for its ruling, but may want to hand down a judgment before the middle of next week, when a standstill agreement that has kept the ABCP restructuring from imploding expires. [Heavens yes, the Courts can't keep the banks and financial companies waiting - never in my life.....did I ever think I would read something like that in this country]. The judges asked about the standstill during hearings on the matter, which some in the room took as a signal that the justices are cognizant of the time constraints.

The banks that are backing the restructuring in return for legal immunity have been voluntarily extending the standstill, under which they have agreed not to halt the restructuring and force a liquidation of the assets backing the paper. But there is no guarantee they will continue to do so indefinitely.

{If they don't hang in, they are nuts, because somebody better head for Bay Street with handcuffs for many of them if they are no longer "immune by agreement" - the day they walk is the day charges had damn well better be laid - or this country is done. And this is your watch, Mr. Harper!}.



Jim Roache
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Postby admin » Tue Jul 01, 2008 7:48 am

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

June 29, 2008
Fair Game
E-Mail That Investors Might Like to Read
By GRETCHEN MORGENSON
EVERY few years, the conflicts of interest so deeply embedded in the Wall Street business model emerge from the shadows for all to see. Coming to light last week, courtesy of Massachusetts regulators, was UBS’s dual roles in the auction-rate securities market, which have had devastating effects on the people and institutions that invested in them.

Because every big brokerage firm that participated in this market faced the same conflicts as both underwriters of the securities and managers of the auctions that set their prices, similar ugliness will likely turn up elsewhere as regulators continue their digging.

Auction-rate securities are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them. They have long-term maturities or, in the case of the preferred shares, no maturity dates whatsoever. The securities are issued by municipalities, student-loan companies, closed-end funds and tax-exempt institutions like hospitals and museums.

In mid-February, the $300 billion market for these instruments collapsed, trapping investors who had been told that they were safe and easy to cash in — leaving both wealthy investors and those of modest means unable to finance their small businesses, buy homes, pay college tuition and otherwise use their money as they had planned.

After receiving a flood of complaints from investors in his state, William F. Galvin, secretary of the Commonwealth of Massachusetts, subpoenaed documents from some major market participants. Thursday, he released materials produced by UBS and filed a civil suit against the firm, accusing it of defrauding investors.



Stephan Savoia/Associated press
William F. Galvin

MR. GALVIN’S complaint says UBS misled investors by peddling auction-rate securities as cash equivalents and ultrasafe. But the suit also asserts that UBS dumped these securities on individual investors to minimize its own exposure to the risks inherent in keeping them on its own books.

Karina Byrne, a spokeswoman for UBS, said the firm would defend itself. “Contrary to the allegations, UBS is committed to serving the best interests of our clients. We continued to support the auction rate securities market longer than any other firm,” she said in a statement. “We have offered our clients loans of up to 100 percent of the par value of their A.R.S. holdings at preferred lending rates. UBS, our clients and clients of other industry participants all share the impact of this unprecedented loss of liquidity in the A.R.S. market.”

Nevertheless, the e-mail messages attached to the Massachusetts complaint support Mr. Galvin’s accusations in stunning black and white.

The problem UBS faces began in August, when the credit markets seized. Corporations — which are big buyers of auction-rate securities because of their slightly-higher-than-money-market yields — were beginning to sell. New buyers had to be found or UBS, as underwriter and auction manager, would be stuck with the securities. The firm was going into shell shock because of losses from subprime mortgages on its books, so it needed to find a way out of the auction-rate mess.

Throughout the autumn, increasingly frantic e-mail messages flew among UBS executives. “As you can imagine during these stressful times, the pressure is on to move our inventory,” wrote David Shulman, global head of fixed income distribution at UBS, on Aug. 30. “I am aware that JPM and Citi are on all ‘alert’ in the same fashion with their retail groups.”

Joel P. Aresco, chief risk officer for the Americas, sent this message on Nov. 15: “Why the continual increase” in the inventory of auction-rate securities? “What measures are being taken to reduce this exposure?”

On Dec. 11, Mr. Shulman wrote: “I am pushing every angle here to move product.”

As it turned out, some of that product being moved was Mr. Shulman’s own stake in auction-rate securities, the complaint said. He testified that he began selling in September, because of his “risk tolerance.” By Dec. 12, he had dumped all his holdings.

UBS declined to make any of these executives available.

On Feb. 12, just days before the auctions ground to a halt, another UBS executive wrote: “We need to beat the bushes harder than ever to unload this paper.”

UBS’s Web site, meanwhile, continued to identify auction-rate preferred stock as a highly liquid cash alternative, the lawsuit said.

“The Massachusetts complaint alleges that sophisticated Wall Street insiders, knowing that the market for auction-rate securities was failing, foisted these same securities off on innocent public investors through profoundly deceptive sales practices,” said Lewis D. Lowenfels, a securities law expert at Tolins & Lowenfels who represents a handful of auction-rate securities investors. “If these allegations prove to be true and prevalent throughout the Wall Street community, then civil actions awarding punitive damages and possibly even criminal actions may well become widespread.”

UBS’s clients were not the only ones that the firm’s executives appear to have misled. Its brokers, too, seem not to have been told about the risks that auctions could fail and their clients could be locked into their holdings.

“We continue to be frustrated by the lack of information that they are providing to us,” one broker wrote about the firm’s auction-rate unit in a Jan. 10 message. “Given the strange and difficult environment, it is imperative that we are fully aware of the risk we are taking. We do not want to imperil any relationships over something as ‘simple’ as their cash investments. The lack of clarity regarding ARPS is contrary to our focus on ‘improving the client experience.’ ” (ARPS refers to auction-rate preferred shares.)

NO Wall Street firm likes to acknowledge that conflicts of interest bedevil its business. And UBS says its clients come first.

But one of the e-mail messages amassed by Mr. Galvin stands out for its cogent discussion of these troubling biases. It was written by Joe Gallichio, a managing director in the municipal finance department at UBS, on Feb. 21, after the market for auction-rate securities had frozen.

“As things change they also remain the same,” Mr. Gallichio begins. “What we face now in the firm as related to muni short term is classic Wall Street. In its core, it is trading versus sales, risk management versus client franchise.”

“As a firm we tell people we are client focused,” he went on. “So if the client is always right, then we should fix the problem this product has created in WM,” the firm’s wealth management unit, which includes retail investors. “To let WM and the firm as a whole go through costly litigation, the loss of investor confidence and significant assets, the cost in management time, legal and compliance, IT spend, the total distraction from our core growth strategy and overall employee morale — will certainly be in excess of the multibillion-dollar hit to balance sheet we would take by just buying the rest of the assets from WM. I just don’t get it.”

Reached Friday, Mr. Gallichio declined to comment. He didn’t have to. His e-mail said it all.
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Postby admin » Mon Jun 23, 2008 6:14 pm

06-20-08 FP: Top Financial Regulator Moves To Close Loopholes In Securities Rules

On June 19, 2008, the Office of the Superintendent of Financial Institutions rescinded the Canadian banks right to assign zero capital in their Basel II capital requirements for liquidity agreements that use the General Market Disruption Clause. The change is effective immediately.

This is an amendment of Guideline B-5, which is widely acknowledged to have been a contributing factor that enabled the international and Canadian banks to walk away from their calls to purchase the Non-Bank ABCP owned by Canadians when no other buyers would buy the paper.
OSFI says it is not to blame for the ABCP debacle because Canada's zero capital assignment for Canadian banks using General Market Disruption Liquidity Agreements was a standard available under the Basel Committee Capital Requirements adopted throughout the world.

OSFI says the blame lies with DBRS for giving top credit ratings to the the Non-Bank ABCP trusts using the General Market Disruption Liquidity Agreements, whereas the international credit rating agencies did not do so in any other country.

Also, OSFI blames the provincial securities commissions for not adequately supervising DBRS and not ensuring the necessary transparency in Non-Bank ABCP sold to Canadians.
I have concluded that OSFI needs to share the blame for the Non-Bank ABCP fiasco,
since the assignment of zero capital for General Market Disruption Liquidity Agreements enabled DBRS, the banks and securities dealers to sell Non-Bank ABCP on the basis of "bank guarantees" that effectively did not exist.
OSFI should not have and cannot now rely on the provincial securities commissions to stop the market players from using OSFI Guidelines that protected the banks, but were detrimental to Canadian savers who bought the ABCP.

Guideline B-5 was an unacceptable bank regulation in Canada and throughout the world.
Canadians are invited to make comments to OSFI on the new requirements applicable to General Market Disruption Liquidity Agreements before July 31, 2008.

I intend to make written comments and if any of the ABCP owners wish to do so, the OSFI contact information is below.




Top Financial Regulator Moves To Close Loopholes In Securities Rules
Duncan Mavin, Financial Post

Friday, June 20, 2008

Canada's top financial regulator yesterday moved to close loopholes in securities rules that led in part to the asset-backed commercial-paper crisis. The draft rules will tighten up capital requirements for liquidity lines supporting ABCP conduits, clarify the roles of banks and others that sponsor the investments, and press for more thorough credit ratings tied to the securities. The suggested changes have been released for comment from the industry and "take into account some observations made during the recent turmoil in Canadian and international securitization markets," said Julie Dickson, head of the Office of the Superintendent of Financial Institutions (OSFI). Earlier this week, Ms. Dickson told a parliamentary hearing into the crisis that OSFI was not to blame for the ABCP debacle.



From attached OSFI Draft Advisory - Securitization Expected Practices 06192008:

2. End of Zero Capital for General Market Disruption Liquidity Facilities

The CAR guidelines and Guideline B-5 provide guidance as to the risk weights to be ascribed to exposures arising from the provision of liquidity lines and define an eligible liquidity facility6.

Eligible liquidity facilities for securitizations in Canada have, historically, taken two different forms: (1) generally available eligible liquidity lines (so-called global style liquidity facilities); and (2) liquidity lines only available during a general market disruption (GMD liquidity facilities). Eligible global style liquidity facilities attract higher capital usage (e.g. 20% or 50% credit conversion factors, for under 1 year and greater than 1 year exposures respectively, under the CAR standardized approach to securitization) because they represent higher risk of loss to the institution that provides them. Eligible GMD liquidity facilities (which attract a 0% credit conversion factor under the Basel II standardized approach to securitization) have not attracted capital because the legal availment rights were very restrictive, thus limiting the potential that the provider would experience credit losses.

Effective immediately,

GMD liquidity facilities provided by Canadian FREs will no longer result in zero capital usage (e.g. a 0% credit conversion factor will cease to apply under the standardized approach) and will, regardless of the approach (e.g. standardized approach;

internal ratings based approach) used to measure risk arising from securitization exposures, receive the same credit conversion factors and capital treatment as global style liquidity facilities. In particular, when using an internal ratings-based approach, no reduction in risk exposure for a liquidity facility will apply if it is structured as a GMD liquidity facility and such facility shall be treated in a manner consistent with global style liquidity facilities.

This guidance reflects that, while GMD liquidity facilities may not exhibit material credit risk, recent events have shown that other risks do exist (such as reputational risk)7 and that, consequently, a capital charge is appropriate.

To implement this change, CAR A and A-1 and Guideline B-5 are amended as set forth in, respectively, Appendices A and B hereto.

From OSFI Letter to Bank - Securitization Expected Practices 06192008:



Diane Urquhart, B.A. & M.A. Economics, CFA
Independent Analyst
Mississauga, Ontario
Telephone: (905) 822-7618
Cell: (416) 505-4832
E-mail: urquhart@rogers.com
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Postby admin » Tue May 20, 2008 7:33 pm

Don raises some great questions.

Can a bankruptcy proceeding have a higher precedence than securities,civil or criminal law?

“… it is not merely of some importance but is of fundamental importance, that justice should not only be done, but should manifestly and undoubtedly be seen to be done.” ( R v Sussex Justices; Ex parte McCarthy [1924] 1 KB 256 at 259.)

Justice Colin Campbell is wrestling with the general legal release that the perpetrators of the ABCP crisis insist upon. A problem arises if the release is limited to fraud- what is fraud? Does it include a breach of fiduciary duty, gross negligence amounting to fraud, breaches of the advertising provisions of the Canada Competition Act, breach of contract or abusive , knowingly misleading disclosure , lying for financial gain? When is a crime not a crime? What message does this send to Board Directors of the institutions involved and what will be the impact on corporate governance? At least we are told the IDA is albeit belatedly , investigating but will they be able to impose fines and sanctions and will they publicly disclose their findings?

And why is the CSA/OSC not investigating how ABCP ended up in retail mutual funds, why no prospectus was required ,why the IDA didn't disclose the issue as soon as investor complaints came poring in last fall and taking a public position on its right to regulate in Canada's biggest financial debacle.They should also be investigating regulatory changes to clarify their role in cases like this.


Retail victim complaints include but are not limited to unauthorized trading, product misrepresentation , misleading /inaccurate client statements, false claims intended to induce sale, unsuitable investments , multiple breaches of IDA rules such as fair dealing with clients and deficient complaint handling procedures including not advising clients that complaints can be taken to OBSI. Are these separately or cumulatively evidence of fraud? And what about internal compliance oversight, internal controls, KYC compatibility, risk disclosure etc.? If all these issues are not worthy of transparent resolution, then Canada is in real trouble. $32 billion will seem like chump change when the long term impact is finally computed.

Depending on the final wording , if these complaints are unresolved/swept under the carpet and this horrific wrongdoing holds no one accountable , why did our parents and grandparents fight wars for a free and just society? Why are we in Afghanistan? Simply agreeing to give the retail investors their own money back after an emotional roller coaster ride is not justice .This would be a terrible precedent we will all live to regret and makes a mockery of investor protection in Canada. Maybe Regulators should close up shop .The silence , detachment and inaction of the CSA is astonishing given that this is Canada's biggest financial debacle and the horrific pain and suffering of 1800 retail investors is fully documented. White collar crime is just as devastating as street crime as is well known from an analysis of victim impact statements. It can lead to emotional distress , deterioration of physical health and even death. In the case of seniors, financial ruin and a nervous breakdown. This has been a truly life altering event for Canadian citizens and their families .

Justice is the basic requirement for any human being and his/her society. It provides the required motivation to work, to succeed, to prosper, to develop, and to excel. Whenever the right and honor of man is encroached upon, there exists some unrest in the society. No matter how small the affected segment is, the consequences can have a major impact on the entire society. If unheeded, it may lead to a rebellion; and should rightly do so. A society that becomes prone to injustice and corruption simply cannot advance or excel, as backwardness and failure becomes its fate. To quote Benjamin Franklin:
“In some countries, the course of the courts is so tedious, and the expenses so high, that the remedy, justice, is worse than the disease, injustice.”

If the judges' suggested compromise is accepted we could see the CSA and IDA neutered even if there was misrepresentation, defective client statements, unsuitable investments and abusive complaint procedures. If so, Main Street is not protected at all. A very dangerous precedent for the short and long-term.

Ken Kivenko
Kenmar Associates
416 244 5803

The OSC in inaction –investor protection in the real world
"From our point of view, we are going to wait and see how it [ the ABCP crisis] unfolds. The OSC is also wary of disrupting the much larger commercial-paper market by any hasty moves. We have to be very careful as regulators." - Jim Turner, vice-chairman of the OSC . Source: John Greenwood, OSC takes tentative steps into probe of frozen investments ,Canwest News Service , Friday, May 16, 2008 http://www.canada.com/vancouversun/news ... 23&k=48928 [ reminds one of how FEMA handled the Katrina crisis, no?]

http://www.canada.com/montrealgazette/n ... 31ecdf25a9



Why were investors left holding bag?

DON MACDONALD, The Gazette

Published: Monday, May 19
In the first confusing days after the asset-back commercial paper market seized up last summer, the easy explanation was that the worldwide credit crisis had suddenly come to Canada.

The statement was true as far as it went. But as the months passed, questions began to surface about how the non-bank ABCP market had failed so spectacularly. Why had the crisis unfolded in the way it did, leaving investors holding $32 billion in illiquid securities?

Were investors properly informed about the risks of these short-term investments and were they warned about storm clouds gathering over the market? Did banks and investment dealers save their own skins by selling paper to clients when it was clear the market was melting down?

The ABCP debacle is the worst market failure in Canadian history and there is a vital public interest in finding out all that went on leading up to it.

An Ontario judge has been considering a plan to restructure the market. He has had to referee a debate over whether market participants, including banks, brokerage firms and the rating agency DBRS Inc., should receive sweeping immunity from lawsuits as part of the plan.

On one side of the debate is the committee of investors that negotiated the restructuring plan. It insists the deal will fall apart if immunity is stripped out, exposing investors to massive losses. On the other side is a group of companies that wants to preserve their right to sue the financial institutions that sold them ABCP.

On Friday, the judge said he's not yet ready to rule on the issue. He did indicate he was willing to allow immunity to claims of negligence, but is looking for a negotiated deal that will allow investors to make claims for serious fraud.

For the public, there is a more important issue before the judge. That's the right of the country's financial regulators to investigate the ABCP crisis and penalize firms and individuals for misconduct.

Incredibly, it appears participants in the restructuring committee, including large ABCP vendors such as the National Bank of Canada and Canaccord Capital, had wanted to grant themselves immunity from regulatory investigation in the restructuring plan. Whether or not that is even possible is a complex legal question, according to lawyers I spoke to on Friday.

It's an issue that hopefully won't have to be tested in court.

Last week, the parties to the restructuring plan agreed to an amendment that would allow for regulatory investigation and sanctions, although regulators would not be allowed to order the payment of compensation or damages to aggrieved parties. In his statement on Friday, the judge made no mention of that proposed amendment, but presumably he will accept it.

The Financial Post reported last week the Investment Dealers Association has opened an investigation into the ABCP crisis in response to complaints from retail investors. The Ontario Securities Commission also is "focused" on ABCP, but is allowing the IDA to do the investigative work.

A spokesperson for the Autorité des marchés financiers declined to comment on whether the AMF is investigating the market failure.

I've argued companies should be allowed to sue vendors of ABCP for its losses; let the courts decide if their claims have merit.

But it doesn't seem like that's going to happen.

And that makes it even more important that regulators conduct a thorough investigation into what happened in this fiasco and impose penalties if wrongdoing is uncovered.

dmacdonald@thegazette.canwest.com



© The Gazette (Montreal) 2008
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Postby admin » Fri May 16, 2008 7:34 pm

Judge to rule soon on frozen ABCP
May 14, 2008 04:30 AM
REUTERS NEWS AGENCY
The judge overseeing a massive restructuring plan for Canada's nonbank asset-backed commercial paper says he will try to rule quickly on whether the plan should go ahead without changes.

"I will try to do my part in a relatively short period of time," Ontario Superior Court Judge Colin Campbell said yesterday at the end of two-day hearing on the fairness of the plan.

Campbell has to decide whether to approve the $32 billion plan as presented or whether he will make changes that would allow lawsuits.

Earlier, a lawyer told the judge that the court does not have the jurisdiction to give banks immunity from lawsuits.

A key sticking point in the restructuring plan is that it would prevent corporate noteholders from suing the banks and brokerages that sold the now-frozen asset-backed commercial paper.

Canadian banks have agreed to fund the restructuring plan as long as they are not sued.

Opponents, however, have said the legal releases in the plan are too broad and could rule out fraud claims.
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Postby admin » Fri May 16, 2008 7:33 pm

ABCP: Hunter and the hunted
Thomas Watson
From the Summer 2008 issue of Canadian Business magazine
Canada’s business elite won’t soon forget Brian Hunter.... We’re talking about Cowtown’s notable Brian Hunter, the oil industry engineer who forced Bay Street to stop ignoring the average folks who collectively and unwittingly dumped hundreds of millions of dollars into the now frozen market for asset-backed commercial paper (ABCP).

These retail investors expected to make a decent rate of return on what were supposed to be safe, short-term investments. But after the market for non-bank ABCP turned to ice last August, they quickly learned to expect nothing, except perhaps to get royally screwed. Today, thanks to a revolt organized by Hunter, almost 100% of the little guys and gals — among them retirees, widows and orphans — exposed to this financial fiasco have a fairly decent shot at getting their money back, maybe even with interest. [At what cost to others? Not that I blame them - but the cynicism of buying their votes to try to push Purdy's deal through makes me ill!]

To Toronto lawyer Henry Juroviesky, who signed on to represent these rebel investors, Hunter is a “man of determination and vision.” To his faithful followers, the 53-year-old is nothing less than a main street hero. But Hunter doesn’t see it that way. He has the confidence of a born leader. He looks likes an officer with the right stuff to command respect from the Calgary Highlanders deployed in Kandahar. But the potty-mouthed engineer is more Rambo than Patton.

Hunter isn’t an activist or an organizer by nature, and he has little patience for folks with limited intellect. He’s a lone wolf more attracted to cross-country skiing and mountain climbing than social work or team building. “I’m not the kind of guy who ran for student council as a kid,” says the married father of three. “I am just a guy who saw people seriously fucking with his wallet. I’m more project manager than revolutionary.”

Hunter has a simple philosophy of life: have fun, make money — in that order. As a partner in Montane Resources, a five-man oil and gas engineering firm that does everything from land acquisition to drilling management, he works hard to play hard.

But that’s not the only reason he was mad as hell when more than half-a-million-dollars’ worth of his life savings became potentially worthless last August. Feeling misled by his investment advisers at Canaccord Capital, he requested a refund. But the Vancouver brokerage responded with a nice letter explaining that it had no legal obligation to reimburse Hunter or anyone else. Nobody, insisted executive vice-president Bruce Maranda, could have foreseen the unexpected and widespread liquidity crisis that threatened Hunter’s financial security.

“Canaccord relied upon the DBRS credit rating given to ABCP,” Maranda wrote. “At the time of purchase, there was no indication that the R-1 (high) rating was inaccurate or that the market might experience a disruption that could impact upon the repayment of such highly rated ABCP.”

A few months later, Canaccord — the largest pusher of ABCP to retail investors in 2007, a year in which its CEO Paul Reynolds was paid $11.2 million — changed its tune. Defending itself against two investor lawsuits, the securities dealer alleged Scotia Capital had aggressively pushed ABCP on Canaccord after a controversial market update — selectively distributed by a major non-bank issuer of ABCP — generated fears over the exposure to sub prime U.S. mortgages. Scotiabank denied any wrongdoing, insisting the information it got was “incomplete.”

That was last December. And by then Hunter no longer cared what Street people had to say. He had no desire to trust that something called the Pan Canadian Investors Committee of Third-Party Structured Asset-Backed Commercial Paper would serve his interests. After all, despite being led by respected corporate lawyer Purdy Crawford, the market restructuring committee in question was put together to find a solution acceptable to institutional investors and the financial community, including the power brokers who built the ABCP house of cards in the first place....

The retail investor’s initial attempts to organize a grassroots rebellion were relatively fruitless. “I was looking to make connections with other Canaccord clients stuck with ABCP for a number of months,” Hunter says. He even tried approaching the media with his tale of woe, but reporters just yawned. That attitude changed as soon as he started to use Facebook....

He created in mid-February an ABCP Facebook page, posting a couple of newspaper articles and starting a few discussions. When he mentioned the Internet campaign the next time he approached reporters, he had limited expectations. “I was still crying and whining, but I also noted I was starting this Facebook thing and suggested that could be worth a mention.” The novelty of using social networking to fight Bay Street generated more than just a mention. English-Canadian newspaper hits generated French-language coverage; television and radio reporters got in the game. Hunter’s army started raising itself. In a matter of weeks, it was more than 100 strong.

But this story isn’t about social networking. It’s a cautionary tale for investors, albeit one that might just have a happy ending because of Hunter. For perhaps the first time in the history of major corporate restructurings, retail investors haven’t been rendered expendable for the greater corporate good. This time, Joe and Jane Average were not thrown overboard — they took over the ship.

The pin-striped crowd shouldn’t have been taken off guard. After all, they put together a toxic product and sold it as a safe haven for short-term money. Canaccord and other dealers continued to compare ABCP to GICs even after the controversial July market update — the one that Scotiabank called inconclusive — led RBC Capital Markets to shun non-bank commercial paper. In some cases, ABCP was said to be even safer than GICs. For instance, on August 1 a Canaccord sales pitch described a block of AAA paper the firm had secured as a product offering better returns and better liquidity than GICs, which are “non-redeemable” and “only insured up to $100,000.” At least one commission-based Canaccord broker sold ABCP as a “no worries” product that was “fully secured.” And all of that cannot be blamed on credit ratings.

Dominion Bond Rating Service (DBRS), which Hunter thinks should go the way of Enron’s accounting firm,[so do I and again, where the hell is the RCMP???] (it) will probably always have a hard time justifying its rating of non-bank ABCP. But most of the underlying assets remain relatively solid and DBRS did outline the risks related to the product’s leveraged structure, which should have stopped any broker from comparing ABCP to GICs. [Then there ought to have been a different Rating - no?]

Retail investors were never told that the commercial paper market was a complex game of financial engineering. Income from a wide range of debt (car loans, credit cards, mortgages, etc.) was packaged together in a banker’s version of musical chairs. Whenever any ABCP matured, an equal amount had to be sold to pay back the last crop of investors. To keep the music playing, liquidity pacts with major banks were struck to keep the money rolling during market failures.

As DBRS pointed out, the liquidity agreements were not up to global standards. [but got top rating anyway???] According to other credit agencies, loose wording made them potentially worthless. This loose wording, of course, is what allowed some bank executives to claim with a straight face that a $32-billion crisis wasn’t big enough to force a bailout. And since a few financial institutions played multiple roles in the market, some of the banks that were paid to back ABCP now stand to actually make money from its failure.

As far as Hunter is concerned, insult after insult was added to his initial injury. The most vulnerable holders of frozen ABCP were not at the table when well-heeled institutional investors gathered behind closed doors to discuss ways of limiting the damage to their balance sheets. Nobody sought input from retail investors when the Crawford committee was set up. And nobody asked them what they thought in March when ABCP trusts were transformed into corporations in order to restructure the market under the Companies’ Creditors Arrangement Act (CCAA).

Simply put, retail investors were left out in the cold with their frozen assets, where they spent this past winter riding a financial and emotional roller coaster. Belts were tightened. Vacations cancelled. Planning for the future became impossible. Daily life became a living hell. The restructuring experts, meanwhile, started racking up what is expected to be a $100-million-plus legal tab for developing a solution.

In April, the Crawford committee released details of a plan to convert the frozen short-term notes into long-term bonds, some with maturity dates almost a decade away. The proposal required all concerned to sign away their rights to sue, protecting ABCP bankers and dealers from having to answer charges of ethical misconduct, not to mention criminal wrongdoing.

Retail investors were stunned. Unlike the Caisse de dépôt et placement du Québec, the largest holder of frozen ABCP, they didn’t help create the dysfunctional Canadian ABCP market. They saw no need to offer immunity to anyone. They also didn’t like the idea of being paid back with long-term bonds. Retirees, widows and orphans have short-term needs, and they believed that unloading restructured ABCP on the secondary market before maturity would be a sucker’s bet.

In stressed-out homes across the country, fear quickly turned to outrage.

Hunter’s mad-as-hell army grew stronger....their collective screaming eventually scared the daylights out of the Street, which suddenly realized that CCAA voting rules gave each and every one of the estimated 2,000 average Canadians caught up in this mess as much say in approving any restructuring as any institutional investor with billions of dollars at stake. Acting as one, the Facebook camp suddenly had the power to veto the immunity to lawsuits that Canada’s financial community so desperately wants.

....Critics insist anybody who invested in something as complex as ABCP, even if a professional broker said it was safe, got exactly what they deserved. According to National Post business editor Terence Corcoran, Hunter’s rebellion has made a mockery of restructuring laws, using the power of the Internet, combined with threats of class-action lawsuits, a little “steamy rhetoric” and the good ol’ “cat food claim” to turn CCAA into a “form of deposit insurance for investors.”

Hunter finds such haughty statements funny. “Maybe,” he says, “some people are upset that things are going our way because the small investor is supposed to get screwed all the time, especially in CCAA.” But he points out CCAA laws were not put in place to provide a blanket of immunity to professionals who cross the line. “We’re not greedy bastards,” he adds. “We are conservative investors who were sold a savings vehicle. Most of us have never bought anything but a GIC before in our lives.”

ABCP wasn’t paying an interest rate that raised any suspicion, says Hunter, and retail investors had to trust professional advice because the paper was allowed to be issued without a prospectus. “We didn’t miss the small print,” the engineer says. “It is not like buying Talisman instead of Imperial Oil because you can compare the assets. You could not know what this shit was.”

Still, Hunter admits he was keenly aware of the power at his disposal as soon as the ABCP trusts applied for court protection. “I’m no lawyer,” he says. “And I’ve never been involved in a CCAA as an investor or bondholder. But when they went that route, I immediately realized the power available to retail investors speaking as one camp.”

And by this time, he adds, “we had some strength in numbers; outspoken, intelligent and interesting characters from all walks of life.” The retail camp wanted nothing less than a full refund, so they threatened to veto the Crawford plan when it was put on an investor road show. They confronted ABCP dealers at their head offices and demanded answers from banking executives at annual meetings. And they bombarded politicians and market watchdogs with complaints.

To let Bay Street know it had a real fight on its hands, Hunter personally sent Scotiabank CEO Rick Waugh a YouTube clip. To increase pressure on institutional players, he started talking to hedge funds interested in buying the retail camp’s votes in order to hijack the CCAA process and shake a profitable deal out of large creditors. [And that is what made Purdy fold his cards - trust me!]

On April 9, the financial community blinked. With financial backing from secret sources — who are not interested in taking credit for bailing out retail investors — Canaccord decided to do what it previously claimed it wouldn’t, couldn’t and had no obligation to do. It announced a $138-million relief program to buy back ABCP at 100% on the dollar (plus interest) from clients who have $1 million or less invested in the toxic paper. The program has since been matched by Credential Securities Inc., the second-largest seller of ABCP to the general public.

....Crawford’s CCAA plan won support from a majority of affected creditors on April 25.

The sudden move to appease retail investors has angered corporate ABCP holders that still stand to take a significant loss if they try to unload any restructured ABCP in the short term. This group ranges from Transat A.T. Inc. and The Jean Coutu Group (PJC) Inc. to Peter Munk’s business empire (which apparently didn’t stop making doomed investments after the Clairtone stereo misadventure) [Munk now has a secret "one of" settlement with Purdy].

At press time, the corporate players were still fighting to have the courts declare them a separate class of investors, which would empower them to kill the CCAA proposal along with the retail investor relief program.

Hunter has sympathy for corporate investors who were also duped, but says he approached this camp and offered to sell them the retail camp’s votes. They declined the offer.

Ironically, Purdy Crawford — whose face greeted visitors to Hunter’s Facebook site — thinks the corporate investors were outplayed because they had sophisticated and expensive lawyers like himself. “They’re good,” he says, but slow moving and they don’t network over the Internet.

That said, Crawford insists he created the best workable solution he could get with the cards he had, which were dealt by other players at the table. What the Hunter campaign did, he adds, was make the game more fair. “I’ve come to know and trust Brian Hunter. He was helpful to the outcome. To what extent Canaccord might have acted without pressure from the Facebook group and my committee, I wouldn’t want to say.”

The Bay Street lawyer freely admits he left a big gun on the table for retail investors to pick up. “I was quite conscious that we were giving clout to retail investors by going into CCAA. I was not entirely conscious of the numbers.” Believe it or not, Crawford says he “had no idea until late in the game” that Canaccord and Credential had sold ABCP to so many average Canadians. After meeting the retail investors face to face, and hearing their stories during the CCAA road show, he concluded many of these people were clearly distraught. “Gosh, you’d have to be cruel not to want to help them.”

According to Crawford, running a CCAA restructuring is a lot like playing a game of chicken in a Mexican standoff. And, he says, Hunter and his army of retail investors did nothing that hasn’t been repeatedly done by investment bankers, bondholders and hedge funds during other CCAAs, such as the restructuring of Hamilton steelmaker Stelco, where self-serving parties threatened the future of thousands of workers in order to turn a profit after buying voting power from scared creditors.

The ABCP fiasco will not be over until the big-city fat cats sing. But Crawford thinks his CCAA plan, with most of its current warts and wrinkles, will eventually get court approval, paving the way for the Facebook gang to get their money back.

The Calgary engineer knows how to focus his troops until the job is done. “We are at or very near the summit of a climb,” he recently told his Facebook followers. “We have worked hard and are exhilarated by apparent success, yet we are tired from the effort.” Descents, he warned, are generally more difficult and sketchy. “There may be a rockfall and a rappel or two that lie between us and the cold beer and high fives in the tavern. Patience and steady hands are mandatory in this part of the journey.”

But whatever the future holds for Hunter, he has learned a lesson. “Don’t let anyone else perform your due diligence on any business transaction,” he says, and if you can’t properly perform it, then “run.” Even with a prospectus, however, you can bet Hunter won’t be holding any more ABCP, which he now unaffectionately calls “asshole-backed commercial paper.”

What about Crawford? Did he add any commercial paper to his portfolio this past RRSP season. “Oh God, no,” he says.
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knowingly tainted Canadian made investments? Yes.

Postby admin » Fri May 16, 2008 7:32 pm

An ABCP legal conundrum

Jim Middlemiss, Financial Post Published: Friday, May 16, 2008

Adecision on Canada's biggest restructuring could come as early as today, and it could set a nasty precedent for the civil justice system.

Mr. Justice Colin Campbell faces an all-or-nothing proposition. If he rejects the plan in the $32-billion non-bank asset-backed commercial-paper restructuring, it puts investors' money at risk and could lead to financial anarchy as banks scramble to collect on their security.

Back the deal and he blesses broad legal releases that bar investors from suing for breach of fiduciary, breach of contract, negligence, bad faith and fraud.

Barring fraud claims would prevent civil lawsuits for injuries from a criminal act and that's bothersome -- as is barring lawsuits in general. It's a basic right of citizens in a democracy to sue. That's why we have courts.

Granted, there's no proven evidence of fraud. Yet, it's plausible that a police or regulatory investigation could unearth fraud. (Where the hell is the RCMP??? JFR)

So parties involved in the ABCP fiasco could face criminal penalties, but not civil, if the deal is passed and that's not justice.

It's no wonder, then, Judge Campbell was clearly pained during the fairness hearing into the plan. He is painted into a corner. Just like noteholders who held their nose and voted 96% in favour of the restructuring, he will probably do the same for the sake of the financial markets and the money at stake. But that doesn't make it good judicial policy or a good precedent.

Judge Campbell is sitting over a Companies' Creditors Arrangement Act hearing. It's flexible legislation that allows businesses to address insolvency issues short of bankruptcy. Call it a Court of Compromise.

That works in business failures, such as Stelco and Air Canada, where ailing businesses and jobs were saved. Releases are common in such workouts, but the encompassing nature of the ABCP releases -- which even required a clarification so they would not prevent regulators from doing their job--go too far.

Purdy Crawford, the lawyer tapped to oversee the committee of investors that negotiated this settlement, was adamant: "There can be no plan unless these releases are included."

The foreign banks and counter-parties, sponsors, asset providers, liquidity providers and bond rating agencies agree. They are worried about the cascading effect of lawsuits. The ABCP parties are so intricately woven together that a lawsuit against one leads to claims against all. Therefore, they argue, the releases are needed to quell the prospect of endless litigation.

Who wouldn't want a free pass from litigation? However, fraud is very difficult to prove, and claims for negligence and breach of fiduciary duty are no slam dunk either.

That raises the question: What are the financial institutions really worried about? If they've done nothing wrong in creating this market and selling billions of dollars in notes and earning millions of dollars in fees, they have nothing to fear. Lawsuits are the cost of business. There are ways to efficiently manage litigation involving multiple parties and multiple claims.

So are the releases simply a cover-up designed to protect the ABCP players from their own or ineptitude [OR WORSE] and liability in running this market? Are they necessary risk management to effect a hard-fought workout? Or is the demand for releases simply legal bluster and a bluff? If Judge Campbell calls them on it, will the parties walk away from this restructuring? That's for him to ponder.

There's an old judicial aphorism: "Justice must not only be done; it must also be seen to be done." Letting anyone off the hook for the sake of a settlement doesn't seem to pass that sight test, at least for the 4% of investors who voted against it. There were errors made in this market and someone other than investors who bought this paper should share the pain. For the good of the justice system, Judge Campbell should call their bluff.
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Postby admin » Sat Apr 26, 2008 11:51 pm

for the short, sweet and humorous take on ABCP go to this site and learn 90% of everthing you need to know in about seven minutes. Funny and enjoyable.

http://www.youtube.com/watch?v=br8mOmH9frE

My thoughts that come to me this evening, after watching the CTV W5 episode on financial abuse of investors by professionals in the financial industry (predatory financial services)..........are this:

Now that Canada has started to look rather "hollowed out" corporately speaking...............the primary game left for those who seek to "gather investment fees" has become one of creating synthetic, and often imcomprehensible investments in much the same manner that synthetic drugs are cooked up in meth labs across the country..............and to misrepresent them as much as possible to get an ususpecting public to purchase them.

It is almost like watching the entire industry credibility drown while they desperately cling on to life by holding others under the water.

It hurt a great deal at the time, and it was not my choice, but I am today very grateful for my "opportuntiy" to walk away from this industry while I still had something left inside of myself.
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Postby admin » Thu Apr 24, 2008 12:43 pm

Believe I have located provincial role in ABCP Fiasco.

The ABCP notes were sold with a waiver from prospectus which kept people from understanding what it was they held, most thought it was a T-Bill type product guaranteed by banks. Turned out be be a derivative based product with flawed liquidity provisions, guaranteed by no one. ABCP was rated AAA R1 by the DBRS, an approved rating agency in Canada. No other rating agencies approved this paper as they believed liquidity provisions were flawed. This was seen to be factual at the end of the day.

The Canadian Securities Administrator CSA, in a national body whose members are the securities regulators from all the provinces and territories. They created a guideline called National Instrument 45-106 (see attached). The prospectus for ABCP was waived based on sections 2.35 and 1.4 of NI45-106 as the paper was
a)maturing in less than 1 year as per 2.35 (1)
b)had an 'approved credit rating from an approved credit rating agency as per 2.35 (1)(b)


Short-term debt
This provision will not be cited in any Appendix of NI 45-102 Resale of Securities.
These securities will be free trading.
2.35 (1) The dealer registration requirement does not apply in respect of a trade in a
negotiable promissory note or commercial paper maturing not more than one year from
the date of issue, if the note or commercial paper traded
(a) is not convertible or exchangeable into or accompanied by a right to
purchase another security other than a security described in this section,
and
(b) has an approved credit rating from an approved credit rating organization.
(2) The prospectus requirement does not apply to a distribution of a security in the
circumstances referred to in subsection (1).

Registration requirement
1.4 (1) An exemption from the dealer registration requirement or from the prospectus
requirement that refers to a registered dealer is only available for a trade in a security if
the dealer is registered in a category that permits the trade described in the exemption.
(2) An exemption from the dealer registration requirement is deemed to be an
exemption from the underwriter registration requirement.

For purposes of NI45-106 the following applies definitions apply re approved credit rating and approved credit rating agency:(extracted from NI45-106)

“approved credit rating” has the same meaning as in National Instrument 81-
102 Mutual Funds;
“approved credit rating organization” has the same meaning as in National
Instrument 81-102 Mutual Funds;

From NI 81-102 the following definitions are provided for approved credit rating and approved credit rating agency:(extracted from NI81-102)

"approved credit rating" means, for a security or instrument, a rating at or above one
of the following rating categories issued by an approved credit rating organization for
that security or instrument or a category that replaces one of the following rating
categories if
(a) there has been no announcement by the approved credit rating organization of
which the mutual fund or its manager is or ought to be aware that the rating of
the security or instrument to which the approved credit rating was given may be
down-graded to a rating category that would not be an approved credit rating,
and
(b) no approved credit rating organization has rated the security or instrument in a
rating category that is not an approved credit rating:
Approved Credit Rating Commercial Long Term
Organization Paper/ Debt
Short Term Debt
CBRS Inc. A-1 A
Dominion Bond Rating Service Limited R-1-L A
Duff & Phelps Credit Rating Co. D-1 A
Fitch IBCA, Inc. A-1 A
Moody's Investors Service, Inc. P-1 A2
Standard & Poor's Corporation A-1 A
Thomson BankWatch, Inc. TBW-2 A
"approved credit rating organization" means each of CBRS Inc., Dominion Bond
Rating Service Limited, Duff & Phelps Credit Rating Co., Fitch IBCA, Inc., Moody's

The flawed liquidity provision was based on the Federal Finance department section Office of Superintendent of Banking Institutions (OSFI) regulation B5 section 2.3 (see extract below) which vaguely suggests that a 'General Market Disruption" is required prior to liquidity funding. The liquidity provider banks used this clause to deny funding based on the assertion that some commercial paper that the banks sponsored was still rolling, this is somewhat questionable but regardless was the case. OSFI claims no responsibility as it was supposedly not the banks that set up the 'Non-Bank' paper market and was mostly foreign banks providing liquidity and assets (not all foreign I note). This argument is disengenious as the canadian Banks were very much involed as Trustees, asset providers and liquidity providers in 'Non-Bank' ABCP they just used middle men called conduits (Coventree etc) to provide apperance of distance from involvement. I like to note that the 2 oxymorons one can observe regarding 'Non-Bank' Asset Backed Commercial Paper (ABCP is
1) It was the Banks
2) there were few real assets, over 80% of 'assets' are synthetic derivative paper with NO real assets.

The paper should more appropriately been called BANK 'Non-Asset' Commercial Paper


2.3 Liquidity support
Liquidity support is a commitment to lend to, or purchase assets of, an SPE in order to provide investors with assurance of timely payment of principal and interest. Liquidity support may include a general market disruption clause. A general market disruption can be defined as a disruption in the Canadian commercial paper market resulting in the inability of Canadian commercial paper issuers, including the SPE, to issue any commercial paper, and where the inability does not result from a diminution in the creditworthiness of the SPE or any originator or from a deterioration in the performance of the assets of the SPE.

Anyway responsibility lies both provincially and federally in this mess. Provinces allowed, through week securities regulatio,n a flawed product to be sold without prospectus which kept unsuspecting buyers from understanding what they owned. Federally, OSFI regulations encouraged liquidity provisions that were useless when needed.

Hope this is of assistance in improving the system so it is more difficult to fool us next time.....

Brian Hunter
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Postby admin » Fri Apr 18, 2008 7:08 pm

http://www.fundlibrary.com/features/col ... p?id=12326

Ken Kivenko’s column is all about investor protection. Ken fights for investors’ rights and exposes violations and malpractices. He also runs an advisory business, Portfolio Analytics, assisting investors obtain restitution due to sales or broker abuses.

Examine risks closely

By Ken Kivenko | Thursday, April 17, 2008

Lessons learned from the ABCP Fiasco.
The made-in-Canada Asset-Backed Commercial Paper (ABCP) fiasco has caused a lot of a pain. It has attracted massive media attention. In fact it’s just one more example of financial assault. We could add the Norshield fund fiasco, the mutual fund market timing scandal. the Portus hedge fund meltdown, Nortel , Bre-X, Income Trust failures and many more. ABCP however was a loud wake up call for the Government.

Where were the so-called provincial securities regulators and the IDA? How could the Office of the Superintendent of Financial Institutions have allowed a gaping loophole that allowed our banks to walk away from providing emergency funds? How could Canada’s credit-rating agency, DBRS Ltd., have given a R1 rating to non-bank ABCP? Why were these Notes sold to people when it was clear there was a looming liquidity crisis? Why didn’t the Competition Bureau investigate alleged misrepresentations by the financial services industry? What happened to the complaint system? Why weren’t retail investors at the Crawford bargaining table? Why is Main Street being asked to vote on a proposal that destroys their lives and is fully immunized from legal action?

Much of the current crisis was born by dealers apparently not knowing or not disclosing what exactly was in the Notes but selling them anyways. The lack of transparency led to a refusal to rollover when questions arose regarding the impact of the U.S. sub prime market on Canadian ABCPs. Valuations could not be established and liquidity vanished. The website http://investorvoice.ca/ABCP/ABCP_index.htm provides a complete commentary on the crisis including the House of Commons Standing Committee on Finance Hearings. The impact on retail investors is enormous. Financial distress, emotional stress, marital discord, health problems and likely a lot more serious issues we’ll be hearing about.

Yet a number of misguided articles lay blame on the unsuspecting victims. Claims are made that they were greedy. They knew or should have known what they were being sold. They unquestioningly trusted their advisers.

The reality of the ABCP crisis

According to press reports, victims were not chasing returns. They wanted a safe haven to park short-term money. Most had no history of being even moderate risk takers. Many were seniors and retirees living on fixed income. Advisers told them the Notes were as safe as GIC’s, guaranteed and liquid—a savings product. Some reported unauthorized trading, totally surprised at what was in their account when they pored over their client statements. Others say that the statements continued to show face value even when this was obviously not the case. The toxic character of these ABCP Notes was never revealed to retail investors. A number found out about the crisis only when they needed access to the cash. Complaints were rebuffed or ignored by firms and regulators. In short, the entire investor protection system failed.

The impact

Some of the other ABCP stories are heart breaking. Seniors, pensioners and retirees do not have the luxury of time to rebuild their lost portfolio assets. Indeed, if some of the major banks had not voluntarily decided to bail out their money market mutual funds and retail owners of non-bank ABCP (National Bank capped its cash settlements at $2 billion) the situation would be far worse and would have affected tens of thousands of people. Retirees with RRIF’s face serious portfolio meltdown yet must according to law continue to make minimum annual withdrawals from a reduced asset base. Questions abound as to how sub-prime mortgages found their way into what is generally considered a safe, conservative savings product. Besides the obvious financial impact, there was a horrible human impact.

When a financial loss has occurred the stress is high. When attempts to resolve a complaint under the current dispute resolution system inevitably fail, the stress and frustration is multiplied. Canada’s dysfunctional complaint and dispute resolution system is a well recognized and documented issue. This made a very bad situation even worse.

So what did we learn ?

We learned that regulators like OSFI don’t examine risks closely enough. We learned that Dealers too readily accept Credit Ratings without adequate due diligence. We learned that financial advisers did not understand what they were selling but made unsubstantiated assertions regarding the safety and liquidity of the Notes. We learned that regulators failed to act decisively even in the face of growing, well-publicized complaints. We learned that when bad things happen, the retail investor is left to drown. We leaned that individual investors had to take matters into there own hands or suffer a nasty fate .Thankfully, they did.

The Bottom line

Small investors are increasingly exposed to financial assault with devastating effect to the social fabric of the country and the economy. ABCP is just the latest. A recent IMF report made it clear that Canada is hugely deficient in the white-collar crime enforcement arena. The Government and the Courts must, with uncharacteristic urgency, initiate major reforms. Billions of dollars are unduly lost each year and the trend is unfavourable. ABCP alone is a $350+ million problem (excluding lost interest on the Notes) for retail investors. In the end, the abused investors will be a drain on the social security system if they are not made whole.

We need a well-resourced industry-independent national investor protection Agency with teeth that would help prevent these issues and would actually enforce securities laws.
We also need a new securities crime complaints intake and assessment system to be jointly administered by the RCMP IMET and the regional and municipal police forces that have fraud squads. We need to re-assess the role of SROs and the certification and registration of advisers who sell financial products to retail clients. We need a judicial system that treats white collar crimes as serious crimes against citizens.

As to dealing with complaints, an Ombudsman created by Parliament as is the case in the UK and elsewhere is required to replace industry—funded OBSI and its restrictive rules of engagement. An International Standard such as ISO 10003 Quality Management - Customer satisfaction—Guidelines for dispute resolution external to organizations should be considered for this purpose.

Will the culprits behind this mess be made to account? Will any reforms take place? Who knows? Perhaps this latest fiasco has enough momentum to get some traction for change. In the meantime, it’s CAVEAT EMPTOR.

Ken Kivenko P.Eng.
Kenmar Associates
kenkiv@sympatico.ca
admin
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Posts: 2836
Joined: Fri May 06, 2005 9:05 am
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Postby admin » Mon Apr 14, 2008 5:53 pm

Lessons learned from the ABCP Fiasco April, 2008

The made-in-Canada Asset-Backed Commercial Paper (ABCP) fiasco has caused a lot of a pain. It has attracted massive media attention. In fact it’s just one more example of financial assault. We could add the Norshield fund fiasco, the mutual fund market timing scandal. the Portus hedge fund meltdown, Nortel , Bre-X, Income Trust failures and many more. ABCP however was a loud wake up call for the Government.
Where were the so-called provincial securities regulators and the IDA? How could the Office of the Superintendent of Financial Institutions have allowed a gaping loophole that allowed our banks to walk away from providing emergency funds? How could Canada's credit-rating agency, DBRS Ltd., have given a R1 rating to non-bank ABCP? Why were these Notes sold to people when it was clear there was a looming liquidity crisis? Why didn’t the Competition Bureau investigate alleged misrepresentations by the financial services industry? What happened to the complaint system? Why weren’t retail investors at the Crawford bargaining table? Why is Main Street being asked to vote on a proposal that destroys their lives and is fully immunized from legal action?
Much of the current crisis was born by dealers apparently not knowing or not disclosing what exactly was in the Notes but selling them anyways. The lack of transparency led to a refusal to rollover when questions arose regarding the impact of the U.S. sub prime market on Canadian ABCPs. Valuations could not be established and liquidity vanished . The website http://investorvoice.ca/ABCP/ABCP_index.htm provides a complete commentary on the crisis including the House of Commons Standing Committee on Finance Hearings. The impact on retail investors is enormous. Financial distress, emotional stress, marital discord, health problems and likely a lot more serious issues we’ll be hearing about.
Yet a number of misguided articles lay blame on the unsuspecting victims. Claims are made that they were greedy. They knew or should have known what they were being sold. They unquestioningly trusted their advisers.
The reality of the ABCP crisis

According to press reports, victims were not chasing returns. They wanted a safe haven to park short-term money. Most had no history of being even moderate risk takers. Many were seniors and retirees living on fixed income. Advisers told them the Notes were as safe as GIC’s, guaranteed and liquid – a savings product. Some reported unauthorized trading, totally surprised at what was in their account when they pored over their client statements. Others say that the statements continued to show face value even when this was obviously not the case. The toxic character of these ABCP Notes was never revealed to retail investors. A number found out about the crisis only when they needed access to the cash. Complaints were rebuffed or ignored by firms and regulators. In short, the entire investor protection system failed.

The impact

Some of the other ABCP stories are heart breaking. Seniors, pensioners and retirees do not have the luxury of time to rebuild their lost portfolio assets. Indeed, if some of the major banks had not voluntarily decided to bail out their money market mutual funds and retail owners of non-bank ABCP (National Bank capped its cash settlements at $2 billion) the situation would be far worse and would have affected tens of thousands of people. Retirees with RRIF’s face serious portfolio meltdown yet must according to law continue to make minimum annual withdrawals from a reduced asset base. Questions abound as to how sub-prime mortgages found their way into what is generally considered a safe, conservative savings product. Besides the obvious financial impact, there was a horrible human impact.

When a financial loss has occurred the stress is high. When attempts to resolve a complaint under the current dispute resolution system inevitably fail, the stress and frustration is multiplied. Canada’s dysfunctional complaint and dispute resolution system is a well recognized and documented issue. This made a very bad situation even worse.

So what did we learn ?

We learned that regulators like OSFI don’t examine risks closely enough. We learned that Dealers too readily accept Credit Ratings without adequate due diligence. We learned that financial advisers did not understand what they were selling but made unsubstantiated assertions regarding the safety and liquidity of the Notes. We learned that regulators failed to act decisively even in the face of growing , well-publicized complaints. We learned that when bad things happen, the retail investor is left to drown. We leaned that individual investors had to take matters into there own hands or suffer a nasty fate .Thankfully, they did.

The Bottom line

Small investors are increasingly exposed to financial assault with devastating effect to the social fabric of the country and the economy. ABCP is just the latest. A recent IMF report made it clear that Canada is hugely deficient in the white-collar crime enforcement arena. The Government and the Courts must, with uncharacteristic urgency, initiate major reforms. Billions of dollars are unduly lost each year and the trend is unfavourable. ABCP alone is a $350+ million problem (excluding lost interest on the Notes) for retail investors. In the end, the abused investors will be a drain on the social security system if they are not made whole.

We need a well-resourced industry-independent national investor protection Agency with teeth that would help prevent these issues and would actually enforce securities laws.
We also need a new securities crime complaints intake and assessment system to be jointly administered by the RCMP IMET and the regional and municipal police forces that have fraud squads. We need to re-assess the role of SRO’s and the certification and registration of advisers who sell financial products to retail clients. We need a judicial system that treats white collar crimes as serious crimes against citizens.

As to dealing with complaints, an Ombudsman created by Parliament as is the case in the UK, Australia and elsewhere is required to replace industry –funded OBSI and its restrictive rules of engagement. An International Standard such as ISO 10003 Quality Management - Customer satisfaction - Guidelines for dispute resolution external to organizations should be considered for this purpose.

Will the culprits behind this mess be made to account? Will any reforms take place? Who knows ? Perhaps this latest fiasco has enough momentum to get some traction for change. In the meantime, it’s CAVEAT EMPTOR.

Ken Kivenko P.Eng.
Kenmar Associates

kenkiv@sympatico.ca
admin
Site Admin
 
Posts: 2836
Joined: Fri May 06, 2005 9:05 am
Location: Canada

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