The cost of being Canadian

Diogenes's picture
purdy2 (3K)
Another historical perspective
for the Facebook group

Canaccord and other ABCP Clients
Will this ever end?

My good friend Brian applies this phrase to all things that cost more than they should for no other reason except that this is Canada.

Cell phone services was the first item on the list. He bought a Blackberry a couple of years ago, that wonderful device made by an equally wonderful Canadian company called Research In Motion (RIM). He wanted a plan and technology that would work from wherever he happened to be in the world.

porsche-boxster-2007 (9K)

The best service plans (technology and price) are offered in the USA. This has little to do with RIM, and much to do with a peculiar canadian market oligopoly.

The next entry on the list was cars. As the Canadian dollar rose in value to trade at par (or better) with the US dollar, a lot of Canadians started to ask why the same model of car cost 25% less just a few kilometers south of the border. What happened to free trade?

But this is really small potatoes compared to the next entry in the journal…

Canada's Big Banks

This entry takes top spot for shear audacity, scale, and cost.

In August of 2007 Brian discovered that his super secure, AAA rated, short term interest note was in default. He learned that it was Asset Backed Commercial Paper (ABCP).

It's a little complicated. The players include Canada's BIG BANKS, some very large pension funds and Canada's biggest investment dealers. They created, insured and sold these products, collecting handsome commissions and insurance premiums as they were serving it to out to unsuspecting clients. ABCP was offered as a product that was as secure as GIC's but with shorter terms and better liquidity.

The financial community paid themselves handsomely for providing this brilliant product and service.

Then the market collapsed on August 13, 2007. What has happened over these last 9 months is shocking and embarrassing. Certain members of Canada's financial community are looking like goons and bullies. Here we examine how is the cost of banking in Canada so high.


Lock the Doors!   Close the vault!

A private committee composed of the chartered banks and other big players in Canada's financial establishment was quickly formed to sort out the mess. They announced that certain ABCP accounts, some $32 billion in total, would be temporarily suspended.

They called this nifty arrangement The Montreal Accord. It has never been explained why they were allowed to do this in the first place, or by what authority this committee was allowed to continue doing what they did for as long as they did. Historians may someday explain.

Brian had his RRSP (his pension) in a single 30 day note that was automatically renewed every month. Low returns but safe, safe, safe. Suddenly he can't touch any of it. There is no run-on-the-banks allowed here.

He starts looking for answers and a lawyer. Neither are easy to find. Some are happy to charge $500 for an estimate on how many millions it will cost to take on the Big Banks. "Save your money" is Brian's advice on this topic.

He even visits the data-room to find out what assets are backing his note, signing a non-disclosure agreement for this privilege. He can't tell me what he saw, but imagine a big room. In the center under a dim lightbulb stands a table and chair. OK - we're about done here.

But some details emerge of what happened and why it happened. These have raised an eyebrow. Brian has these eyebrows you don't mess with.

How many lawyers does it take to screw up a light bulb?

It has been suggested that the big banks avoided honouring the liquidity guarantees they had sold by claiming that the conditions required for a general market disruption had NOT been met. This Made in Canada legal definition of a general market disruption is at the heart of this unique financial fiasco.

Apparently, in Canada, the seizure of $32 billion in short term interest notes does not qualify as a general market disruption.

It has also been suggested that overnight loans from the Bank of Canada helped some banks in achieving this alternate reality.

The committee continued to negotiate for months, repeatedly missing their own deadlines. The $32 billion remains suspended. Nobody is paid or collects any interest except for the many lawyers engaged by the banks and other committee members to make this mess go away.

A proposal is finally outlined in December 2007 (over 5 months later) to restructure the notes. It calls for the principal to be paid (and maybe some interest) in 8-10 years instead of 30 days as originally promised. There is little comment from the media.

On the wings of a butterfly

purdy2 (3K)

In February, Brian starts a Facebook group called Canaccord and Other ABCP clients, an internet support group to share stories, information and ideas.

He also contacts the media and offers his laundry. How much have you lost? A Facebook group you say? Embarrassing but necessary - it gets the attention.

A newspaper runs a story about his Facebook group. The group has only 4 members at the time (this includes Brian and his wife), but a Facebook group, now that is interesting.

The word gets out. There are many other small investors in the same situation. They join the group. At first it is a public group: anybody can join and everybody can see.

Some of the stories are heart wrenching. It is an older group, retired or near retirement, the type that prefer super safe interest accounts. No mutual funds, no stocks. Now a life of careful saving is suddenly gone!

Within a week or so, the group has two dozen members. Brian wisely makes the group private over concerns of confidentiality. There is personal and sensitive information being shared on the discussion board, and anyone can see it.

The switch to a private group means only members can see the content, and that new members must ask to join or be invited to join. It hurts a little in getting the message out.

Meanwhile, the committee continues its closed door negotiations. A credit facility is needed to make everything work. Some banks are reluctant to sign on. Other problems and excuses delay the release of a formal proposal by another four months. The $32 billion remain suspended.

Finally, on March 20, 2008, 7 months after seizure, a formal proposal is made. It is 385 pages long!

marlon_brando2 (4K)

Make them an offer they can't refuse

The committee, which by now had a long and forgettable name, has proposed a court restructuring under Canadian bankruptacy law. It involves transforming trusts into corporations, then declaring those corporations bankrupt.

Short term notes that were due to mature in 30, 60, or 90 days will now take as long as to 9 years to be repaid. There may be some interest paid, but nobody will say how much.

This represents a heavy discount in terms of present value. With 9 years before repayment and only a credit facility to back it up, there is additional risk that things may go wrong (again). Price this risk in, and the new notes are worth far less than the originals, maybe a 60% loss, if you need the money now.

Small investors have learn this is called a haircut in the lingo of the Bay street bagman.

The plan also calls for legal immunity to all parties involved in the creation and marketing of ABCP. If the agreement is accepted, noteholders will not be able to sue for breach of fiduciary, breach of contract, negligence, bad faith or fraud.

The Companies Creditors Arrangement Act (CCAA), Canada's version of bankruptacy law, offers one of the few (and maybe the only) ways to obtain such immunity from lawsuits. While this might make sense for a company bankruptcy; a nasty but expeditious way of winding up and moving on, this situation is different.

There is $32 billion on the line here. And nobody has gone bankrupt… yet.

Under the CCAA, the proposed restructuring must be approved by a majority of the noteholders and by a majority represented by the value of the debt held.

Power to the people

It is now known there are many small noteholders, over 1,800. Though they hold less than 1% of the $32 billion in debt, they represent 95% of the noteholders. They find themselves with the numbers to block the restructuring plan crafted by the committee.

The Facebook group grows to 284 members. Media coverage also grows as the members organize email, phone, and letter campaigns to politicians, the regulators, and anyone else who will listen.

They make themselves and their stories available to the media.

A collective courage is found. They attend bank shareholder meetings and ask questions. They pass out leaflets in committee meetings across the country. Internet web pages appear in support of their cause.

And they continue to press for accountability from everyone that should be held accountable.

The group hires a law firm with the intent on filing their own class-action lawsuit. They demand to be made whole, refusing to accept a 50% loss. They also form their own ad-hoc committee and apply for legal representation, to be paid for from the proceeds of the frozen trust funds (like other committee members).

Canaccord Capital, a prominent investment dealer that sold ABCP to about 1,400 noteholders, finds itself facing increasing public and media scrutiny about its role and handling of its retail investor accounts.

With the small noteholders now organised and represented by a respectable law firm, coupled with the very real possibility that the noteholders could scupper the proposed restructuring by collectively voting NO, Cannacord comes under intense pressure to to come up with a better solution.

On April 9, 2008, two weeks before the critical vote, a 100% restitution offer is made to every Canaccord ABCP client holding less than $1 million, in exchange for their collective votes approving the restructuring.

Credential Securities, the investment dealer used by the rural based credit unions, follows suit with a similar offer to their clients holding less than $1 million.

A controversial aspect of this offer is the arbitrary cut-off figure of $1 million. Those with $1 under that number are paid in full, those with anything more have to accept the deal, which probably means a 50% haircut if they need the money now. It was revealed that Canaccord had 15 noteholders in this category. Over half of these noteholders were employees of Canaccord.

After conducting their own due diligence on the conditions and offers, the small noteholders gave their collective approval to the restructuring.

The vote was held on April 25, 2008. It passes with over 96% of votes cast in favour of the plan.

Objection, your honour!

Flaherty (5K)

There remains one major obstacle. A small group of noteholders, about 20 in number, many of them companies, and some of whom have upwards of $100 million invested in ABCP, object to the legal immunity clause. They do not want to give up the right to sue and have challenged this provision of the agreement.

Do we grant this power to banks and investment dealers and then free them of the responsibilities and consequences of their actions?

The Supreme Court of Canada should not be needed to decide this question.

The judge overseeing this bankruptcy proceeding, Justice Colin Campbell, has wisely expressed misgivings on granting a sweeping immunity, especially one that includes fraud. He has instructed the conflicted parties to itemize and elucidate claims of fraud to the courts today (May 30) for consideration.

So fraud may be allowed. If so, expect the foremost line of defense to be to fingerpoint at others. It will be tough to prove fraud (and a waste) given that the ABCP collapse was a global event. Allegations of stupidity, neglect, and greed might have a better chance, but these sins are widely spread.

A lot of people who make six or seven figure incomes are available to explain how this could all happen. Securitization of debt (SIV, CDS, CDO, ABCP etc.) was supposed to spread the risk around and lower the pain for all.

boarding2 (10K)

Instead, the pain seems rather selective. There was no sense of proportion. Small investors who only wanted a safe, safe, short term deposit were blindsided and hammered into the boards.

The Montreal Accord committee members are not alone here. The Bank of Canada, The Superintendent of Financial Institutions, and ALL of the many, quite useless, provincial securities regulators share a slice of the responsibility here.

The banks and investment dealers are slowly owning up their responsibility in this debacle, but there is nothing gracious or noble about their actions. They are doing everything to minimize their losses and risk.

This whole Montreal Accord thing, the restructuring, this 9 months of pain (hell for some), should not have been allowed to happen in the first place.

The blood on the ice have the banks and investment dealers sitting in the penalty box for now; what they really deserve is a game misconduct.

And the rules of the game need to change.