Thursday, December 27, 2007

The Accord successfully concludes, but was the timing a coincidence?

By: Ross Hendin, Hendin Consultants

I'm going to make this entry shorter than usual because I've come to understand that this time of year (a few days before Christmas through New Years) is a time like August in Europe, when people just want to get away from work and aren't following the news.

My short entry, and your focus on family and holiday is probably what the Committee was hoping for when they announced a successful restructure and held a conference call on Christmas eve at 12.30 PM... who would still be in their offices to read the media reports by the time they came out? If it wasn't Christmas, the chances are much higher that the market would be focused on the story right now and asking a lot more questions than they had otherwise done.
If this were a one-off, it would be one thing, but since it's the second time that the Committee has chosen a time to report an update or deadline that is moments before people switch off for a break, it makes me think that they are either horrible with their PR strategy and the ways they want to bring their news to the market, or they are intentionally picking times to report when the media is most inconvenienced, and there is a much smaller audience. As they have chosen National PR to work with them, and David Weiner is a bright and accomplished partner in the firm (I've known him for a few years now, having worked with him in 2005 on two cases), I can only assume the timing is intentional. Which leads me to ask why would they want to report news, especially good news, when nobody is around to listen?

In doing litigation communication abroad, I've learned the hard way that releasing news that seems good at a time when people are not focused on work means trouble because people don't take time to question the news, they just assume it's as good as it sounds, and their attention switches to their personal lives again. If I was going to announce good news like this, I'd want the world to know and I'd ask National to help get the story out there as best they could.
IF it's intentional -and I'm not saying it is - it means that the Committee is operating in a way not consistent with the transparency they are trying to bring to the notes. If they are picking these times to report because they want to give the media access to the information as it develops, and those times just happen to be Saturday mornings and Christmas Eve, then we should thank them. They are sacrificing a lot to save this market, including their personal lives and off time, and we are very grateful for it.

Ross Hendin is CEO of Hendin Consultants, and is a Senior Advisor to the Canadian office of a leading multi-national PR firm. With strategic communication experience in more than 20 countries around the world, Ross specializes in litigation, financial and political strategic communication. He has worked in the ABCP niche since 2006.

Hendin Consultants is in Toronto and London, UK, and is on the web at

Email Ross at

Tuesday, December 25, 2007

Best Wishes For the Holiday Season!

I wanted to take this opportunity to wish everyone a happy and safe holiday season. Despite all the activity with ABCP, I hope you are all finding some time to spend with your friends and family.

I will be taking the next couple of days off, but will be back on the Business News Network (BNN) at 8:15 AM on Thursday, December 27, and will continue making blog entries toward the end of this week.

I wanted to extend my appreciation and thank you for all your support. I hope you have found this site very helpful, as the one place to go for all your up to date news, commentary and insights on the ABCP situation. Please feel free to contact me with any questions or comments. I will continue to level the playing field by disseminating education to the market and look forward to working with my clients and friends in the New Year to help them through this very difficult situation.

Best Regards,

Daryl Ching

Monday, December 24, 2007

Agreement in Principle Complete by Purdy Crawford's Committee

By: Daryl Ching, Clarity Financial Strategy

The CNW Group published a press release from the Crawford Committee announcing a restructuring plan for ABCP. Below I will provide new pieces of information from the press release and my commentary below:

1) The restructuring of "substantially" all triggers to become more remote and transparent spread loss triggers.

Does the Committee anticipate that some mark-to-market triggers will remain or do they expect to restructure all the triggers?

2) The Committee plans to raise $14 billion for the margin facility in the event of collateral calls on CDO transactions. A group of institutional investors including La Caisse de Dépôt et Placement du Québec and Desjardins Financial Group have decided to provide their own capital to self-fund the margin facility in the amount of about $8 billion. The remaining $6 billion will be funded by a syndicate of banks and other institutions. This will create two distinct pools of notes from a legal, risk, economic and governance perspective.

Some institutions that have sufficient capital have elected to put up their own margin facilities to avoid paying fees. One question I have is whether these two classes of notes will reference two distinct pools or whether they will reference the same amalgamated pool that is parri passu from one another. If they have created two discrete pools with different assets, how is the committee ensuring that one group does not have a reference portfolio that is of better quality than the other?

3) The traditional non-synthetic assets will remain series specific and will not be pooled together into a jumbo fund. The US Sub-prime related assets will also remain series specific and will also not be pooled together into a jumbo fund.

This makes a lot of sense. The CDOs needed to be pooled together in order for the spread loss trigger to work. If the intention of the Committee is to reference a public credit default swap index that contains a wide basket of corporate names, the spread loss trigger only works if the underlying portfolio looks similar. By pooling the CDOs together, the underlying assets are becoming more diversified referencing a wider basket of credit default swaps and therefore further resembling a public index. However, this does not change the fact that certain trusts with CDOs that had low leverage and better quality credit could potentially be worse off with the amalgamation of all the assets.

There is no reason to pool the traditional assets together. Investors who bought trusts with better quality assets will be rewarded by bearing the same level of risk with the same underlying assets. This logic also applies to the US Sub-prime assets. As there are varying degrees of credit quality within this basket, investors continue to take on the risk of the underlying pool of assets they originally purchased.

4) The Committee has a 90% commitment for the margin facility. On the conference call, there was an indication that they have a foreign bank that is willing to provide the balance in the event that they are not able to raise enough money from the Canadian banks.

Although, we did not get a sense of how much each bank was stepping up, I am confident the Committee will come up with the required margin facility to warrant investment grade ratings on the notes.

5) The fees are expected to be in the range of 160 bps for participants to standby for the margin facility. In the event of a draw on the margin facility, the institutions providing the liquidity will rank senior to the rest of the noteholders.

It was mentioned on the conference call that to the extent there is excess cash, interest will be paid to the noteholders but it is uncertain what the rate will be at this time. I suspect that a significant portion of the yield will be used to pay for the margin facility. Although this fee seems high, we have to understand that this is a direct indication of the global liquidity crunch. Banks have liquidity problems of their own and are under the gun from the shareholders to minimize CDO and subprime exposure. They need to be compensated well to step in and provide a bail out to the frozen assets.

Overall, I remain confident that the restructure is moving in the right direction and will be successful with a secondary market opening as early as March 2008. However, to echo my previous comments, I continue to hope that the Committee will provide some liquidity relief to the small investors. Although I understand that this is an issue that is being tabled, it sounds to me like any liquidity that the Committee is successful in locking down will be used to fund the margin facility. Reading between the lines, I continue to believe that investors should expect that there will not be sufficient liquidity relief provided until the secondary market opens. Further to that, although it may be widely expected that most of the assets will yield par at maturity, investors selling the notes should still expect a haircut from potential buyers who deem the assets to be distressed and need to be compensated for various uncertainties. However, greater transparency will only help the situation.

Friday, December 21, 2007

Light at the End of the Tunnel

By: Daryl Ching, Clarity Financial Strategy

It sounds like we are seeing some real progress from Crawford's Committee. It was announced yesterday that Skeena Trust was successfully restructured with 98.7% of the principal and accrued interest as of August 15 being returned to the noteholders. John Greenwood of the Financial Post, wrote an article called ABCP Proposal Could Come Within 10 Days announcing that a restructure proposal with valuation of the holdings provided by JP Morgan could come within 10 days.

As I believe Mr. Crawford has learned his lesson from previously over promising and dissapointing the market, we have seen a recent reversal to under promising and over delivering. Earlier, Crawford announced that the Skeena Trust restructure may not complete by year end and that losses may exceed 2%. Now, people will applaud the completion of the restructure with a 1.3% loss.

Crawford’s Committee received some pressure the Canadian Securities Administrators as they revealed that they would be exercising more scrutiny on how public companies disclose their exposure to ABCP. Accurate disclosure can only come from full transparency on valuation from Crawford’s Committee. There is another strategic incentive for the restructure proposal to come out in December, similar to having an announcement on Friday at midnight. The note holders of ABCP are trying to wrap up for year end and go on their vacations for the holiday season. After four months of stress and uncertainties, sellers of ABCP may choose to ignore the fine print and sign on the dotted line to be done with the situation altogether. However, as a consultant I can only urge sellers and potential buyers not to make the same mistake twice. While it would be convenient to accept the proposal with JP Morgan’s valuations, investors will be doing themselves a favour by seeking the expertise and taking a second opinion to ensure they are getting a fair deal.

In order for an announcement to be made with terms and conditions, Crawford’s Committee must finalize negotiations with foreign banks on the conversion of mark to market triggers to spread loss triggers on the CDOs and secure the liquidity required from the big banks to fund a margin facility for potential collateral calls. With this recent announcement, I am confident that they are close to finalizing these arrangements and we will be hearing about the proposal soon. I continue to hope that some funds will be available as loans to the smaller investors to give them temporary relief as we wait for the conclusion of the restructure scheduled for March 2008, but I think investors should prepare for the fact that this may not be made available.

There has also been some great news for the unfrozen ABCP, which represents about $87 billion in Canada. Deutsche Bank launched a new conduit, Okanagan Funding Trust, the first Canadian ABCP conduit to be rated by S&P. RBC Capital Markets announced that they have added a Moody’s rating to all three of their conduits. The Canadian Pension Plan Investment Board (CPPIB) has purchased $6 billion of bank ABCP. This demonstrates the resilience of the ABCP market and a very positive sign that it will survive through the turmoil. Altogether, this has been a great week for the securitization industry.

Thursday, December 20, 2007

The Power of the Mea Culpa

By: Ross Hendin, Hendin Consultants

According to Wikipedia: Mea culpa is a Latin phrase that translates into English as "my fault", or "my own fault". In order to emphasize the message, the adjective "maxima" may be inserted, resulting in "mea maxima culpa," which would translate as "my most [grievous] fault."

The power of the media has evolved to a point where every comment we make, every email we send, and every place we've been will be exposed at some point if we ever step into the spotlight. Since nobody's perfect, the world has come to accept the mea culpa as a way to cleanse the professional spirit. The world has become desensitized to people that break the law and say they are sorry. Look at what happened years ago to Jimmy Swaggart (YouTube video), and juxtapose that to Martha Stewart and the Imclone scandal. Jimmy didn't do the hard time that Martha did for her crimes, but Martha used the challenge, the apology and the mea culpa to catapult her brand to an amazing recovery. Celebrities found driving drunk do a mea culpa on a blog, go to rehab and get a clean slate. Michael Richards gives one of the most venomous rants outside of a Klan meeting, does a mea culpa on Letterman, and its forgotten about a month later.

In the finance world, the dynamics are a bit different when shareholders are involved, because investors today are not only more sophisticated, they also have access to more information than they ever did. Don't forget, Ms. Stewart had to do some hard time before as part of the process.
Communication strategy is becoming as important as legal or political strategy. As applied to the ABCP situation, anyone and everyone involved should be able to look like they are the “good guys” in all of this, if they follow the right steps. The groups all seem to be taking a lot of time to see how the dust will settle, and to perhaps prepare articulate strategies. Well, in the PR world, we would call the time between the August meltdown and right now (after the missing of the December Montreal Accord voting date) "crisis time", and in a time of a crisis, proper crisis management should be used. Many tell me they believe that the real crisis time will come after, when there may be lawsuits, or there may be a need to assert oneself in a public forum. In the meantime, nobody wants to say the wrong thing in the media and get sued for it.

Just as there is a process to rolling paper, rating companies, and filing a motion for any number of civil charges, so too is there a process (albeit a more fluid one) for controlling a situation and rallying for support in your favor.

Properly managed, BP have re-branded themselves "Beyond Petroleum" and publicly state that they are working day and night on a smart solution to oil and fossil fuels that we can all use and enjoy. Somehow, that makes it OK that they are one of the world’s biggest contributors to one of the atmosphere’s most damaging practices.

Everyone involved in this situation, or who is about to get involved in the coming weeks, should remember that when defining moments come, the people who are remembered as the best leaders and the companies who are remembered most fondly are not always the ones who are right. They are ones who managed the situation properly.

National Bank did the right thing, and has been viciously attacked for it by shareholders like Jean Coutu, when they really should be praised and celebrated.

Royal Bank has announced a second rating on their ABCP conduits from Moody’s, and they may add another as well. While DBRS may fight a more convincing lawsuit by keeping quiet, will it matter if nobody feels comfortable using them again?

And what about Mr. Crawford? Nobody doubts that he’s doing the best he can, and that he’s making the efforts he should to seem like his Committee is communicating effectively. But, if he’s unable to save the day, and an enquiry is done about what went wrong, a hearty “I tried, and am sorry” will go a lot further than having that enquiry discover in week one that there was no need to lock the data room, discover in the next week that he only reached out to the banks the week before the deadline and didn’t have a plan, week three examine what he did or said to get the banks (perhaps even TD?) to take on the liquidity risk. Transparency now and an “I’m sorry” later will make him a hero either way.

If we see Jimmy, Michael, Martha, and the other most profitable sinners in the world winning back the hearts of their customers with a mea culpa and some good PR, there must be something to it.

Ross Hendin is CEO of Hendin Consultants, and is a Senior Advisor to the Canadian office of a leading multi-national PR firm. With strategic communication experience in more than 20 countries around the world, Ross specializes in litigation, financial and political strategic communication. He has worked in the ABCP niche since 2006. Hendin Consultants is in Toronto and London, UK, and is on the web at Email Ross at

Wednesday, December 19, 2007

A Few More Reasons For Greater Transparency

By: Daryl Ching, Clarity Financial Strategy

Sean Silcoff from the Financial Post wrote an article today called "ABCP Creates Acid Test for Auditors". The article comments on the fact that auditors are not being given the tools to properly value companies with ABCP exposure. The fact we have seen write downs from 5% to 40% is testament to the fact that everyone is making different assumptions and nobody really knows what the ABCP is worth. More and more investors that I speak to are admitting that while they previously thought they understood the investments, there appears to be a lot of complexities that they could not have grasped without being in the industry with a structuring role. With the lack of transparency, this is absolutely true and I have been providing the advice required to help them understand the various structures and make strategic decisions.

As financial statements are supposed to provide a snapshot of a company's financial health, there are repercussions of being too conservative or too aggressive with the write-down. If a company writes down too much, they may create future profits. If a company writes down too little, they could be subject to a greater loss in the future.

This uncertainty has led to major inconveniences for a wide array of institutions. A merger of the British Columbia and Ontario central credit unions has been put on hold. Companies will have trouble planning a budget for the New Year due to the uncertainty of when they can sell their frozen assets and for how much. This may lead to a delay on important projects and purchase decisions. Investors cannot make prudent investment decisions, as they have to question the financials for all companies holding ABCP. The list goes on.

I have seen people refer to the ABCP as toxic waste and junk assets. Let's keep in mind that 97% of the assets continue to be affirmed AAA by DBRS. The subprime component represents about 7% of the total non-bank ABCP. While I have heard estimates of a 50% write-down on all subprime, that would be convenient but not right. Let's not forget that subprime origination activity was significantly more aggressive in 2006 with teaser rates and very low down payments. The subprime mortgages originated in 2003 and 2004 were to borrowers with low credit scores, but required sizable down payments and did not offer introductory teaser rates. Instead of asking "How much subprime do you have?", sophisticated investors should be asking "In what year were the subprime mortgages originated? What is the average LTV? What percentage of the portfolio has teaser rates? What is the delinquency and default rate?"

The point I am trying to make is that not all subprime is bad. The expected loss is derived from a combination of two components: default frequency and loss severity. Default frequency is simply what percentage of the subprime borrowers default on their mortgages? Loss severity is a reflection of the recovery value from selling the properties net of selling costs. So let's take another look at this 50% write-down. Are we assuming that 100% of the subprime borrowers will default with a 50% recovery on real estate? Is that reasonable? We need to start assessing the quality of assets with real data, rather than attaching a value based on a buzzword.

I hope that a lesson that has been learned from the entire ABCP debacle is that investors need to be more sophisticated and industry participants need to offer more transparency. The good news is that JP Morgan has completed their valuation assessment and is in a good position to reveal anticipated recovery values. This is probably the best available indicator of what the assets are worth. Again, even when the data does become available, I strongly urge investors to seek a second opinion, get educated by an expert and perform their own analysis and convince themselves that they are comfortable with the values.

The Crawford Committee had indicated a hesitation to disclose the information to prevent professional investors from profiting from trading against some of the positions. I think the concern here is that buyers may short positions in order to compress the value of the assets, in order for them to buy in cheaper. Would that not be offset by the influx of investors globally who are interested in buying the assets when information becomes available? The most important reason as I have mentioned in a previous blog is to provide a secondary market for the smaller investors who are in dire need of cash. With TD's reluctance to get involved in the non-bank ABCP market, we can anticipate that there will be less funds overall made available by the big banks to help solve the problem. The funds will likely be used to fund a margin facility for the availability of collateral if margin calls are made for CDOs. What this means is that investors are not likely to receive any liquidity relief before March 2008. For all the reasons I have mentioned above and in previous blogs, it is more clear to me now than ever before that there needs to more transparency and the data should be made available to the public.

Tuesday, December 18, 2007

TD - Standing Proud, Standing Alone - But Why?

By: Ross Hendin, Hendin Consultants

The Globe and Mail contributes an important fact and insight in today's article on the ABCP issue: TD breaks ranks on frozen ABCP. It's an article worth reading.

Standing Proud, Standing Alone

Ed Clark, head of the TD Bank, has signaled that he is going to stand tall on the ABCP issue, and not expose his bank or shareholders to any ABCP risk. As he stood alone and didn't reap the benefits of the ABCP products when they were rolling well, he now stands alone as the one person who is not on the hook to run with the Crawford Committee's request for liquidity. I'm sure both his clients and his shareholders will breathe a sigh of relief. I'm also sure that the other heads of the banks, and the Committee, realize it means more investment and more risk than the other banks want to provide.

TD has been in the best position of all banks, but in saying that this can't be an easy time for any of them. I applaud Mr. Clark for making this choice and having the conviction to do it properly and from the outset while there must be a very strong lobby to have him change course. I can't help but wonder though if this decision has something to do with TD's international posture, even more than their domestic profile...

I still believe that most of the banks probably will sign on to support this accord. It's better to win friends in Ottawa and win the affection of clients than to save a few dollars for shareholders in the short term. Now that there is a potential financial incentive through a truce of lawsuits, what the Committee has offered banks really makes the Accord much more attractive. The banks now have strong legal, PR and financial incentives to risk the money and provide liquidity.
It makes me wonder just how high the risk to the banks really is if they won't sign onto this Accord even with all of these incentives... if the other bank's CEO's are keeping quiet because they know they are heading for litigation and they STILL aren't signing on the dotted line, the market should take note of that. The banks not signing on, combines with the lack of transparency in the Accord's progress, to signal something very bad. It makes me think that there are issues much bigger than the market expects that may come to light if the data room is opened and transparency is given. If that's the case, as I've said before, it's better to face the music now than keep the world in suspense.


Coming back to why TD would take this stand, the obvious answer is the one I am sure they will give to the market. But nobody has exposed or discussed the new, international element of the ABCP situation, and I think it's a critical insight into this TD decision and what the other banks may do in the days to come.

The world markets and savvy investors have been quietly following the story for months, but the world's major and most respected media are noticing this and giving their readers what they want - a close account of the situation in terms of trading the ABCP, and more and more the political fallout that is coming from the way the situation is being managed in terms of PR (everyone I know agrees that Mr. Crawford is doing nothing short of making miracles, and everyone agrees that if the Accord fails or not, he has done an outstanding job of trying to find the Win-Win situation). The situation is becoming increasingly radioactive by the day. With the world watching, everyone needs to be on their best behavior as they can't get away with what they could have otherwise.

TD has a number of companies outside of Canada that it needs to consider in all of this. TD Asset Management, TD Waterhouse, TD Ameritrade and TD Banknorth are probably the most important ones. There is a TD Waterhouse on High Holborn in London just a block away from an office I used to work in. With TD's global ambitions and the potential for disaster that they have seen and continue to see in the market, steering clear of ABCP may lose TD popularity at home with the other banks, but they no longer need to worry that their clients abroad will hear that they had anything to do with this. They must be concerned with their global image, not just their Canadian image, and that image will look much cleaner if they can take the high road on a looming political and financial disaster.

Ross Hendin is CEO of Hendin Consultants, and is a Senior Advisor to the Canadian office of a leading multi-national PR firm. With strategic communication experience in more than 20 countries around the world, Ross specializes in litigation, financial and political strategic communication. He has worked in the ABCP niche since 2006. Hendin Consultants is in Toronto and London, UK, and is on the web at Email Ross at

Monday, December 17, 2007

Does a Second Solution Make Sense at this Point?

By: Daryl Ching, Clarity Financial Strategy

A key issue that everyone is asking about is whether the banks will backstop liquidity for ABCP investors. I commented on this topic in great length on my interview on BNN this morning. Click here to view the interview. Also, my colleague Ross Hendin has provided some insight into this situation on a blog on Friday, December 14. The general conclusion is that it will be very difficult to get the banks to agree to provide this liquidity and there is no certainty that it will be enough to address investor concerns.

The key subject I would like to touch on today is where do we go from here? By no means am I disappointed by the progress that has been made by Crawford's Committee. This is a very difficult restructure and I think we have come a long way. I am however, disappointed by the continued lack of transparency and the unwillingness of the Committee to consider a second option. At this point the Committee owes it to the investors to be more forthcoming. Based on my conversations with various investors, I have concluded that they continue to lack the understanding required to make an informed decision. More education and disclosure is warranted at this moment.

As I have previously mentioned I am extremely sympathetic for the smaller investors who are in dire need of liquidity and have had their business operations negatively impacted by the wait. To put things in perspective, these investors had to report to their board of directors and shareholders in August that they have had their ABCP locked up, but are hopeful for a solution by October. In October, they returned to these meetings stating that progress was being made on a restructure and a solution was imminent in December. Once again, they have to report that another extension has been made, and terms and conditions will be available by January with a completed restructure by March. Further to that, we have received no firm commitment from the big banks to provide backstop liquidity.

While the larger investors that represent the super majority generally have the balance sheet to wait out the restructure, there are many in a position that cannot wait any longer. Crawford Committee's press release does not provide enough information for the investors to make meaningful decisions at this point. This brings me back to the idea of a second solution - an open market. While the big banks that are facing liquidity issues of their own are reluctant to take on any more ABCP exposure, there may be other financial institutions in a better situation that might be more willing.

Rather than constraining the market to several parties, opening up the Data Room will bring more participants to the table. This includes potential buyers of ABCP who are willing wait out the restructure and financial institutions who are willing to provide loans to backstop ABCP.

By no means am I suggesting that the Committee should halt the restructure process. There are certainly investors that have the financial backing to wait this process through and they should continue to work with the Committee. However, there are certainly investors that can't and they deserve a second option. I believe the Committee has a responsibility to provide liquidity today, and that is by providing more transparency and information to the public, so investors have the choice to sell their assets or seek loans from other financial institutions if they choose to do so.

Saturday, December 15, 2007

Crawford Committee Extends Standstill Period - Commentary

By: Daryl Ching, Clarity Financial Stratetgy

Crawford's Committee put out a press release this morning at 12:45 AM calling it, "Pan-Canadian Investors Committee Announces Framework for Restructuring of Third-Party ABCP" on Canadian Business Online. Some new information has been presented. I will present the information followed by my commentary.

1) A syndication of a margin funding facility is being put together.

This means the Committee will not be able to waive all mark to market triggers for CDO transactions and will require a facility to post collateral if margin calls are made. An obvious question here is who is in the syndicate group?

2) The standstill period has been extended to January 31, 2008, with a plan to reclose the restructuring by March 14, 2008.

This means the Committee was unsuccessful negotiating an extension to March 2008 as they had hoped. The Committee has 47 days left to get all parties to agree to the terms and conditions of the restructure. It is obvious that various parties are growing impatient and may lay the hammer as early as January 31, causing an event of default and law suits.

3) There will be distinct restructuring solutions for three different types of assets: "(i) ABCP which is supported solely by traditional, unleveraged assets (approx. $3 billion), (ii) ABCP which is supported by leveraged assets, unleveraged synthetic assets or a combination of leveraged and unleveraged assets (approx. $27 billion) and (iii) ABCP which is supported primarily by U.S. subprime assets (approx. $3 billion)."

This is not enough information for investors to make an informed decision about whether this deal makes sense for them or not. I expect to see more information on the jumbo fund and how the assets would be split between senior and junior class notes.

4) In some cases mark-to-market triggers will be replaced by more remote spread loss triggers. However, in cases where mark-to-market triggers cannot be waived, a credit facility will be put in place to post collateral on margin calls.

Investors will need to assess whether the credit facility is large enough to cover the potential risk of margin calls given today's volatile credit envirnoment.

5) The restructured notes will come out with an investment grade rating.

6) The Committee will make a further announcement following agreement on difinitive terms sheet with all key stakeholders. An information package will be circulated to holders of ABCP following such an agreement.

Will we see another announcement prior to all parties agreeing to the terms?

7) The Globe and Mail indicated in a recent article that the big banks have agreed to put up $500 million a piece.

This is good news. Although the smaller investors do not represent a super majority of ABCP holders, there is absolutely nothing more vital right now than providing emergency funding to those participants who are cash strapped and have had their business operations impaired since August. How much of the $2.5 billion from the Big Banks will be used for the credit facility and how much will be provide the emergency liqudity funding for the small investors? How will this money be prioritized and allocated to the investors? Will this be enough to carry the investors through to March 2008?

It appears that great progress is being made by the Committee. Having the big banks step up and provide liquidity is a big success and provides some of the backup required to make this restructure a success. This press release looks and feels like the release back on October 15 when the Committee came out and said that great progress was being made and people should wait a couple more months for a solution. While I am confident that progress is being made and we are further down the road today than back in October, we are now at a critical point, four months after the market disruption where more information needs to become available for investors to make informed decisions about the restructure. Investors will no longer settle for the lack of transparency in the process that has been apparent to date. I expect Crawford's Committee is working through the weekend to come up with more information and I certainly hope that information becomes available as early as next week. I also hope to see more frequent updates on progress as we move forward.

Friday, December 14, 2007

Will the Big Banks Step Up Liquidity? - Pre Announcement

Will the banks come through for the Committee, or their shareholders?
By: Ross Hendin, Hendin Consultants

The banks are caught between a rock and a hard place, and it’s one minute to midnight. The issue really focuses now on politics and nothing more. Will the banks bend to the muscle of the Bank of Canada and the Committee, or will they learn a lesson from Jean Coutu and National Bank and protect their shareholders by leaving both their clients and the Bank of Canada to face a potentially massive disaster?

Reasons why the banks would come through for the Committee and provide liquidity would be to repay the favor of the Bank of Canada stepping in with a cash infusion months ago, and to bail out the clients they sold the notes to (just as National Bank did with their clients). This, from an optics and political perspective is the best choice for the banks: its great PR, it pays back favors to the political heavyweights that it needs favors from in time to come, and it allows the banks to position themselves as heroes and then hope that people don’t remember they are a large part of the reason the market is in this situation in the first place.

The main reason why the banks wouldn’t come through for the Committee and provide liquidity is their accountability to their shareholders. Just as Jean Coutu has publicly chastised National Bank for bailing out their clients, so too to CEO’s of the big banks need to justify why they put further funds on the line to try and save the Committee’s structured rescue. At best, shareholders will see this as a needless risk that worked out well, but at worst it puts substantial funds into needless risk – a surefire way to make sure you go from the top of the heap never working on Bay St. again.

This has to be one of the hardest weeks in all of the CEO’s lives, as there is no right answer here. What’s better: paying a favor to the powers that be, or avoiding risk for shareholders and shielding from further exposure to dangerous assets? Either way, a powerful lobby is going to have your job and your reputation at the top of their hit list.

As in so many other places in the world, I’d imagine that CEO’s would be speaking to their spouses, confidants, lawyers and their PR people about this. If I were advising on the right course of action, I would do what’s right for the bank’s clients over anyone else. Canadian’s today have more choice than ever in their retail and commercial needs – HSBC, ING etc. are all going to be able to take advantage of massive fallouts between clients and their “trusted” institutions. Shareholders will see their stocks rebound and then some if the CEO’s are perceived to be concerned about their client’s needs. If they put shareholders first, the negative public sentiment may take a long time to forget. Look at the Exxon Valdeez or the McLibel suit, and compare it to the JetBlue groundings and BP calling themselves “beyond petroleum”.

The best move for a CEO is to put their client’s first, and themselves second. It’s the best way to make sure they maximize PR for the bank and make the Bank of Canada and Mr. Crawford look like heroes – all things that will help make the frown on shareholder faces turn upside down faster.

A CEO that puts their shareholder’s needs today above their client’s needs risks lowering shareholder value tomorrow. The CEO that puts good PR and saving the minority note-holders above the needs of the shareholder today, will see both groups much happier tomorrow.

Is There a Future For ABCP?

By: Daryl Ching, Clarity Financial Strategy

I spoke on BNN this morning to give an update on the Crawford Committee deadline. Click here to watch the interview. Further to my comments I wanted to add more commentary.

The outcome of the non-bank ABCP restructure for the $35 billion of frozen assets will have a significant impact on the ABCP market going forward. Despite the fact that this represents only one quarter of the total ABCP market in Canada, if investors take losses, they may shy away from the ABCP investments altogether. The news that we are hearing is that progress is being made by the Crawford Committee with the restructure of Skeena Trust, the jumbo fund with senior and junior notes and a positive outlook on getting the standstill period extended to March 2008.

While this is good news for the large ABCP investors who can wait out the restructure, this does not help the smaller investors who are cash strapped and cannot wait any longer for the restructure. The smaller investors have expressed frustration, not having a seat at the table through the negotiation process. The money they expected to get paid in August has hindered their ability to continue normal business operations, they feel they have been left in the dark with little transparency on progress and they find it tough to sell their assets, as information on the assets is not being released to the public. In my mind, despite representing the minority, there is nothing more imperative than providing some liquidity relief to small investors who cannot wait out the restructure any longer. I certainly hope that since Crawford's Committee has decided not to release the information to facilitate a secondary market, that they have a plan in their proposal to provide some form of liquidity to the smaller investors who are in dire need, and I hope this becomes available immediately. I also hope to see more transparency and more frequent updates from the Committee going forward.

So the big question is will the ABCP market collapse? My response is that the ABCP market is too important to fail for many reasons. The ABCP market is approximately $120 billion in Canada, which represents the largest portion of the non-government short-term money. There is more ABCP outstanding than Banker's Acceptances and corporate commercial paper combined. While I can point out that ABCP represents a neat alternative investment for a higher pickup in yield than GICs, it is more important to note that many large companies across the country rely on securitization is a key source of funding. The Big 3 auto companies, credit card companies, mortgage companies and others rely on ABCP as their largest source of capital. If the ABCP market went away, you would have many large companies scrambling to find a new source of funding that will likely come less efficiently and at a higher cost, passing on higher prices and interest rates to consumers.

There is no question that market participants have made mistakes in this industry, and we are paying dearly for them. However, this is an opportunity for us to learn from our mistakes and make it right. There are two fundamental changes that must occur to revive the industry: 1) Market participants must increase transparency and make a concerted effort to educate the investors and 2) Investors must do their homework. If investors want a pick up on yield on their investments, they cannot rely solely on the rating agencies and they should only be considered opinions. It will be up to the investors to seek the required expertise, establish their own criteria for how they get comfortable with the assets and set up a platform to do monthly due diligence and analysis.

Is there a need for further regulation? I don't think more regulation is answer to our problems in this case. I think investors will get smarter, demand more information and do their analysis. Industry participants will realize that they need to provide more transparency. With the work required to analyze the assets, this may mean that we see less investors, but they will become more sophisticated. On August 13, the market disruption was caused by panic from investors who did not understand the assets and found out the they had exposure to subprime. It should be noted that there is good quality and bad quality subprime assets. The earlier vintages of subprime had no teaser rates, minimum down payments, respectable credit scores from the borrowers and low delinquency and default rates. Mortgage underwriting became more aggressive in 2005 and 2006 with the low teaser rates and no down payments. If investors were sophisticated and understood this, there would not have been a mass exodus on the entire non-bank ABCP market and investors would have continued to roll the trusts that had good quality assets.

As an indiviudal who has invested so many years in this industry, I feel a personal responsibility to help revive the securitization market. I will do whatever I can to push for more transparency from conduit sponsors and provide education to participants who need to get up the curve. I believe this will level the playing field, where all participants in the market will receive consistent information and there will no longer be any investors at a disadvantage.

Daryl Ching

Thursday, December 13, 2007

ABCP Proposal to Offer Range of Losses - Commentary

By: Daryl Ching, Clarity Financial Strategy

Jacquie McNish and Boyd Erman wrote an article in the Globe and Mail today titled ABCP Proposal to Offer Range of Losses. The story reveals that recovery rates for the trusts range anywhere from about 50% for Apsley Trust to close to par for other higher quality trusts. While the Crawford Committee is still trying to win sufficient support to extend the standstill agreement until March 2008, they announced that they have Deutsche Bank AG on side, a party that is believed to be counterparty to half of the $25 billion of CDO transactions. The Committee revealed that although it has completed its assessment of the current value of the ABCP, it does not plan to release the information until the new year. The most interesting piece of news is that the plan calls for investors to swap their ABCP for two classes of notes that will be ranked senior or junior. Investors whose ABCP is backed by assets with higher market value will receive a higher portion of senior notes and those with harder hit assets will take more junior notes. The Committee has approached the banks to underwrite a market for these notes but they have not heard back from the banks.

While it appears the Committee is still struggling to get all parties to agree to an extension of the standstill period, getting Deutsche Bank AG on side is an important development. With the credit default swaps under water in today’s credit environment, the foreign banks who are swap counterparties to the CDO transactions can lay the hammer by making a margin call. In an environment where ABCP cannot be issued, this would result in an event of default and a firesale of the assets. It is relief to know that the Committee has Deutsche Bank’s support. I am confident that the Committee will round up the support required to continue the standstill period in order to continue the restructure into spring.

My interpretation of how the restructure will work is that the Committee will create a jumbo fund by amalgamating all the assets of all the trusts, with the exception of Skeena Trust that has been restructured separately. All the assets will be placed into two categories based on credit quality – senior and junior. The Committee will look at each trust and determine which assets belong in which category and assign notes accordingly to each investor. It is likely that the junior notes will be subordinate to the senior notes and take first losses.

This plan has its advantages and its disadvantages. Generally, investors will be better off, as all the assets will be pooled together to form greater diversification. However, this simplified approach also has its disadvantages and raises a lot of questions. Can we really separate all the assets into two categories? How will they be separated? Is a leveraged super senior corporate CDO that is levered five times in the same bucket as a CDO levered 40 times? Do all traditional securitization assets get thrown into senior? Does that mean that Canadian subprime mortgages are in the same bucket as a bank’s line of credits? What I am trying to get at here is that investors who bought very high quality trusts may receive more senior notes, but their assets may still be diluted with poorer quality assets. In the long run, some will be better off with this plan and others will be worse off.

I applaud Mr. Crawford’s committee for the progress made thus far. It appears they have had several successes including the restructure of Skeena Trust, the extension of the standstill period until now and a plan that may receive super majority support. Having said that, it would still be prudent for investors to fully understand the implications of this plan before signing on to the agreement. My opinion is that the assets cannot simply be sliced into two categories – good and bad. The complexities warrant more categories if we hope to have a more equitable outcome for all investors.

Finally, as the Committee has decided not to release any more information on the assets to facilitate a secondary market until the new year, I certainly hope that they provide some relief in the form of liquidity in the interim to investors who cannot wait until the spring to get some cash back.

Daryl Ching

Wednesday, December 12, 2007

Skeena Fix Not So Easy, After All - commentary

By: Daryl Ching, Clarity Financial Strategy

Boyd Erman of the Globe and Mail published an article about the progress of the ABCP restructuring. He indicated that Skeena Trust, a trust sponsored by Edenbrook Hill Capital and Dundee Securities Corp., which the public widely believed would be restructured in short order with full recovery on principal and accrued interest, could still lose two cents to the dollar. It is being restructured into a 9-year bond issued by White Knight Investment Trust. Skeena Trust is comprised of six leveraged super senior CDO transactions, some of which have been levered over 40 times. The Globe indicates that the haircut is due to further deterioration in the credit markets and the "banks squabbled over which would absorb losses and take on risks as part of the conversion of the trust's derivative assets to more stable contracts."

This is an indication that the market is not willing to pay par for exposure to CDOs. With respect to leveraged super senior transactions that reference credit default swaps, it can easily be assumed that the reference portfolio of corporate names is worth less today in our current credit environment than it was when these transactions were first originated. This sets a precendent for all other trusts with leveraged super senior CDOs.

Despite the deterioration in the credit market, the CDO transactions would have been fine with a functioning ABCP market. Many of these CDO transactions have "mark to market triggers", in which investors would have to post collateral if there was deterioration in the value of the credit default swaps. Like putting up more cash for a margin call when you buy stocks, investors would have simply issued more commercial paper and posted cash. The only impact this would have had on investors would have been a compression in yield due to a lower leverage factor, similar to the fact that you would receive a lower return on your stocks. However, in today's credit environment where ABCP cannot be issued, investors would have to find other ways to post collateral if a margin call is made. This would result in additional exposure to the assets, and this environment, investors are reluctant to take on any more exposure than they have to. Like the stock market, if investors are unable to post collateral on a margin call, the foreign banks have the right to sell the credit default swaps in the open market, make themselves whole and return whatever is left to the investors.

It is interesting to note that White Knight Investment Trust is not subject to any collateral calls by the banks. The banks that provided backup liquidity to Skeena Trust include Bank of Nova Scotia, ABN Amro Bank NV and HSBC Holdings PLC. However, there are only two swap counterparties in relation to the transactions. While the swap counterparties would likely be willing to waive margin calls if they themselves were investors, they would not be incented to waive margin calls for other investors involved without some form of compensation. It can be assumed that a haircut of the accrued interest and some principal (2 cents to the dollar) was required in order to negotiate the waiver of the margin call. However, it is great news that the margin calls have been successfully waived and the investors no longer need to worry about posting collateral for a mark to market trigger. Despite the loss of two cents in principal, I commend Mr. Crawford's committee for the successful restructure of Skeena Trust.

It is also interesting to note that the ABCP will be converted into new bonds issued by "White Knight Investment Trust" and will be rated AAA by Standard and Poor's and DBRS. This gives us a new piece of information about the restructure. It seems likely that the restructured notes will come in the form of a bond offering with at least two ratings. This should not come as a surprise, as investors will take more comfort in a second opinion from another rating agency. ABCP trusts in the US and Europe have at least two ratings. I anticipate we will start seeing at least two ratings on all ABCP trusts going forward, as one of the structural changes to the securitization industry in Canada.

This news confirms that the ABCP restructure continues to remain a great challenge for the Crawford Committee. It is also unfortunate that a precedent has been set that it will very difficult to obtain par on the new bond offerings. It is now more important than ever, that buyers and sellers seek the expertise required to get comfortable with the valuation of the assets before making any decisions to trade. However, there is light at the end of the tunnel, and hopefully this sets a precedent more successful restructures to come.

Daryl Ching

Tuesday, December 11, 2007

Dodge Calls For More Disclosure

By Ross Hendin, Hendin Consultants

David Dodge, the current Governor of the Bank of Canada, made a few interesting comments at the closing speech for both the year and his career, choosing to spend some time discussing the future of the ABCP market. As this was more of a political and PR tactic than anything else, I think it's worth a second look from the political and PR perspective. This blog entry reflects on the article by Heather Scoffield that covers the story in Dodge Calls For More Disclosure In Structured Finance Products, from the Globe & Mail on December 10.

While I could go on about this article and the speech for a while, I'm just going to raise 3 points here worth considering. If this article is any indication, I wouldn't be surprised at all if a number of the groups involved in the ABCP issue have run to Ottawa lobby firms to voice their interests. I worry seeing this article that they may not be really considering a strategy for how to deal with the policy change, and are more focused on saying that the issue wasn't their fault.

1) Mr. Dodge makes a point of NOT blaming the rating agencies (READ: DBRS). He says: “Credit-rating agencies are not to blame for the lack of information about those highly structured products that were sold to highly sophisticated investors in the so-called exempt market,”. He then goes on to say that investors should have done better homework. Well, every investor I've spoken to about this so far has said to me that if every ABCP product had to have diligence like the equities they buy, the commercial paper would not be worth the effort. If I have to spend hours looking up several analyst reports and double-checking assertions, I need the returns to be worth the time. The point of having rating agencies is to do that homework for the investor. Now, I'm not saying that this is DBRS's fault (as it happens, I agree with Mr. Dodge that it isn't their fault, but for different reasons), but I want to be clear that with a statement like this, Mr. Dodge has adopted an advisors party line without really thinking through or explaining his reasoning in a way that the people who work in the industry can relate to.

2) The article goes on to report: "Mr. Dodge also suggested that asset-backed securities should carry a “certificate of origination” or some other type of brand or tag that would tell investors that the securities had been well-researched before they were sliced, diced and packaged up for sale to investors." Funny, I thought that was the point of a credit agency rating. What he should have suggested is a reform to the way these securities are reported - to quickly increase transparency for the investor. A new, re-branded certificate of quality is a consumer product approach to an industry and policy specific problem. To me, this is a disappointing, political response that also could have been better articulated, or presented in a way that makes sense for the investors.

3) This page is of the comments the article sparked. The site closes the conversation after 12 comments. I invite you to read them, as I think you will agree that if nothing else, they show real interest in the Bank of Canada's role and position on this.

Monday, December 10, 2007

What is this ABCP Worth?

By: Daryl Ching, Clarity Financial Strategy

December 14 will mark the end of the standstill period where investors have agreed not to force a default, conduit sponsors have agreed not to issue liquidity notices, foreign banks have agreed not to make margin calls on corporate CDOs and various parties have agreed not to launch what can be a hailstorm of lawsuits.

The ABCP restructure is extremely complex, involving many parties with conflicting interests. The parties include the Big 5 Banks, other Canadian financial institutions and non-bank securitization providers, a group of large foreign banks, investors ranging from small mining companies in BC to the largest pensions funds in Quebec, and more recently, the Office of the Superintendent of Financial Institutions and the Bank of Canada. To give an idea of just how many interests each group has, consider that just the banks were involved with the following: sale of commercial paper (distribution), liquidity provider, CDO underwriter, conduit sponsor and investor. The odds are stacked against Mr. Crawford’s committee.

On November 22, Mr. Crawford’s Pan Canadian Committee released the first comment on the restructure in months in a Financial Post article. The Committee disclosed two new pieces of information:

- The Committee is creating a liquidity tranche for investors in need; and
- The restructuring is scheduled to be completed by March 2008.

As a consultant, the two most questions I get most rfrequently asked are: 1) What are these assets worth? and 2) Who is to blame for the debacle? Today I will tackle Question 1.

In order to answer the $35 billion question of "What are these assets worth?", we must answer this question with some more questions. Below are some of the key questions that should be asked of Purdy Crawford's Committee and the answers will have a material impact on the recovery value on the assets:

- The most difficult part of the restructure will be to address the margin calls that can be made by the foreign banks for corporate CDOs in an environment, where new ABCP cannot be issued. If investors are unable to post collateral for a margin call, this will result in an event of default and a firesale of the assets. How will the Committee prevent this from happening? There is speculation that either the triggers will be widened to a level where they are less likely to be triggered or the foreign banks will agree to waive them altogether. However, this leaves the foreign banks greater exposed to corporate credit market. It is not likely they will agree to these new terms without some form of compensation. That form of compensation is likely to come from the investors. For this reason, it can be assumed the investors will not receive par for their investments in leveraged super senior CDOs, as the value of the credit default swaps are generally lower in today's credit crunch environment, compared to when the transactions were first originated.

- Who will be providing the “liquidity tranche” and how will this work? The government? Banks? Who is willing to take on additional exposure to the ABCP? Will this be available on December 14 or March 2008? This might give investors immediate temporary relief.

- How bad will the US subprime market get? As of October 2007, the default rate (90 days past due) was at 16% on the US$1.3 trillion subprime mortgage market. Will Bush's plan to freeze subprime mortgage rates for five years be successful? This may have an impact on the 7% of US subprime assets embedded in the ABCP.

- At what rate will investors be compensated for the standstill period?

- What type of return can investors expect on the new longer term notes?

- Will the restructure come in a form of bonds, issued with a prospectus much like the asset backed securities term transactions or will they be privately traded?

- Who will be the administrator of the newly structured notes? Can the role of administration be passed on seamlessly without any interruptions? Any interruption in administration (investment of collateral, collecting on receivables from traditional clients, etc.) can lead to deterioration in recovery value.

- When will the Data Room be open to the public to facilitate secondary trading? The sonner this happens, the sooner we will some bids from potential buyers.

- Can all investors wait until March 2008 for the restructure to complete? Are we confident the restructure will complete by March 2008?

- Will the standstill period be extended until March 2008? Can the Committee get all parties who have been waiting patiently since August to waive their rights again for an additional three months?

- Most importantly, can the Committee successfully convince all parties to play ball, or will one significant stakeholder lay the hammer and not agree to the terms and conditions beyond December 14?

It should be apparent that the valuation of the assets is a very difficult question to answer. This is why we have seen write-offs on ABCP all over the map between 5% to 40%. For the parties trying to sell ABCP, it is important to remember that in an open market economy, the assets are only worth what buyers will pay for them. While the affirmation of AAA ratings by DBRS gives some investors comfort, it is not enough to solicit meaningful bids from buyers. We must all do our part to urge greater transparency and flow of information in the market. Not only wil this give the market a better idea of the value of the assets, but we will actually begin to see some meaningful bids from secondary buyers.

Daryl Ching
Clarity Financial Strategy

Friday, December 7, 2007

US Subprime Rate Freeze - Commentary

By: Daryl Ching, Clarity Financial Strategy

Date: December 7, 2007

On December 6, George Bush unveiled a plan to freeze interest rates on subprime mortgages for five years. Leading up to 2007, with a booming real estate market, US lenders have been aggressively offering mortgages with low teaser rates, that balloon to a regular variable rate after a certain period of time, usually two years. The intention was to attract borrowers with poor credit quality and offer them rates that they could afford initially. As rates have been resetting to normal levels, there has been an increase in defaults, as borrowers can no longer afford to make the higher mortgage payments.

US Treasury Secretary Henry Paulson told reporters that this plan will avoid foreclosures and give the nation a chance to work its way through the housing cycle. The US subprime mortgage market is estimated to be US$1.3 trillion. Reports have indicated defaults (90 days delinquencies) / foreclosures to be anywhere between 16-20% to date. There is estimated to be an additional $500 billion of mortgages resetting in 2008.

I agree that this plan will temporarily slow down the rate of defaults and give the market some breathing space. Investors of Canadian ABCP with subprime exposure can stand to benefit from this plan, especially if the term to maturity of the assets is within a five year timeframe. However, we have to take a look at Bush's plan from several angles.

In order for this plan to work, the US government will need to receive some form of consensus from the investors who currently hold the subprime risk. Investors who had agreed to these investments had likely expected a greater pickup in return on their investments, which can only be received from higher mortgage rates. Also, in securitization transactions, a common form of credit enhancement to protect against losses is excess spread - yield on mortgages minus funding costs. For the borrowers who can afford to pay the higher reset mortgage rates, their proceeds will be used as a cushion for losses and will also help pay the higher returns to investors who have agreed to take on this risk.

Investors will have to decide if the resulting decrease in defaults more than offsets the yield they could have earned from borrowers who continue to make mortgage payments. A couple more important questions should be asked when thinking about the long term:

1) Are we not just delaying the inevitable? Paulson argues that by pushing the resets out five years, we may push them out to a higher point in the credit cycle. However, is it not the poor underwriting of mortgages that has led to this crisis and drop in housing prices in the first place? I can only believe that the delay will lead to the same problem in five years.

2) There is always the debate about whether government intervention, particularly bail outs are good for the capital markets. Have the various participants in the financial markets learned their lesson? Will we see this happen again within the next century? Do government bail outs encourage the market to continue its wreckless underwriting and help participants forget about the mess that has been created?

While I am convinced that this plan provides a bandaid solution that will limit defaults in the subprime sector into 2008, I am not convinced that mortgage rate freeze is good for the market in the long term. Sometimes, people only learn lessons the hard way, and that is to feel the pain of a loss from poor investment decisions.

Daryl Ching
Clarity Financial Strategy

Thursday, December 6, 2007

Scotia Capital / Canaccord ABCP Lawsuit - Article and Comment

By: Ross Hendin, Hendin Consultants

Tara Perkins and Jacquie McNish wrote an article in today's Globe and Mail: Scotia Capital named in ABCP lawsuits

I think it's an article worth reading because it goes into a lot of the details that will become important as litigation continues to unfold in the case and after the Accord is voted on.
For readers of the Globe, I have already made a comment about the article.

But for the readers of the Clarity blog, I want point out a few other things:

1) The first and last paragraphs of this article are really the heart of the issue here. Scotia Capital may have known the market was heading for turmoil. They may have not just ignored this, but may have gone a step further by reducing the amount of paper they held while promoting the paper to clients. Now, as I often tell clients, there are two places that corporate legal cases are fought: the court of law and the court of public opinion. Even if Scotia Capital wins in court, they are going to have a challenge winning this one in the court of public opinion. This is a legal fight that should be in the public eye, and it seems very likely to me from a PR strategy perspective that Canaccord probably launched the suit in advance of the Montreal Accord deadline for the very purpose of getting advance media attention and trying to get the message out there that at least one group may have known about the ABCP meltdown before hand and did nothing about it. IF this is what they are trying to do, I commend them on the strategy and just hope now that they can get the message out more effectively. Scotia Capital also has a chance to use the spotlight to its advantage if it can figure out how to harness this action in its best interests. I think it can be done.

2) Branding, and the way you present yourself as a company, is critical at all times. Before anyone launches a litigation or an accusation, PLEASE for the love of your shareholders consider if your arguments or assertions in your legal filings (that go on the public recorded and may be exposed) are in line with what you hold yourself out to be. For example, click here to see the Canaccord Capital website. Beside the logo are the words "Independent Thinking". Their case is totally premised on the fact that they were told what to do and what to think by Scotia, they DIDN'T think independently, and they are suing because of it. More and more over the last number of years, companies have been realizing that the market and their clients are becoming more observant. Many of the most forward-thinking companies now make it a rule to hire a PR person to work with their lawyers (litigation communication) to translate between English and Legalese, and to make sure mistakes like this one just don't happen. There is a very famous PR case study called the 'McLibel' trial that comes to mind: McDonald's actually sued two people from Greenpeace. Even if they won the case, it doesn't matter - it was a PR disaster.

Ross Hendin is CEO of Hendin Consultants, and is a Senior Advisor to a leading multi-national PR firm. With strategic communication experience in more than 20 countries around the world, Ross specializes in litigation, financial and political strategic communication. He has advised companies in the ABCP niche since 2006. Hendin Consultants has offices in Toronto and London, UK.

Hendin Consultants is on the web at
Email Ross at

Investors should not lose sight of credit risk, says Bank

By: Daryl Ching, Clarity Financial Strategy

Date: December 6, 2007

Tara Perkins wrote an article today about a paper publicshed in the Bank of Canada's Financial System Review. Click here to view the Globe and Mail article

This article starts off by addressing the Asset Backed Commercial Paper debacle and stating that “investors need to accept responsibility for managing credit risk in their portfolios.” It suggests that investors cannot fully push off accountability to the rating agencies who rated the ABCP. I wholeheartedly agree with this statement. At the end of the day, the rating agency provides an opinion on credit quality based on relevant facts they have available to them. When situations change, like the recent market disruption, they revise their criteria to reflect a change in environment.

Investors do not sue research analysts for placing a "buy" rating on a stock if it plummets. Auto purchasers do not take action on consumer reports if they put out positive reports on a car and the engine breaks down. At the end of the day, much like other reports available in public, the rating agency provides an opinion. It is ultimately the responsibility of investors to understand the rating methodologies and convince themselves that they are comfortable with their investment decisions.

If we think back to the market disruption, there were no downgrades of any ABCP conduits at the time and no sign of credit deterioration in the trusts. The market disruption of the non-bank trusts was as a result of a loss of investor confidence from the buzzword "subprime". Can you blame the rating agency for not predicting a mass exodus of ABCP investors when there was no reason from a credit perspective to panic? It has been pointed out that DBRS may have been wrong on the General Market Disruption liquidity protocol, as some banks did not fund emergency liquidity in August. However, until the courts confirm that the banks were right not to fund, the verdict is still out on that issue as well.

I also agree with the comment in the paper that government regulation of the rating agencies could stifle innovation and development of the financial markets. The rating agencies are closer to the market having constant interaction with various participants and are in a better position to rate structured products than the government. I think the best approach for development of the capital markets is to learn from our mistakes and make changes going forward. As a result of this debacle in Canada, investors will need to be more savvy and will demand more transparency. DBRS has revised their criteria to require global style liquidity for ABCP conduits. This opens the door for other rating agencies to come in and rate the paper. Having a second opinion from another rating agency on ABCP will add a layer of scrutiny and provide greater comfort to investors as well.

As we watch the evolution of the ABCP market, it will be interesting to see how things unfold and how the market looks next year this time. At the very least, I certainly hope we have learned a couple key lessons:

1) More transparency and more disclosure will be required.
2) Investors need to do their homework and are accountable for all their investment decisions.

Daryl Ching
Clarity Financial Strategy

Wednesday, December 5, 2007

Perimeter ABCP: Market Update

Click here to view Perimeter's newsletter

Perimeter Financial has released a newsletter through their Markteplace Update on the progress that has been made thus far. A few interesting conclusions can be drawn from the information provided:

1) There is still a large discrepancy between the bids and offers. This is likely due to the lack of information available on the assets.

2) A common question being asked is "What do these transactions mean?" This speaks to the fact that investors are still not receiving adequate responses to their questions on the underlying structures. It would be prudent for investors to seek professional advice from individuals who have had a structuring role in the industry to fully understand what they have purchased.

3) Another anonymous comment cited in the newsletter is "All my assets are AAA, I wouldn't accept any haircut beyond 5%." Because investors have purchased AAA investments and those investments continue to be affirmed AAA, investors continue to believe they should not accept any bid too much below par. This comment reiterates that investors are continuing to rely on the AAA rating. My advice for investors is that they need to learn about the assets, methodologies on ratings and figure how to determine for themselves that the assets are still AAA. Without a real understanding of the assets are structured, AAA is a relative term.

If there is one lesson to be learned from this entire situation, it is that investors need to do their own due diligence for all investment decisions.

Daryl Ching
Managing Partner
Clarity Financial Strategy

Monday, December 3, 2007

What can we expect with the Montreal Accord on December 14?

By Daryl Ching
Clarity Financial Strategy

It should be apparent that many questions still need to be answered when assessing the outcome of the ABCP restructure, and all these questions have implications on recovery value of the investments. It appears in a recent report issued by Purdy Crawford's Committee that progress is being made and I applaud their efforts on this difficult restructure. Having said that, we still seem to be missing the principles of something our nation is very proud of – capitalism and an open economy. Whether an investor holds $50,000 or $1 billion of ABCP, it's counterintuitive to say that they are not allowed to sell their assets. What the Pan Canadian Committee is missing is a second option for investors to sell their assets immediately in the event they cannot wait until March 2008 or possibly longer. In order for this to happen, the Committee must release the information in the Data Room managed by Ernst & Young to the public to allow meaningful secondary bids. As the assets continue to be of strong credit quality, there is certainly demand from various hedge funds and fixed income portfolio managers to buy the assets. However, they cannot do this without information. By providing data, secondary investors will have the tools to conduct prudent analysis for their investment decisions and offer bids higher than 50 or 60 cents to the dollar. With multiple bids, this will enhance the pricing on these investments and at the end of the day, investors have a choice to sell their assets or not.

In various press releases, I have seen potential buyers labeled as “debt vultures” and making an effort to “exploit those in need of liquidity”. I have a hard time trying to understand how secondary trading in ABCP is any different than any other market. Let’s take an example where Mutual Fund Corp., a conservative fund manager is holding XYZ Corp. that is suddenly downgraded below investment grade on negative earnings. Due to Mutual Fund Corp.’s conservative investment guidelines, they are forced to sell XYZ Corp. The likely buyers will be other funds that take greater risks, in hopes of high reward. It is likely that Mutual Fund Corp. will sell XYZ Corp. at a discount from its original purchase price. However, Mutual Fund Corp. is likely thankful of an open market system and the fact that they were able to dispose of their assets.

Despite strong affirmed ratings by DBRS, the ABCP can clearly be classified as distressed assets. There is no liquidity in the ABCP market and there are so many uncertainties about the outcome of the restructure. It is only fair that potential buyers of ABCP need to be compensated for the lack of information available and the uncertainties that exist. It is for this very reason that potential buyers ask for a purchase price at a discount to par. A trade will take place between a seller who cannot wait for the restructure to complete or does not have the risk appetite for the uncertainties ahead in the restructure and a buyer who can wait and does have the appetite. However, we should all be glad that there is an investor base willing to buy the distressed assets when an efficient ABCP market does not exist.

Despite the lack of information, I remain confident that the Pan Canadian Committee will be successful in the restructure. Whether this takes place in March 2008 or later remains to be seen. The restructure will result in the ABCP being converted to long-term notes to match the maturities of the assets. When this happens, I expect there will be much more information and help for market participants to assess the value of the assets. I anticipate that we will find that the trusts are of varying quality, and some will price closer to par than others. However, I am also hopeful and optimistic that for those investors who just cannot wait, there an opportunity for them to sell their ABCP well before March 2008 either privately or through the Perimeter Financial trading platform.

As an individual who has invested over six years in this industry, I feel a personal responsibility to facilitate a fair resolution for all parties involved. At the very least, fair to me means full transparency and full dissemination of information that is available to all parties involved to level the playing field so that everyone can make informed decisions.

Daryl Ching
Clarity Financial Strategy

Wednesday, November 28, 2007

Caisse under fire over commercial paper


Source: Reuters

MONTREAL — Quebec's public pension fund manager, Caisse de depot et placement, came under fire from opposition politicians Wednesday for taking what may be a multibillion-dollar stake in the troubled nonbank asset-backed commercial paper market.

Henri-Paul Rousseau, chief executive of the Caisse, Canada's largest pension fund, was scheduled to testify before the legislature's finance committee in Quebec City Wednesday afternoon on the extent of its holdings in the $35 billion market for so-called ABCP.

Before his testimony, however, Quebec's two main opposition parties demanded answers from the minority Liberal government on the Caisse's role in the frozen market for ABCP.

Mario Dumont, leader of the Action Democratique du Quebec, accused the government of washing its hands of the ABCP mess.

He criticized Quebec Finance Minister Monique Jerome-Forget for telling the legislature Wednesday that rating agency Standard and Poor's has lauded the government's policy of not intervening in the Caisse's management of investments.

“It's interesting that she cites Standard and Poor's. They said not to buy it -- commercial paper -- and the Caisse has $14 billion of it,” Dumont said.

Daryl Ching, head of Clarity Financial Strategy, which aims to educate corporations and professionals about the ABCP market, said there is plenty of interest in finding out exactly how much ABCP the Caisse holds.

“There have been guesses about their exposure of anywhere between $12 billion and $20 billion,” he said.

“If it's much higher than $13 billion, that'll be a shock to the market,” Ching added.

In Quebec City, Jerome-Forget told the legislature she had communicated with the governor of the Bank of Canada and Canadian Finance Minister Jim Flaherty on the matter, but Quebec would not intervene in the day-to-day management of the Caisse's portfolios.

“It's not that the Caisse has commercial paper, it's what is the quality of that commercial paper,” she said.

Gilles Taillon, finance critic for the ADQ, wanted to know if the Caisse's ABCP holdings could affect the solvency of some $27 billion of public employees' pension funds.

The Caisse, which manages Quebec's public pension and insurance funds, has $237 billion in assets under management.

It is widely believed to have been the biggest investor in that part of the ABCP market that is not run by the country's big banks.

That market faltered badly in August when investors balked at buying the securities because of fears that the assets backing the opaque instruments had hidden exposure to the default-ridden U.S. subprime mortgage market.

The Caisse led other key investors such as National Bank of Canada in signing the Montreal Accord, an agreement by those holding more than 80 per cent of the market to not trade the paper until a workout strategy could be put in place.

The deadline for that workout, which would seek to replace the paper with longer-term debt, is Dec. 14.

Wednesday, November 21, 2007

Will the Montreal Accord fly?


From Wednesday's Globe and Mail

Asked why it wrote down its asset-backed commercial paper by only 8 per cent, Groupe Desjardins told us, among other things, that it thinks the Montreal Accord restructuring effort will succeed.

National Bank, another signatory to the accord, gave its ABCP portfolio a 27-per-cent haircut, and hasn't said that it doubts the outcome of the accord.

You hope it works out for the sake of the investors holding the bag, but the odds don't look particularly good at the moment.

About three-quarters of the $33-billion of third-party ABCP sold to investors is of the synthetic variety, meaning, for example, that the conduits investors put money into are built from various kinds of interest-bearing securities and derivatives like credit default swaps. And almost 60 per cent of the total ABCP is leveraged, meaning through the use of derivatives, there are more assets in a conduit than investors put in money.

Here's the problem, according to people we spoke to: When the conduits entered into swap agreements, their counterparties - typically foreign banks - were essentially given first claim on the assets of the conduits in the event of a problem. If the value of the assets backing up their investment deteriorated, they could place a margin call forcing the conduit (or its sponsor) to add more collateral. Conduits would do this by tapping the capital markets for more money, which would have been possible in normal times. But of course now the markets are not functioning at all and the plan is to morph the commercial paper into 10-year notes with floating interest rates.

Under the circumstances it's a fine idea except for those pesky counterparty agreements in the leveraged conduits: They don't just go away for free.

The only logical trade would have been to ask the counterparties to drop the right to demand more collateral in exchange for not having to provide liquidity, but as it happens the liquidity agreements were so weak that there was effectively no risk of them ever being triggered. The banks weren't going to trade something that had very little risk to them for something that exposed them to great risk.

(The irony of course is that these banks win if credit quality drops but don't suffer if, as has happened, market liquidity dries up, even though the two problems can be closely related.)

With commercial paper, as mentioned, a margin call could be met by issuing more paper (in a normal market). But once converted to floating-rate notes, the situation becomes static: There's no easy way to raise more collateral. So the protection of that margin call disappears. Therefore, there doesn't appear to be any motivation for the foreign banks to play ball, and given that more than half the commercial paper is leveraged, it's hard to see the Montreal Accord succeeding. More...

Sunday, November 18, 2007

The black box explodes

From Saturday's Globe and Mail
November 16, 2007 at 9:47 PM EST

Shortly past 8 a.m. on an already sweltering August Monday, a small team
of financiers hurried down a flight of stairs in one of Montreal's most historic
office buildings to watch a modern disaster unfold.
The men, senior executives with National Bank Financial, were hurrying to a
cavernous room on the main floor of the beaux-arts Sun Life building where
more than 100 traders buy and sell billions of dollars of stocks, currencies
and debt instruments every day. Leading the group was Ricardo Pascoe, a
wiry, soft-spoken derivatives specialist who was named co-chief executive
officer of National Bank of Canada's securities arm a year earlier. At his side
was his top legal executive, Brian Davis.
Mr. Pascoe whisked the group past long lines of noisy trading desks to a
normally quiet corner where a half dozen men and women were feverishly
working the phones. The traders were seeking buyers for a Byzantine class
of short-term debt called asset-backed commercial paper. Known by the
clunky abbreviation ABCP, the paper had become a money market darling in
the past decade, accounting for more than 30 per cent of Canada's $360-
billion short-term debt market.
The 30-day and 60-day notes paid interest generated by bundles of mortgages,
car loans and other debts pooled in special vehicles called conduits or
trusts. These conduits were hard to understand, even by many lawyers and
bankers, but the lack of transparency never seemed to bother investors, who
snapped up the notes because they offered some of the highest interest
rates going, boasted the best credit ratings and were sold by the world's
leading banks. MORE...