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.