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.

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