Eerie silence into mid-January

By: Daryl Ching, Clarity Financial Strategy

We are 20 days away from the standstill period deadline and there has still been no confirmation from the big banks to step up for the margin facility. One can only assume that this negotiation is as difficult as we had suspected back in December. It is very difficult to determine to what extent each bank was involved in the frozen ABCP market. Banks could have participated in several ways: provide liquidity, provide hedging for traditional securitization deals, selling ABCP and acting as counterparties for CDO transactions. With TD Bank clearly announcing their reluctance to participate due to their non-involvement in the market, this has opened up a can of worms as the banks start pointing the finger at the negotiation table, arguing about who is more responsible.

In a blog that I posted on January 2, I pointed to several articles written by the Star, National Post and Globe and Mail that identified the “mystery banker” backing the margin facility. During Mr. Crawford's conference call on December 24, he announced that a foreign bank would be willing to step in with approximately $2 billion to top up the required amount for the margin facility in the event that we have a shortfall from the Canadian banks. At that time, the Committee refused to identify the banker. The bank was later identified to be JP Morgan by the press. Furthermore, the Committee was criticized for the potential conflict of interest, as JP Morgan is the financial advisor negotiating the size and the fee of the margin facility and the only party with access to the data.

Mark Boutet, a spokesperson for the Committee responded by saying, “If there is one, JP Morgan has committed to look the world over to find financing for this and to deliver the market for it.” As it is January 11, and we still have not received a commitment from the big banks, I certainly they hope that the Committee has fulfilled their promise and reached out to other global institutions that may be less exposed to CDOs. I also hope that they are providing sufficient data to these institutions to help them get comfortable with the risks of the margin facility. The deadline is fast approaching and we are running out of time.