Thursday, February 28, 2008

The Big Game of Chicken

By: Daryl Ching, Clarity Financial Strategy

I will be on the Business News Network at 2:45 PM EST to speak about the BMO CDO conduits - Sitka and Apex Trust. However, I will focus my blog today on the repercussions for the non-bank ABCP.

DBRS has downgraded Sitka and Apex Trust to the equivalent of CCC. They are technically in an event of default, because bank counterparties made margin calls, and to date all the parties failed to implement a restructure or post the required margin. BMO now has two days to remedy this situation or the bank counterparties will have the right to seize the assets in the trusts and proceed with a firesale. BMO faces a serious predicament. Should they post the required collateral (that will result in an additional $495MM in writedowns) or let them sink? I will discuss this decision on BNN.

Either decision they make begs the question about whether they are still going to stay committed to the margin facility for non-bank ABCP. Let’s just say for the sake of argument that BMO is more likely to bail out their own conduits than non-bank conduits and they decide to walk away from Mr. Crawford’s Committee. What then? Does CIBC pound their fist and say “Wait a minute! We’re in a dire situation too. Why should we have to participate then?” All of a sudden we may see this big game of chicken being played by the Big Banks. Nobody wants to see a $33 billion meltdown, and yet nobody wants to step up to the plate to be the saviour either.

Now let’s think back to December. On a conference call on Christmas Eve, Mr. Crawford mentioned a mystery banker that could step into the shoes of the Canadian banks if they did not step up. That mystery banker was identified to be JP Morgan, which some participants pointed out was a conflict of interest. However, fast forward the clock a couple months and the credit environment is significantly worse today than it was in December when the margin facility was first proposed. Is JP Morgan going to save the day or are they having second thoughts as well? This is likely causing the delay for Mr. Crawford’s press release.

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