Wednesday, February 27, 2008

Deafening Silence - What is happening behind those closed doors?

By: Daryl Ching, Ross Hendin

While the Crawford Committee has been quiet, participants in the market certainly have not been. The Facebook forum has had a high volume of comments. We have been inundated with numerous questions from ABCP noteholders and media about our thoughts on what is happening at this moment. The Clarity team has been thinking a lot over the last couple days about why there is a silence and what possibly could be happening with the Committee. While we have come up with a few thoughts that we are happy to share with you, we want to remind you that they are educated guesses at best, and these are conclusions being drawn with no input from the Crawford Committee.

Ross’s Perspective: So let’s start with why the silence?

It's no secret that the Committee has been doing whatever it can to keep its developments and actions as quiet as possible, while still trying to appear forthcoming and heroic. Every deadline the Committee has set so far has been for Friday at midnight, when nobody is around to celebrate their victories. They also had a media conference call last Christmas Eve at 12.30 PM - about the last time in the world anyone would want to hear about financial news. I have been saying for months that the point of their strategy has been to appear forthright but in reality be very secretive about their activities, and it could be that this week, we have seen their strategy be taken to another level of secrecy - total silence to the public.

The only comments that have recently been drawn in public are from private individuals who want this dealt with transparently and quickly so that they can find some economic relief and value in the notes sooner rather than later. These people, who should never have held ABCP at all, are understandably irate at the process. The other thing that the spotlight is doing is forcing accountability for the Committee. With so many people doing their homework on what's really happening, and starting to see how the Committee itself may profit from this work, there is increasing speculation and pressure growing in a forum that really has little impact on the restructure itself or the parties involved.

So, I can imagine that for the Committee, and the vast majority of corporations and individuals that want to see this restructure happen, the best thing for Mr. Crawford to do is keep the story and the reporting out of the media and the public attention. With no reporting or interviews at all, the media will have nothing to report on, and with nothing to report on, the Committee can continue to operate in the darkness that they have been striving to find for months. Silence, in the scenario they find themselves in, really could be golden.

Daryl’s perspective – Three possible scenarios

The latest standstill agreement states that the standstill is in effect until March 15th, unless the banks do not sign up by Feb 22, in which case it expires on Feb 22. I am not sure whether to take the silence as the banks have signed up and the Crawford Committee does not feel the need to issue a press release until March 15 or the Committee is still having problems seeking a commitment from the banks on the margin facility.

Based on Ross’s comments, I believe the most likely scenario is that the Standstill period has been extended or is close to being extended but Crawford’s Committee has not made the progress that they would like. The Committee is fully aware that short of coming out with news that the Restructure Plan is fully complete (ready to vote on) with final terms and conditions and full commitment from the banks for the margin facility, any news will be met with great disappointment. The Committee is likely trying to prevent various parties from taking immediate legal action. Silence may be a better deterrent than a press release stating that they are still not quite there yet on the restructure.

The second scenario may be that JP Morgan has decided to move to a AA, A, or BBB rating for the CDO tranche. While a AAA rating would be ideal for noteholders planning to sell the notes in the secondary market, a lower rating would likely decrease the required size of the margin facility and probably relax the spread-loss trigger to a level more palatable for the bank counterparties, who would like to be able to make a margin call sooner rather than later. If this is the case, the Committee will need to switch gears and renegotiate the quantitative terms and conditions with the various parties.

Finally, the last scenario is the worst one. It could be possible that the Committee has simply not been successful getting all the parties to agree to the terms and conditions, and is unable to do so. Under this scenario, the Investor Committee will disband, the Standstill period will cease and investors will be left with the old notes they had originally purchased. This would lead to margin calls, more calls for liquidity from the banks, events of default, firesale of the assets and a hailstorm of litigation. Because there is so much at stake, we do not believe this to be a likely scenario.

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