Wednesday, April 30, 2008

After the vote, is the end really in sight?

By: Ross Hendin, Hendin Consultants

According to this article, almost 96% of the noteholders voted in favor of the restructure, but that in no way means that it’s going to happen right away.

A few corporate noteholders are upset at what's happened to them – that either they feel the restructure itself isn’t fair, or the reason they hold the product in the first place because of unfair play on the part of their banks. In an effort to join the retail clients and also be made whole, some of them have tried to band together while others are making claims on their own – which may prevent the restructure from happening on time – by their first asking that they become their own class of noteholders (and therefore have veto power) and presently by asking the Court to limit the scope of the restructures legal releases, so the corporates can sue the banks for fraud, gross misrepresentation, and other issues around how they found themselves holding ABCP in the first place. According to this article in Bloomberg, Benjamin Zarnett, who represents the Committee, told the Court that the banks that agreed to provide back-up financing to the for the new notes will withdraw their support if the releases are trimmed.

The vote was allowed to go on as planned, but now that the vote has happened, the Court is in an awkward situation: caught between the rights of corporations, the broadest legal release ever in a CCAA agreement, and the reality that if a $32 billion dollar market melts down, the repercussions will be massive and international.

If it's possible, this has become a far more dangerous game of Chicken than the retail investors played. The stakes are much higher, as the focus will ultimately return to the Banks - the last place anyone on Bay Street wants them to be. Criticism for the plan itself is really superficial next to the illegal undercurrents that companies such as Barrick are pointing to, and it makes me wonder what will happen when the time comes for everyone to put their confidential documents in front of the Court in an Examination for Discovery. According to their motion, Barrick says that CIBC confirmed that their investments didn't have subprime exposure, when in fact they did. Barrick also makes a point of saying that they bought more paper just prior to the market freezing - which made me wonder if that purchase was made before or after the release of the now infamous Coventree letter.

Barrick also state that they were misled by the Investors Committee, saying it didn't come through on a deal to allow Barrick to retain litigation rights.

So, to give some context, what Barrick is saying isn't that they want to hold up the process, see this melt down, or have a nuclear button they can push to hold everyone hostage, what they are saying is that they feel strongly they have been wronged, and they want the right to be able to seek vindication for it.

This to me turns the Barrick / CIBC situation into a game of Chicken. CIBC may be assuming that Barrick and the other companies like it aren't going to be able to sue, so they are sitting tight. If CIBC were to try and make them whole, there are probably a number of other clients who would line up behind Barrick for the same treatment, and even more scary, the corporate clients of the other banks would go to their account managers and say "if CIBC is doing it, why aren't you" - the domino effect so begins. It's therefore in CIBC's interest to wait it out for a while, and hope that Barrick, Jean Coutu, Transat AT, Redcorp, and the many others involved in this corporate noteholder offensive are tainted as the companies trying to ruin the process for the market and are pressured or decide to back down.

From the corporate noteholders perspective, pushing to be able to sue is critical because they aren't concerned about the new paper as much as they are annoyed that they are in the situation in the first place. They are pushing here for transparency and to call the bank out because their banks may have sold products they either didn't know enough about, or knew about and didn't share the information with their clients. To the corporates, it may be worth holding up the restructure another few weeks and risking looking selfish to get to the bottom of the problem and push to be made whole, or open the Pandora's box that is the actions of the banks before the market freeze. If they are successful in being able to sue, I'm sure that CIBC will either threaten to walk from the margin facility, or will fold on the case very quickly and make them whole. Why? Because I'd bet CIBC cannot afford to let this suit get to an examination for discovery - a process by which Barrick and eventually the Court will be able to seek disclosure for internal documents.

And so, if the Court rules that the banks can in fact be sued for fraud and actions that put their clients in the midst of the freeze, there is a good chance that CIBC and maybe other banks will walk from the facility and once again the risk returns that the market will meltdown. Even if that (hopefully) doesn't happen, what it does is open up the banks to a lot more questioning and scrutiny by their clients. Over-regulation and transparency by Flaherty going forward will be the least of their problems, as they will have to decide between finding the money to make their clients whole and risking the Court, and the court of public opinion, see what really happened in the months before the meltdown.

A reality exists that it’s in everyone’s interests to have the restructure happen, and then have the banks buy the new notes from the clients and make up the difference in their value, than it does to put the entire process at risk like this.

The story is taking now taking a turn to litigation and public relations strategy. Every word and every motion on the side of the Banks will be essential to their survival in this period of the ABCP saga, just as it will make the difference for the corporates between being remembered as “commercial crusader” or “that company that sparked the largest financial meltdown in Canadian finance history”.

Ross Hendin is CEO of Hendin Consultants, and is a Senior Advisor to the Canadian office of a leading multi-national PR firm. With strategic communication experience in more than 20 countries around the world, Ross specializes in litigation, financial and political strategic communication. He has worked in the ABCP niche since 2006. Hendin Consultants is in Toronto and London, UK, and is on the web at Email Ross at

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