The black box explodes

From Saturday's Globe and Mail
November 16, 2007 at 9:47 PM EST

Shortly past 8 a.m. on an already sweltering August Monday, a small team
of financiers hurried down a flight of stairs in one of Montreal's most historic
office buildings to watch a modern disaster unfold.
The men, senior executives with National Bank Financial, were hurrying to a
cavernous room on the main floor of the beaux-arts Sun Life building where
more than 100 traders buy and sell billions of dollars of stocks, currencies
and debt instruments every day. Leading the group was Ricardo Pascoe, a
wiry, soft-spoken derivatives specialist who was named co-chief executive
officer of National Bank of Canada's securities arm a year earlier. At his side
was his top legal executive, Brian Davis.
Mr. Pascoe whisked the group past long lines of noisy trading desks to a
normally quiet corner where a half dozen men and women were feverishly
working the phones. The traders were seeking buyers for a Byzantine class
of short-term debt called asset-backed commercial paper. Known by the
clunky abbreviation ABCP, the paper had become a money market darling in
the past decade, accounting for more than 30 per cent of Canada's $360-
billion short-term debt market.
The 30-day and 60-day notes paid interest generated by bundles of mortgages,
car loans and other debts pooled in special vehicles called conduits or
trusts. These conduits were hard to understand, even by many lawyers and
bankers, but the lack of transparency never seemed to bother investors, who
snapped up the notes because they offered some of the highest interest
rates going, boasted the best credit ratings and were sold by the world's
leading banks. MORE...

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