Editorial: Paper tiger

There may be a plan to deal with the ABCP crisis, but the Canadian public is entitled to a much fuller accounting.

There should be mixed feelings about the engineering that magically turned Canada’s troubled asset-backed commercial paper (ABCP) trusts into insolvent corporations in order to land court protection from creditors and litigation. Despite valiant attempts by Purdy Crawford’s Pan-Canadian Investors Committee, which expected to unfreeze the $32-billion ABCP market months ago, this restructuring has turned into a fiasco expected to cost more than Stelco’s $200-million CCAA. Some investors are crying foul over what they see as an attempt to cover up ethical abuses, if not fraud. And while the sheer number of dollars involved goes a long way toward justifying the CCAA, something has to be done to better address the stink.

ABCP is short-term paper issued to fund investments in longer-term assets such as car loans, mortgages and various types of credit receivables. The Canadian market had relatively little direct exposure to sub-prime U.S. assets. But it was highly invested in credit default swaps providing excessive leverage. As a result, whenever investors were paid out, new paper had to be issued to new holders. That “rollover” process was backed by banks that agreed to provide liquidity during “general market disruptions.”

The so-called safety net earned Canadian ABCP a good credit rating, but didn’t kick in when the market froze during the credit crunch last summer. The banks collected fees when times were good, but during an obvious crisis they insisted a general market disruption had not occurred because ABCP was still rolling over in other parts of the world (where asset backers didn’t have the Canadian out).

Maybe nobody understood the real risks. Dealers, however, have been accused of knowingly unloading ABCP after being made aware that the market was cooling fast. ABCP was clearly billed as a highly liquid cash investment, and risk-averse buyers were sold something similar to a GIC that came without the guarantee.

Investors are angry. But the effort to restructure the market has stifled the finger pointing, and nobody appears to be investigating who knew what and when. Now, the CCAA filing has limited potential litigation, perhaps for the greater good, perhaps not. But after the accountants finish fixing the books, there should be a public reckoning. Confidence in our financial system is as important as its stability.