Friday, December 21, 2007

DBRS and the Big Freeze

(Globe & Mail) There are many authors of the Big Freeze in asset-backed commercial paper that handed hundreds of Canadian companies, funds and investors multimillion-dollar losses on what were supposed to be sure-thing investments.

You could point a finger at the Office of the Superintendent of Financial Institutions for demanding the now infamous phrase “general market disruption,” which gave banks a truck-sized loophole to walk away from emergency ABCP loans to cover paper issued by non-bank companies. Or you could finger global regulators, investment dealers and even investors themselves for failing to insist on any data about the specific assets underlying the murky paper. Then there is the Caisse de dépôt et placement du Québec, which kept the non-bank ABCP engines running by investing more than any other single buyer. But the one party that wears it more than anyone else is Canada's DBRS Ltd.

While U.S. rating agencies refused to endorse Canadian paper because of the OSFI-created bank loan flaw, DBRS jumped in and gave the notes its highest ratings. Without the DBRS rating, flawed Canadian ABCP would likely never have found a buyer.

Also worthy of question is DBRS's close relations with ABCP issuers. The firm earned commissions on the notes it rated and wasn't always quick to share bad news with investors. It had become such a market booster that it rushed to reassure investors it “has no concerns” about the quality of ABCP issued by Toronto's Nereus, even though it the firm was reeling from a management exodus and legal battle with its parent Coventree Inc.

What DBRS did not say publicly is that it privately warned the companies in writing that the turmoil could cause “a potential loss of confidence by investors.”

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