Tuesday, December 18, 2007

Who's pulling Crawford's strings? ABCP workout plan resembles Keystone Cops

(Financial Post) Imagine you are North American auto manufacturers General Motors, Ford and Chrysler, when a foreign-based automaker such as Honda and its parts suppliers come to you and say Honda is going to go out of business and that's going to hurt all the Canadian consumers who bought a Honda and the auto parts suppliers who make things for everyone.

So you -- Chrysler, Ford and GM -- have to ante up billions of dollars to save Honda from itself for the betterment of the Canadian auto industry.

Kind of nuts, eh?
Apparently not in the wacky world of third-party asset-backed commercial paper (ABCP), whose restructuring is becoming more and more like a Keystone Cops movie than a Stelco or Air Canada workout.

That's pretty much the gun-to-the-head scenario put to the Canadian banks last week by the self-declared Pan Canadian Investor Committee, headed by Osler Hoskin & Harcourt lawyer Purdy Crawford. The banks were told to ante up to save the market or suffer the consequences. This from a committee that has yet to meet any deadline it has faced, but is quick to wrap itself in the flag as saviours of Canadian capitalism when its members interests are at stake.

It's also a committee whose role increasingly appears to be that of shill for the foreign banks that stand behind the third-party ABCP. These institutions swooped into this country and helped create the mess in the first place when some of them failed to provide the conduits holding the paper with the liquidity they needed when the market began to seize.

Now it appears Crawford's committee is trying to set up the Canadian banks to be the fall guys when his group can't thaw the frozen $33-billion market. If the Canadian banks don't play in his snow fort, Crawford can point to them as the culprit when corporate Canada is forced to write off billions of dollars and sell the paper for dimes on the dollar, an event that seems to creep closer each day.

People forget that lurking behind the Pan Canadian Committee are the six signatory foreign financial institutions ABN Amro, Barclays Capital, Deutsche Bank, HSBC -- which already faces a lawsuit over its handling of ABCP -- Merrill Lynch and UBS, plus the homegrown National Bank Financial. These players signed the Montreal Accord, which brought things to a standstill with a rosy promise to work things out in 60 days.

That led to the appointment of the "Pan Canadian Committee," but a cynic might argue this is more of a Quebec Inc. problem, than Pan Canadian, given that much of this junk paper is held by Quebec-based institutions.

Let's remember no one here is a philanthropist. In fact, these foreign financial institutions, until lately, have been living high off the hog from the millions of dollars in fees earned over the years from this type of ABCP.

Not only that, but many of them wore so many hats in this affair that it has become an incestuous conflict trying to work out who will take a haircut and for how much. They participated as manufacturers and sellers of the paper to providers of the liquidity and operating on both sides of the trade, taking a chunk of the fees along the way.

If these guys were law firms, the law society would have shut them down for having their hands in too many pies. But they're not, they're foreign banks.

So why aren't they putting up the liquidity needed to make this market happen? It's not like they can't afford it. These foreign banks dwarf the Canadian players they are trying to drag to the table.

Moreover, what are the foreign banks giving up to make this happen? It's not clear, because transparency is a foreign concept to this self-appointed restructuring group, which has operated under the cloak of secrecy since it set up its deal room. The fact that we are more than 100 days into this process and many investors don't even know the value of their holdings is flummoxing to say the least, as is the fact that only recently have Canadian banks been brought into these ongoing discussions. They should have been there from day one if they were going to be called upon to participate in a bail out as a key player.

Right now it's a high-stakes legal standoff such that a lame-duck Bank of Canada governor has rode in on his horse hoping to wrestle the Canadian banks to the ground. Oddly silent is OSFI, the regulator for Canadian banks, and the federal government. If this is such a systemic Canadian problem, why aren't they reading the Canadian banks the riot act?

Because it's not systemic. See, the bank-owned tranche of ABCP, which accounts for about two-thirds of the market, continues to function, albeit it's needed help along the way -- help the main Canadian banks have given each other.

What's really going on here is an apportioning of the risk. To suggest that the Canadian banks take on billions of dollars in possible risk is ludicrous, and to send them a bare-bones term sheet with a 24-hour turnaround is no way to treat banks that you need to be your saviour. What did Crawford expect? To be met with open arms? Imagine the howls of outrage were the tables turned and Canadian banks made such a demand. There would be Parliamentary hearings in a nanosecond.

Moreover, what does OSFI think of a deal where Canadian banks participate in a large credit facility without having access to information to complete the due diligence necessary to assess the soundness of the plan?

Why won't the Crawford committee share vital agreements involving the liquidity backstopping and financial information with the banks? What are the foreign banks so fearful of disclosing?

The Canadian banks' legal exposure to lawsuits should this restructuring hit the skids, which is where it is headed, is likely far less than they're being asked to ante up, certainly for TD Bank, whose hands are clean on this. They didn't manufacture or sell third-party paper. Why should their TD shareholders be put to the risk of a restructuring that may or may not work?

Those close to negotiations say Crawford's committee is sending mixed messages. On one hand they're touting viable commercial paper, on the other, they're offering legal releases. Which is it? Are you flogging protection from bad paper and lawsuits or selling commercially sound paper?

What works in the Canadian banks favor at the moment is that when this blows up, the bulk of lawsuits will be negligent misrepresentation claims. Those are tough to prove. You must have a misstatement or omission of a material fact that the buyer then relies on to make their investment decision. That will make it hard to bring class actions, because each party's facts will be different.

One bank lawyer who has listened to some of the taped calls between brokers and buyers of third-party ABCP says that there's no advice given on the sales calls, largely because the advisors selling the product don't have enough information to differentiate one conduit from another. It's usually a simple request by a sophisticated buyer to acquire term paper with a certain rating. That's it.

The Canadian banks seem to agree that there's a role for them to play, but not under the current scenario. That begs the question, has the Crawford workout group got another plan or the credibility at this stage to pull off a restructuring? Or is it time to send in the litigation team, blow this mess up and kick it to the courts to sort out?

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