Monday, February 18, 2008

Bank of Canada didn't consider ABCP bailout-Carney

(Reuters) - The Bank of Canada never considered using public money to bail out the country's C$35 billion ($35 billion) non-bank asset-backed commercial paper market, a corner of the money market that seized up last August, Governor Mark Carney said on Monday.

"It was absolutely clear from moment one that there was not going to be any public money put behind any of this because these are decisions of financial market participants," Carney said.

"They took them, they are sophisticated ... That is not the place to put taxpayers' dollars or the balance sheet of the Bank of Canada," he said in response to a question from a business audience in the West Coast city of Vancouver.

In some of the most detailed comments yet from a Canadian central bank official on the Bank's role in the ABCP fracas, Carney said it acted as a "light-touch" facilitator for talks between various market participants.

"We became involved in this situation in a very light-touch way because there was a huge coordination problem in August when the problems emerged between the various players -- the banks, the derivatives counterparties, the investors.

"There was a real risk of a fire-sale with very, very low recoveries to the investors," Carney said after delivering his first speech since becoming Bank of Canada Governor on Feb. 1.

Canada's ABCP market, for paper issued by groups other than the country's big banks, ground to a halt six months ago when investors suddenly stopped buying the investments on concerns they were invested in U.S. subprime mortgages.

Banks refused to provide emergency funding, taking the market to the brink of collapse until a group of the biggest investors quickly stepped in to try to halt any defaults and hammer out a restructuring plan. The repair effort is still ongoing and market participants have largely heeded a trade and margin call standstill agreement.

"Our approach was to try to squeeze out some of the mistrust so that there could be ... a proper negotiation to try to make a bad situation less bad," Carney said.

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