Wednesday, March 26, 2008

Crawford must make retail ABCP holders whole

(Globe & Mail StreetWise) Over the next four weeks, lawyer Purdy Crawford needs to turn up $269-million, and hand it over to retail investors in frozen asset-backed commercial paper.

Mr. Crawford can talk bravely about cutting some sort of a deal with 1,800 individuals who had the misfortune of parking their savings in this triple-A rated paper back in August, as he did Wednesday at a Canadian Club luncheon in Toronto.

But he has to realize that there is only one set of terms acceptable to this crowd, very few of whom were in the Canadian Club crowd.

The retired priests and engineers and various other hard-working types who've had their savings frozen for seven long months want payment in full. And they want their money soon.

They're after the same 100-cents-on the dollar deal that National Bank gave to its ABCP-owning individual clients, back when this crisis broke in August. That rescue saw the bank buy back $2-billion of paper.

This crowd wants to be made whole the way Manulife Financial made good its clients in 2005, after steering them into $235-million worth of hedge fund Portus, which subsequently went belly-up. Who came blame them?

Fair or unfair, Mr. Purdy needs to deliver on the precedent set by National Bank and Manulife. The alternative is that a $33-billion restructuring blows up because owners of less than 1 per cent of the assets voted it down.

The fate of the ABCP rescue plan really rests with about 1,4000 clients of Canaccord Capital. If this group can be brought onside, approval of the package is a slam dunk - it requires a thumbs-up from 50 per cent of all investors who vote.

The problem is that Canaccord claims it doesn't have the $269-million needed to take out its clients at 100 cents on the dollar. The paper is likely worth about 60 cents on the dollar, if it were to actually trade.

Mr. Crawford is focusing his efforts on managing down expectations from individuals. He warned Wednesday that retail holders of ABCP should guard against overplaying their hands. Here's where a lifetime of deal-making can lead a fellow astray.

In Mr. Crawford's world, as a rainmaker at law firm Osler Hoskin & Harcourt and as CEO of Imasco, executives and lawyers push and prod and scream and cajole as they negotiate deals. Everyone gets close to the brink, but knows not to go over. The respected securities lawyer needs to realize this Bay Street experience means nothing on Main Street.

ABCP holders are angry. They've got class action lawyers urging them to fight. And they've got good reason not to trust the financial institutions that put them into this commercial paper in the first place.

These investors see no reason to compromiise, given the precedent set by National Bank. There is no indication these investors know or care about the larger threat to capital markets. Pure spite could push the ABCP rescue over the brink.

One trial balloon being floated would have individuals who made a good-faith investment in short-term paper now take 80 cents on the dollar in the form of a loan. The idea is a non-starter - it's all or nothing for many individual holders.

Law suits between Canaccord and Bank of Nova Scotia, which allegedly sold the ABCP to the dealer, do nothing to help the individual investor recover their funds. The finger-pointing simply looks bad on all these supposedly sophisticated players.

The biggest holders of frozen ABCP - Quebec's Caisse de depot et placement and Desjardin Group and various other institutions - have enormous motivation to complete the rescue. They also have deep pockets. If the rescue package falls apart, this gang loses billions of dollars.

In coming weeks, Mr. Crawford's considerable negotiating skills would be best spent in getting all the institutions holding ABCP to chip into some sort of bailout for Canaccord clients. That's the only deal that will win the support of retail investors.

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