Friday, December 18, 2009

Accountability and Canadian 3rd Party ABCP

Original posted on the Globe & Mail's StreetWise by Andrew Willis:

If I were a bank CEO – perish the thought – I would be doing a bit of weekend reading.

I would ask, politely, for a copy of the settlement agreement that regulators have struck with a number of the institutions involved in the ABCP fiasco.

If I’m the boss at National Bank, CIBC or Bank of Nova Scotia, I want to understand just why my institution is going to have its name dragged through the mud on Monday.

The heads of Royal Bank of Canada, Toronto-Dominion Bank and Bank of Montreal would want to know just how they dodged this bullet.

The rest of the world won’t see these settlements until Monday, when they are approved, but it’s pretty clear what the CEOs would be reading.

First, they will see their banks and regulators agreeing that well-paid financial professionals – that would be Canadian money market traders – sold their customers products that the traders didn’t understand. That should ratchet up the blood pressure of three CEOs.

Then the bank bosses may read something really disturbing. The settlements are expected to state that the banks learned of potential problems in the ABCP market in late July and early August of 2007, when Coventree Capital began to tell fixed income desks just what was in the products it was selling. Armed with this knowledge, the banks are expected to agree with regulators that they dumped their own holdings of this supposedly low-risk commercial paper onto unsuspecting customers.

The banks ripped the faces off their clients, to quote the immortal words of derivative trader Frank Partnoy in a book called FIASCO. (I’ve got a copy, given to me by friends at Canso Fund Management, and it’s a great read.) And if I’m a bank CEO, news that my best and brightest abused a trust relationship with clients would totally wreck my Sunday morning.

Because we know what happened in the second week of August, in 2007. The ABCP merry-go-round stopped turning. Those still on the ride had their holdings frozen for the better part of two years, and anyone with more than $1-million of the paper suffered horrendous losses.

After finishing a run through the ABCP file, a bank CEO might want to write a short list of questions to ask the fixed income team on Monday morning, when all the details of this settlement become public. That list might include the following inquiries:

- Which of our clients ended up stuck with ABCP sold by this institution in the summer of 2007, and what exactly have we done to support that customer?

- Who exactly sold third party ABCP to customers in the summer of 2007? What have we paid that person since that time, and what training, if any, have they received?

- When ABCP creator Coventree Capital advised the bond desk of its woes in July of 2007, how was that information shared within the bank? How do we now deal with such disclosure?

If I was a bank CEO, or a bank director, there are a couple of things about this regulatory penalty that I would really want to understand.

I would want to know why several banks – most notably Toronto-Dominion Bank – steered clear of this whole sector, while others were in it up to their eyeballs. I would want to know what’s been learned from the ABCP meltdown, and how those lessons have been embedded in the culture of the organization.

Finally, I would want to know the exactly status of every investment bank employee involved in 2007 decisions that put clients in harms way.

And if satisfying answers to these questions were not forthcoming, I would make Monday morning very uncomfortable for the individuals involved.

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