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GET YOUR MONEY BACK! Misconduct and malpractice. Investment industry "best and worst practices". Information to improve public protection. Expert witness services for industry and investors. Forensic investment analysis. • View topic - ABCP's of stealing $32 Billion. Case study 2 for inquiry

ABCP's of stealing $32 Billion. Case study 2 for inquiry

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Postby admin » Sun Sep 30, 2007 2:50 pm

good article, supports the premise that trusting, vulnerable, and at times foolish members of the public can (and will be) be easily preyed upon by financial professionals as well as those who serve them.


NEW YORK TIMES
--------------------------------------------------------------------------------

September 30, 2007
Economic View
Six Fingers of Blame in the Mortgage Mess

David G. Klein
By ALAN S. BLINDER
SOMETHING went badly wrong in the subprime mortgage market. In fact, several things did. And now quite a few homeowners, investors and financial institutions are feeling the pain. So far, harried policy makers have understandably focused on crisis management, on getting out of this mess. But soon the nation will turn to recrimination — to good old-fashioned finger-pointing.

Finger-pointing is often decried both as mean-spirited and as a distraction from the more important task of finding remedies. I beg to differ. Until we diagnose what went wrong with subprime, we cannot even begin to devise policy changes that might protect us from a repeat performance. So here goes. Because so much went wrong, the fingers on one hand will not be enough.

The first finger points at households who borrowed recklessly to buy homes, often saddling themselves with mortgages that were all too likely to default. They should have known better. But what can we do to guard against it happening again?

Not much, I’m afraid. Gullible consumers have been around since Adam consumed that apple. Greater financial literacy might help, but I’m dubious about our ability to deliver it effectively. The Federal Reserve is working on clearer mortgage disclosures to help borrowers understand what they are getting themselves into.

“Warning! This mortgage can be dangerous to your family’s financial health.”
While I applaud the effort, I’m skeptical that it will work. If you have ever closed on a home, you know that the disclosure forms you receive are copious and dense. Should we add even more?
Fewer words, and in plainer English, might help, especially if they highlighted the truly important risks.

“In two years, your mortgage payments could double.”
But the truth is that there is much to disclose, that complicated mortgage products are, well, complicated, and that people don’t read those documents anyway.
It seems more promising to point a finger directly at lenders. Some lenders sold mortgage products that were plainly inappropriate for customers, and that they did not understand. There were numerous cases of unsophisticated borrowers being led into risky mortgages.

Here, something can be done. For openers, we need to think about devising a “suitability standard” for everyone who sells mortgage products. Under current law, a stockbroker who persuades Granny to use her last $5,000 to buy a speculative stock on margin is in legal peril because the investment is “unsuitable” for her (though perfectly suitable for Warren Buffett). Knowing that, the broker usually doesn’t do it.

But who will create and enforce such a standard for mortgages? Roughly half of recent subprime mortgages originated in mortgage companies that were not part of any bank, and thus stood outside the federal regulatory system. That was trouble waiting for a time and a place to happen. We should place all mortgage lenders under federal regulation.

That said, bank regulators deserve the next finger of blame for not doing a better job of protecting consumers and ensuring that banks followed sound lending practices. Fortunately, the regulators know they underperformed, and repair work is already under way.

Regulators also need to start thinking about how to deal with a serious incentive problem. In old-fashioned finance, a bank that originated a mortgage also held it for years (think of Jimmy Stewart in “It’s a Wonderful Life”), giving it a clear incentive to lend carefully. But in newfangled finance, banks and mortgage brokers originate loans and sell them quickly to a big financial firm that “securitizes” them; in other words, it pools thousands of mortgages and issues marketable securities representing shares in the pool. These “mortgage-backed securities” are then sold to investors worldwide, to people with no idea who the original borrowers are.

Securitization is a marvelous thing. It has lubricated the market and made mortgages more affordable. We certainly don’t want to end it. But securitization sharply reduces the originator’s incentive to scrutinize the creditworthiness of borrowers. After all, if the loan goes sour, someone else will be holding the bag. We need to find ways to restore that incentive, perhaps by requiring loan originators to retain a share of each mortgage.

But wait. Don’t the ultimate investors have every incentive to scrutinize the credits? If they buy riskier mortgage-backed securities in search of higher yields, isn’t that their business? The answer is yes — which leads me to point a fourth finger of blame. By now, it is abundantly clear that many investors, swept up in the euphoria of the moment, failed to pay close attention to what they were buying.

Why did they behave so foolishly? Part of the answer is that the securities, especially the now-notorious C.D.O.’s, for collateralized debt obligations, were probably too complex for anyone’s good — which points a fifth finger, this one at the investment bankers who dreamed them up and marketed them aggressively.

Another part of the answer merits a sixth finger of blame. Investors placed too much faith in the rating agencies — which, to put it mildly, failed to get it right. It is tempting to take the rating agencies out for a public whipping. But it is more constructive to ask how the rating system might be improved. That’s a tough question because of another serious incentive problem.

Under the current system, the rating agencies are hired and paid by the issuers of the very securities they rate — which creates an obvious potential conflict of interest. If I proposed that students pay me directly for grading their work, my dean would be outraged. Yet that’s exactly how securities are rated. This needs to change, but precisely how is not clear.

SO that’s my list of men (and a few women) behaving badly. But as we point all these fingers, let’s remember the sage advice of the late and dearly missed Ned Gramlich, the former Fed governor who saw the emerging subprime problems sooner and clearer than anyone. Yes, the subprime market failed us. But before it blew up, it placed a few million families of modest means in homes they otherwise could not have financed. That accomplishment is worth something — in fact, quite a lot.

We don’t have to destroy the subprime market in order to save it.

Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians.
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Postby admin » Tue Sep 18, 2007 3:13 pm

Tuesday » September
18 » 2007
Canada suffers $10B 'discount'
Tuesday, September 18, 2007
OTTAWA - The lack of a single securities regulator in Canada costs the economy as
much as $10 billion and 65,000 jobs a year, according to a U.S. securities law
expert commissioned to advise the federal government.
John Coffee, a professor at Columbia University law school in New York, said Monday
he based his figures on various existing studies.
"There is a discount on Canadian securities," he said. "You have to sell more of your
stock to raise the same money in comparison, say, to a similar U.S. company. And
you may have to pay more on your debt rate, too."
The so-called Canadian "discount" stems from the fact investors are less confident
about putting money into Canadian public companies, he said.
The reason for this is they feel the Canadian system, which has 13 provincial and
territorial agencies that monitor the industry, leads to less reliable enforcement of
public companies and can lead to poorer corporate governance.
Less checks on activities such as insider trading, Coffee noted, result in a lower level
of return for ordinary investors.
© The Edmonton Journal 2007
CanWest News Service
Copyright © 2007 CanWest Interactive, a division of CanWest MediaWorks Publications, Inc.. All rights reserved.
Print Story - canada.com network Page 1 of 1
http://www.canada.com/components/print. ... e0e0355053 9/18/2007
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ABCP's of stealing $35 Billion. Case study 2 for inquiry

Postby admin » Tue Sep 18, 2007 3:12 pm

Tuesday » September
18 » 2007
Caisse top ABCP holder
More than $20B; Half of Canadian total ravaged by
crisis, sources say
Tuesday, September 18, 2007
The Caisse de depot et placement du
Quebec has the greatest exposure to the
asset-backed securities market at more
than $20-billion, according to Ontario
government sources, which is more than
half of the estimated $35-billion of nonbank-
backed, asset-backed commercial
paper (ABCP) held in Canada and ravaged
by a global liquidity crisis.
The Caisse spearheaded "the Montreal
proposal" on Aug. 16 to help institutions
buy time to restructure their finances to
deal with the credit crunch emanating from
the U.S. subprimemortgage crisis.
A spokeswoman for the Caisse declined to
talk about the fund's ABCP holdings. "We
have seen quite a few numbers published
and we don't comment on any of them," said Lucie Freniere.
A number of companies have disclosed their exposure including Ontario Power
Generation Inc., which reported holdings of $102.6-million; Canada Post, which holds
$27-million in its fully funded pension plan; Nav Canada, which said last week it holds
about $368-million worth, and the Greater Toronto Airports Authority with ABCP
investments of about $249-million. The Ontario government, through the Ontario
Financing Authority, holds more than $700-million.
To calm market turmoil, the signatories of the accord agreed not to ask for money
from lenders or take money out of the trusts for 60 days.
On Sunday, Jim Flaherty, the Minister of Finance, said the government is monitoring
the credit issues that have spread from the U.S. subprime-mortgage crisis, but told
reporters that "we hope they are able to sort it out among themselves." He did not
give any time-line for a resolution. He also praised the creation of the Mont-real
accord, which he said was the "envy" of other international organizations.
Canada's market for non-bank-sponsored ABCP seized up on Aug. 13 after being hit
by repercussions from the U.S. crisis. But due to a glitch in industry practices in this
country, banks did not step up with emergency funding when the market dried up,
leaving investors on the hook for any losses.
Since the beginning of August, holders have been unable to sell their notes. Under
the Montreal proposal, the $35-billion market would be converted to longer-term debt
with maturities based on the underlying assets.
Many investors, especially smaller companies, say they are frustrated with the
situation. They say they thought they had bought short-term investments that were
as liquid as cash only to find out that it may take a lot longer to get their money out.
Indeed, some analysts predict there will be significant losses.
Karen Mazurkewich And John Greenwood
Financial Post
CREDIT: Christinne Muschi/ National Post
Henri-Paul Rousseau, Chairman of the
Board and CEO for the Caisse de Depot et
placement du Quebec
Print Story - canada.com network Page 1 of 2
http://www.canada.com/components/print. ... f7&k=91390 9/18/2007
"I have lots of concerns about how this thing is being put together," said a senior
official at one company with significant ABCP holdings.
Meanwhile, the broader short-term debt market has also been hit with subprime
contagion as investors backed away in recent weeks, sparking concerns about more
liquidity problems.
Issuers responded in the past few weeks by jacking up yields by more than 50 basis
points in some cases, but industry players warn that such yields are not sustainable.
They say issuers will move to other more economic financing options such as term
loans.
Market activity "has improved" in the past few days, said one fixed-income trader,
who attributed the change to the fatter yields.
"We're starting to see a material change, but we're not out of the box yet."
Others are less optimistic. They say the crucial problem is that as things are, it no
longer makes sense for companies to finance using commercial paper.
Unless spreads come down in a matter of the next few weeks, the major banks could
be forced to take billions of dollars of existing debt onto their books, analysts said.
© National Post 2007
Copyright © 2007 CanWest Interactive, a division of CanWest MediaWorks Publications, Inc.. All rights reserved.
Print Story - canada.com network Page 2 of 2
http://www.canada.com/components/print. ... f7&k=91390 9/18/2007
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ABCP's of stealing $35 Billion. Case study 2 for inquiry

Postby admin » Sat Sep 15, 2007 7:16 pm

Saturday » September
15 » 2007
Unitholders on hook for Global paper
Deutsche Bank Declines To Repay Maturing Notes
Wednesday, August 15, 2007
Global Diversified Investment Grade Income Trust and Global Diversified Investment
Grade Income Trust II have something in common: Both have been unable to fund
maturing issues of asset-backed commercial paper. And both, through their specialpurpose
funding vehicles -- MMAI-I Trust and Silverstone Trust -- also thought they
had an arrangement with Deutsche Bank.
Yesterday, the two issuers -- both promoted by National Bank -- said that after
requesting Deutsche Bank provide liquidity by repaying the maturing notes, the
German bank declined. In both cases, unitholders are on the hook.
Both issuers deal in the exotics. The two provide an economic interest in a mezzanine
tranche of credit-default swaps on a portfolio of mortgage-backed securities, assetbacked
securities, structured-finance securities and synthetic corporate exposure.
Global Digit raised $107.1-million in September, 2004, at $10 per unit; Global Digit II
raised $149.5-million, also at $10 per unit. Yesterday, Global Digit (DGU) closed at
$4.50, down $2.50; while Global Digit II (GII-U) at $1.60, down $1.70.
Investors in Global Credit Pref Corp. didn't fare much better. That issuer, which raised
capital at $25 per share two years back, offers holders exposure to a structured
credit-linked note. The pref shares, which were downgraded in April to P-3 from P-1
low in July, 2005, closed at $11 yesterday, down 75¢.
---
Ray Johnston, who runs Sherwood Financial, an Alberta-based micro-cap corporatefinance
company, isn't the happiest of campers these days, particularly as far as his
investment in Mart Resources Inc. is concerned. Mart explores for oil and natural gas
in Alberta and Nigeria. Indeed, at tomorrow's annual meeting, to be held in Calgary's
Delta Bow Valley, Johnston intends to present some of his concerns, including: - The
composition of the board. Not only does he believe the board is too small -- there are
six directors -- but he doesn't like their geographical spread, given that half of them
live outside Canada. Two of the six live in England, while the chairman, Wade
Cherwayko, lives in Lagos. Further, he argues that the board lacks independence as
only one of the directors, Leroy Wolbaum, hasn't been an officer of the company. The
other five directors include William Cherwayko, the father of the chairman. The
meeting will ask shareholders to fix the board at six members. - The lack of adequate
voting choices. Johnston would like to be given the choice of being able to vote
against the management slate, to be able to vote against each director individually
and to vote against the appointment of Meyers Norris Penny LLP as the company
auditor. (As is the norm, shareholders can either vote "for" or "withhold" on the
matter of dealing with the election of directors and appointment of auditors. The
proxy form mailed by Mart is correct.) Johnston also wants to know about the
international capability of Meyers Norris Penny LLP, an accounting firm based in
Western Canada. (Its Web site says it is an independent member of Baker Tilly
International.) - Past behaviour. Johnston wants to know more of the reasons why in
May the Alberta Securities Commission issued a cease-trade against a number of
insiders. (At the time, the company said the election in Nigeria caused delays in
preparing the financial statements.) In July, after financial statements were filed, the
cease-trade order was lifted. - More details about some of the recent financings. In
July, Mart announced it hoped to raise up to $33-million via a private placement of up
to 60 million units, with each unit consisting of a share plus half a share purchase
warrant. Mart also issued two lots of promissory notes, one secured and one
unsecured. Both notes, which were bought by private investors, mature in November,
Barry Critchley
Financial Post
Print Story - canada.com network Page 1 of 2
http://www.canada.com/components/print. ... 7e1a19de87 9/15/2007
2008.
Johnston, whose business focuses on early-stage Western Canadian companies, said
he has "been an admirer of Wade Cherwayko's mission for many years. He takes high
risks in politically difficult parts of the world for potentially huge rewards. But I want
good, full and fair disclosure and a board of directors that acts in the interests of all
the shareholders. As well, the board needs more directors, including [at least] one
who is a professional accountant with audit experience."
Calls to Mart Resources weren't returned.
---
Difficult market conditions have put an end to, for the time being at least, one of the
more interesting structured products to come along in a while.
The fund is known as the Brompton 130/30 Equity Fund and was unusual because it
offered investors more choice than a traditional long-only fund that invests in the U.S.
equity market. The fund allowed for short selling of up to 30% of the portfolio. So
after investing, say, $100-million in a long-only fund, the manager -- in this case UBS
Management -- would borrow another $30-million and use the proceeds to short the
market. In this way, the original $100-million grows to $130-million while the
borrowed $30-million is on the short side. Ergo: a net $100% long exposure via
something known as 130/30 investment strategy.
Brompton couldn't be reached for comment.
bcritchley@nationalpost.com

http://www.canada.com/components/print. ... 7e1a19de87 9/15/2007
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ABCP's of stealing $32 Billion. Case study 2 for inquiry

Postby admin » Sat Sep 15, 2007 7:15 pm

Goldfarb missing millions in commercial debt crisis
JACQUIE MCNISH
FROM FRIDAY'S GLOBE AND MAIL
SEPTEMBER 14, 2007 AT 1:10 AM EDT
Martin Goldfarb, one of Canada's most influential political pollsters, said his company has been sideswiped by a freeze-up in the
commercial paper market and he is calling for his bank to step up and help get the funds flowing again.
Mr. Goldfarb, chief executive officer of Goldfarb Corp. [GDF.H-X] , said he has been investing most of the Toronto investment
company's cash during the past few years in asset-backed commercial paper issued by small financial players such as Coventree Inc.
[COF-T] The paper was purchased from Bank of Nova Scotia [BNS-T], which has been Goldfarb's banker for 35 years, and by July of
this year the company had invested $30-million, equal to most of its asset value, in the notes.
Mr. Goldfarb said he and the company's board believed they were prudently investing cash in short-term securities as they prepared to
wind up Goldfarb and distribute proceeds to its shareholders.
“The salesmen were telling us that this was the highest-rated paper out there and that it was backed by the banks. We believed we were
pursuing a conservative investment strategy,” said Mr. Goldfarb, the company's chief executive officer.
Goldfarb Corp.
Related Articles
Recent
�� Flaherty sings praises of ABCP's Montreal accord
Mr. Goldfarb learned how wrong he was on Aug. 10 when most of the paper matured. By then a widening global liquidity crisis had
paralyzed commercial paper and many issuers could no longer raise money to pay back investors.
A few days later one of the issuers, Lafayette Structured Trust, had sufficient backing from a Swiss insurance company to buy back
$13-million of the paper owned by Goldfarb.
That left Goldfarb with $17-million of orphaned commercial paper and many questions for Bank of Nova Scotia and CEO Rick
Waugh, whom Mr. Goldfarb describes as a friend. Under a special accord signed by some of the country's biggest asset-backed
commercial paper owners, investors are restricted until mid-October from selling the notes while a special committee scrambles to
rescue more than $35-billion of securities sold by non-bank intermediaries.
In the meantime, Mr. Goldfarb said he and his chief financial officer have been unable to get any information from the bank or the
special committees administrator about the assets linked to the $17-million of commercial paper his company owns.
“There is no information anywhere. There is no transparency. I haven't heard a thing from [Mr. Waugh] or the bank. They have an
obligation to inform us and to commit to helping us get our money back.”
Mr. Goldfarb isn't alone. According to people familiar with the rescue operation, most of Canada's major banks were active sellers of
the troubled asset-backed commercial paper and a broad cross section of wealthy individuals, corporations and provincial and
municipal governments saddled with the investments are pressuring these banks to contribute to what is expected to be a lengthy and
potentially costly restructuring. The banks that actively sold asset-backed commercial paper from the troubled smaller financial
companies are Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada [RY-T], and National Bank of
Canada [NA-T]. Banks have already earned undisclosed commissions for selling commercial paper on behalf of such companies as
Coventree.
reportonbusiness.com: Goldfarb missing millions in commercial debt crisis Page 1 of 2
http://www.reportonbusiness.com/servlet ... bNews/home 9/14/2007
Frank Switzer, a spokesman for Bank of Nova Scotia, said the bank does not talk about its clients. He said that the buyers of assetbacked
securities were experienced investors who were placing orders with the bank rather than seeking investment advice.
“If a sophisticated client calls our order desk and places a decision to order these securities, that is their decision,” Mr. Switzer said.
He added that the bank is also prepared to lend money at standard rates to any clients who have cash needs as result of the credit
crunch.
Mr. Goldfarb, however, said he is appalled that the banks would seek to make profits by lending money to clients during a financial
crisis.
“They are trying to take a disaster situation and make money from it,” he said.
Although bank executives have publicly said they are under no legal obligation to assist or lend money to support the commercial paper
market, a number of sources said they expect the banks to play a role once more information becomes available about the assets
underlying some of the commercial paper.
Sources said they expect that once details are available about assets linked to the commercial papers, the banks will help sell the
distressed notes to potential buyers. “The banks recognize they have to do something here,” said one bank official who declined to be
identified.
Phillip Crawley, Publisher
reportonbusiness.com: Goldfarb missing millions in commercial debt crisis Page 2 of 2
http://www.reportonbusiness.com/servlet ... bNews/home 9/14/2007
Last edited by admin on Tue Mar 18, 2008 8:27 am, edited 3 times in total.
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