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

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Postby admin » Wed Dec 19, 2007 9:50 pm


December 20, 2007
$9.4 Billion Write-Down at Morgan Stanley
Morgan Stanley reported the first quarterly loss in its 72-year history Wednesday, heightening fears that the financial toll would keep mounting from the fast-spreading crisis in the subprime mortgage market.

The company took a $9.4 billion charge on subprime-linked investments for the fourth quarter, bringing its cumulative charges for subprime mortgages to $10.8 billion. In a stark reflection of its diminished status it also said it would sell a $5 billion stake to a Chinese investment fund to shore up its capital.

Wall Street banks so far have reported more than $40 billion of losses as a result of the crisis in the mortgage market. Worst-case estimates put the eventual bill at $200 billion or more. The tally is likely to rise again Thursday when Bear Stearns is expected to report a quarterly loss.

The developments on Wednesday were a stunning turn of events for Morgan Stanley, an offshoot of the Morgan banking dynasty that has counseled corporate America since the Depression. John J. Mack, the bank’s chief executive, said he took full responsibility and would forgo a bonus for 2007.

Like Citigroup and UBS of Switzerland, Morgan Stanley has turned to a wealthy investor from the East after losing billions of dollars on subprime-tainted investments. Morgan Stanley lost $3.59 billion for the fourth quarter. It said its remaining subprime exposure was $1.8 billion.

The drastic losses may heighten speculation about the fate of Mr. Mack, who returned to the firm in 2005 after the removal of his predecessor, Philip J. Purcell. One of Mr. Mack’s signature changes was to push the firm further into trading using its own capital, an effort to emulate its profitable archrival, Goldman Sachs. His strategy worked for a while but then backfired when trades in tricky subprime-linked securities went wrong, resulting in the biggest write-down in the firm’s history. While Mr. Mack is expected to keep his job, his compensation will plummet — one of the harshest punishments meted out on Wall Street, short of showing an executive the door. Last year, he made $40 million; this year, he will take home about $800,000. His paycheck is particularly humiliating since Lloyd C. Blankfein, the chief executive of Goldman Sachs, is likely to receive a $70 million bonus. James E. Cayne, the chief executive of Bear Stearns, is also expected to forgo a bonus.

In a conference call on Wednesday, Mr. Mack was quick to take responsibility. “The results are embarrassing for me and the firm,” he said.

But he also pointed out that the bulk of the $9.4 billion loss occurred on one trading desk and that other areas of the firm, particularly the investment banking, asset management, retail brokerage and hedge fund servicing businesses, performed well.

As for the investment from China, Mr. Mack framed the transaction not as a desperate act but as a strategic move. And he refused to concede that Morgan Stanley was a weakened firm. “We remain bullish on Morgan Stanley’s significant growth potential,” he said.

Still, the investment shows how reliant Morgan Stanley and Wall Street are on foreign funds and gives additional credence to the joke now circulating on trading floors: “Shanghai, Dubai, Mumbai or goodbye.”

The fund, the China Investment Corporation, has agreed to purchase almost 10 percent of Morgan Stanley; it will have no role in the management of the firm.

Citigroup recently sold a stake to a Middle East fund.

The deal is an abrupt shift in strategy for China’s $200 billion sovereign fund and underlines the extent to which it appears to be under the direct control of the country’s leaders.

Morgan Stanley executives first began discussing an investment with the fund this summer, but it was not until recently that the deal was struck.

For Morgan Stanley, the terms are severe. The firm will pay annual interest of 9 percent on bonds that will be convertible into Morgan Stanley stock in 2010.

The China Investment Corporation is under the control of China’s finance ministry, with some influence as well from the People’s Bank of China, the country’s central bank. There has been discussion in the Chinese government over whether even more foreign currency should be injected into the investment fund, as the People’s Bank of China continues to accumulate $1 billion a day as it buys up dollars to prevent the value of China’s currency from rising in international markets.

The loss at Morgan Stanley highlights a sense of strategic confusion within the firm. Going back to the firm’s early days when it broke off from the Morgan Bank, Morgan Stanley’s strength has been its investment banking and advisory business areas; both did well this year.

Mr. Mack, however, was eager to strike a more aggressive pose when he took over from Mr. Purcell, who had been criticized for his cautious approach. By encouraging his traders to take on more risk, Mr. Mack plunged Morgan Stanley into a complex, sophisticated and dangerous area that has never been a core area of competence for the firm.

In the conference call, Mr. Mack confronted tough questions from analysts.

“How could this happen?” asked William F. Tanona, an analyst with Goldman Sachs. “How could one desk lose $8 billion?”

Mr. Mack, generally a brash, expansive man, struck a chastened tone. He said the firm would be dialing back from making big trading bets.

“We had been sprinting,” he said. “Now we will be jogging. But we are in a risk business, and we will be in the market taking risk.”

Mr. Mack blamed the firm’s inadequate risk-monitoring procedures and said the firm’s risk managers would now report to the chief financial officer, which is the practice at Goldman Sachs. Previously the risk managers had reported to Zoe Cruz, the co-president overseeing trading, who was ousted by Mr. Mack last month, a further indication that the firm’s big bets lacked objective risk oversight.

Investors, while upset over the loss, seemed to be giving Mr. Mack the benefit of the doubt. Shares of Morgan Stanley’s rose $2.01, to $50.08.

“He can’t have another screw-up,” Brad Hintz, a securities analyst at Sanford C. Bernstein & Company, said of Mr. Mack. “But the clients I have talked to have not been calling for his scalp.”

Morgan Stanley had previously said it would take a $3.7 billion write-down from the trading. Now, the total loss from that trading is $7.8 billion. Morgan Stanley reported an additional $1.2 billion in write-offs from nonperforming loans. The total loss wiped out fourth-quarter revenue. For the year, Morgan Stanley has taken nearly $11 billion in trading and subprime-related charges.

Other Wall Street firms have ousted their chief executives after such losses. Charles O. Prince III of Citigroup and E. Stanley O’Neal of Merrill Lynch lost their jobs over escalating subprime write-downs.

By all accounts, Mr. Mack still has the support of his board, which includes four holdovers from the Purcell era. And unlike Mr. Prince and Mr. O’Neal, who were to some extent outsiders, removed from the culture of their respective firms, Mr. Mack, has ties to the firm’s glory days in the 1970s and 1980s and with his ability to charm, he is still liked within the firm.

In addition to keeping his board fully briefed, Mr. Mack has also reached out to the former executives who led the campaign to oust Mr. Purcell. On Wednesday, he called Robert Scott, a retired senior executive of Morgan Stanley, and briefed him on the results.

“We are here to help,” said Mr. Scott, according to a person who was briefed on the call.

For the moment, the board seems to be in no position to force Mr. Mack from his job. Not only is he well liked, but he also has no ready successor and as the protracted search for a Citigroup head demonstrated, there is a dearth of outside executives ready and willing to take on such a job.

Keith Bradsher contributed reporting.
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Postby admin » Mon Dec 17, 2007 2:57 pm

I have the following observations on the National Post article "ABCP restructuring will happen one way or another, Purdy Crawford," dated December 15, 2007 and on the White Knight Investment Trust DBRS Description, dated December 11, 2007:

(1) The Pan Canadian Committee asking the banks to take responsibility for as much as $10 billion of collateral calls, suggests to me that the damages in the $33 billion face amount of Non Bank ABCP under the Montreal Accord are about $10 billion or a loss of -30%. -30% is smack in the middle of my estimated loss range of -20% to -40% (or $7 to $13 billion) for the Non Bank ABCP trusts under the Montreal Accord. I made the -20% to -40% estimated loss range in the attached independent research report, "Another Made-in-Canada Defective Investment Product," now updated to December 17, 2007 and consolidated for all of the new developments and research done, since I first wrote this report on September 24, 2007. These loss estimates are before accommodating settlement offers from the vendor group, which I say should occur given that the vendor group had to know about the defects in the Non Bank ABCP in general and may have had specific adverse information at the time of sale that was not known to the Non Bank ABCP buyers. Just because the gatekeepers may have been trusting or asleep, does not mean the vendor group can rob Canada's pension funds, and government and corporation treasuries.

(2) Non Bank ABCP owners are unlikely to accept the restructured long term notes in exchange for their ABCP, unless the banks pay for all or a substantial portion of the credit default swap liabilities and expected U.S. subprime mortgage defaults within the 22 Non Bank ABCP trusts.
Canadian pension fund managers and government and corporation treasurers did not invest in money market instruments for high investment returns, but to achieve capital preservation while they waited for its long term deployment in corporate projects, public infrastructure and services and the purchase of long term investments such as stocks, bonds and real estate. The buyers were told the Non Bank ABCP was safe and had top credit ratings.

(3) The breakdown in negotiations is occurring as the domestic investment bank distributors and the international and domestic banks involved in the manufacturing of the Non Bank ABCP funded trusts duke it out on who is the cause of the crisis and who is responsible for paying the damages to the Non Bank ABCP investors. The international and domestic banks became involved in the manufacturing of the Non Bank ABCP funded trusts by being counterparties to leveraged credit default swaps and signatories to the "no use" liquidity agreements. Top quality assets, bank liquidity agreements and top credit ratings are essential ingredients to make the Non Bank ABCP saleable to Canada's pension funds, government and corporations.

(4) The White Knight Investment Trust DBRS Description dated December 11, 2007 provides some precedent for the accommodations made by bank signatories of liquidity agreements in the Skeena Trust: Royal Bank, Scotiabank, HSBC Bank and ABN Ambro. It says: "Even though all of the Trusts Asset Interests will consist of highly leveraged structured synthetic investments (such as collateralized debt obligations (CDOs)), the Trust is not subject to any collateral calls from the buyers of protection that are swap counterparties to the Trust.

It is somewhat confusing what the exact accommodation from the banks is "Since the Trusts Asset Interests will consist of highly leveraged structured synthetic investments (leveraged super-senior CDO tranches), the Trust could be exposed to a higher severity of loss should losses rise substantially in excess of AAA stress-case scenarios. Losses incurred on the Asset Interests will reduce the principal amount on the Floating Rate Notes" Does this mean there are no collateral calls during the interim of the notes term, but such collateral calls will occur on the maturity date? Who would want to own a note with such high end of period principal risk, when the cash offer in the Skeena Trust is reported to be 98 cents on the dollar?

National Post - "ABCP Restructuring will happen one way or another, Purdy Crawford," dated December 15, 2007, says:
Sources say Mr. Crawford tried to persuade the institutions that sold the CDOs to eliminate the triggers for margin calls but he was unsuccessful.

Under a new strategy, he has asked the big five banks to assume responsibility for the margin calls. That would take of the risk off investors and increase the value of the notes.

Sources said the Bank of Canada has thrown its weight behind the idea and has been "twisting the arms" of the banks to get them to sign on. However the banks are said to be reluctant.

Talks reached an impasse late last week when the banks dug in their heels. They say they shouldn't have to shoulder that responsibility for margin calls because they did not create the problem.

"Various banks have different motives for participating," he said. "All I can tell you is that they are now fully engaged at a senior level."

A source close to the negotiations said the Crawford committee wants the banks to take responsibility for as much as $10-billion of collateral calls.

White Knight Investment Trust - DBRS, dated December 11, 2007 says:

 The Asset Interests of White Knight Investment Trust (the Trust) are term-matched to the notes issued by the Trust.
 Even though all of the Trusts Asset Interests will consist of highly leveraged structured synthetic investments (such as collateralized debt obligations (CDOs)), the Trust is not subject to any collateral calls from the buyers of protection that are swap counterparties (the Swap Counterparties) to the Trust.

 Since the Trusts Asset Interests will consist of highly leveraged structured synthetic investments (leveraged super-senior CDO tranches), the Trust could be exposed to a higher severity of loss should losses rise substantially in excess of AAA stress-case scenarios.

 Losses incurred on the Asset Interests will reduce the principal amount on the Floating Rate Notes (the Notes).

 The Trust is subject to ratings volatility due to its exposure to numerous non-investment-grade credits in the underlying CDS portfolios.

 Enforcement of Events of Default is subject to a number of non-market-standard provisions due to the unique structure of this transaction.

Diane Urquhart
Independent Analyst
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Postby admin » Fri Dec 14, 2007 9:15 am

The December 12, 2007 National Post article, "David Dodge Sounds Alarm," quotes the Governor of the Bank of Canada as follows:
"All Canadians could pay a price if banks fail to come up with an agreement to save the troubled sector of the country's debt market and $300-billion worth of leverage is allowed to unwind in a worst-case scenario, David Dodge, governor of the Bank of Canada, said yesterday. If the whole market goes into a shambles everybody gets affected, including Mr. and Mrs. Jones on Main Street," said Mr. Dodge. "We have a collective interest in the whole thing not going into a shambles."

In my opinion, the banks should offer the solution, where they take the newly restructured long term notes and they offer cash settlements to the current owners at par, (except for the Caisse due to its dominance in the Non Bank ABCP market and its conflict of interest as an owner of Coventree and modest discounts for ABCP Series Notes not backed by any liquidity agreement). Then, the banks can take possession of, on their own balance sheets, the AAA rated collateral assets and the leveraged credit default swap liabilities under settlement arrangements amongst themselves, that avoids the fire sale of $300 billion worth of AAA rated collateral assets and CDS reference AAA asset portfolios. The banks should upon taking the restructured long term notes onto their own balance sheets, take the marked to market writedowns on the underlying net assets. As noted in my independent research report, "Another Made-in-Canada Defective Investment Product," dated November 23, 2007, the banks can afford to take the writedowns, as the after tax loss would likely be between -4% and -8% of their total shareholders equity.

The banks agreeing to this solution, that I illustrate by schematic above, would demonstrate the same leadership that J.P. Morgan exhibited in the U.S. Financial Panic of 1907, where the major U.S. banks agreed to bailout several trusts that were suffering runs by depositors, who feared the loss of their money when the net assets within the trusts were becoming impaired in value. These U.S. banks volunteered to make the trust depositors whole even when they had no legal obligation to do so. In the current Canadian Non Bank ABCP crisis, the ABCP short-term lenders are akin to the depositors in the trusts during the Financial Panic of 1907. The difference in circumstances within Canada today, is that the domestic banks(excluding possibly the TD Bank) and the foreign divisions of international banks were themselves, or their subsidiaries, directly involved in the manufacturing or distribution of the frozen Non Bank ABCP that were designed and sponsored by entrepreneurial conduit firms. Some Canadian banks and the list of international banks in the Montreal Accord became involved in the manufacturing of the Non Bank ABCP trusts, when they became buyers of the leveraged credit default swaps or the signatories for the "no use" liquidity agreements. In most cases, the bank who bought the credit default swaps with the claims for default damages and subsequent rights to the AAA collateral assets, was the same bank that signed the "no use" liquidity agreements. This simultaneous contracting by the banks was not fair dealing and not disclosed to the Non Bank ABCP owners.

The banks offering the solution I suggest is not a case comparable to J.P. Morgan organizing a bank bailout of trusts that they were not legally required to do. Owners of the Non Bank ABCP today do have legitimate legal claims for remedy from the banks for negligent misrepresentation related to the manufacturing or distribution of the Non Bank ABCP trusts. If J.P. Morgan and the banks existing in 1907 had the where with all to make a voluntary bailout of the trusts, when they had no legal obligation to do so, to avoid a financial crisis, surely the Canadian and international banks that have legal liability for their direct or subsidiary involvement with the Canadian Non Bank ABCP trusts can step to the plate to come up with an agreement with Canadian pension funds, governments and corporations that are stuck with this defectively designed commercial paper of uncertain current value.

The way I see it, just because the securities guard is asleep does not mean you are entitled to rob the bank. The pension fund portfolio managers, government and corporation treasurers could have asked more questions, but the banks should not have sold a product negligently or with deceit that has Canadian pension beneficiaries, shareowners and taxpayers being robbed of their cash. The money managers and treasurers working for Canadians did not invest in money market instruments for high investment returns, but to achieve capital preservation while they waited for its long term deployment in corporate projects, public infrastructure and services and the purchase of long term investments such as stocks, bonds and real estate.

Diane Urquhart
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Postby admin » Sun Dec 09, 2007 12:07 pm

Here's hoping report clears up financial quagmire
December 09, 2007
Ellen Roseman Toronto Star

Last June, an investor called Ron believed the stock market was overvalued and asked his adviser to sell most of his mutual funds.

"The timing seemed excellent as the market correction arrived shortly after," he says.

But Ron failed to discuss with his adviser what to do with the sale proceeds.

The money ended up in a 30-day money market investment, which was called Rocket Trust on his monthly statement.

The adviser said Rocket Trust notes had a AAA rating, better than many government bonds.

But after 30 days, the adviser called to say the funds weren't available and had to be rolled over for another six months.

"I was fine with this. The stock market was still unstable and I was looking for a safe haven," Ron says.

"But after doing a bit of research on Rocket Trust, I see it's part of the Coventree asset-backed commercial paper (ABCP) quagmire.

"How worried should I be that I am exposed to ABCP?"

This Friday, a blue-chip committee will report on its efforts to restructure Canada's $35 billion market in non-bank ABCP – mostly in trusts run by independent issuers such as Coventree Capital Group of Toronto.

The original October deadline was extended. Everyone hopes that Montreal lawyer Purdy Crawford and investment bank JPMorgan Chase will be able to wring concessions from international banks and get the market moving again.

Small investors like Ron can hardly be blamed for not knowing what they got into.

The information memorandum about Rocket Trust, available at Coventree's website, is 18 pages of bafflegab, clarifying nothing. There was no indication that any assets were linked to the U.S. subprime mortgage market.

It was easier to rely on the AAA rating conferred by Dominion Bond Rating Service, whose report is also at Coventree's website.

Only after the crisis blew up did it become widely known that DBRS was the only bond rating agency that would rate such debt. The other agencies, such as Moody's and Standard & Poor's, stayed away.

DBRS said the Rocket Trust notes had liquidity lines to cover market disruptions – a strength. It also said the liquidity lines were limited to market disruption – a challenge.

With such equivocation, how could investors or advisers rate the rating agency's AAA rating?

Only later did it become known that the liquidity backstop for these securities was less complete in Canada than elsewhere.

International banks had to buy back the assets only if there was a market disruption severe enough that commercial paper issuers could not issue anything at all. That never happened.

Ron bought his Rocket Trust notes from Credential Securities, a firm that is owned by the credit union movement in Canada.

Credit unions market themselves as more ethical and customer-friendly than banks. But even they are not immune to the money market contagion.

A merger between two of Canada's largest credit union organizations, Credit Union Central of Ontario and Credit Union Central of British Columbia, has been held up because of their holdings of ABCP.

Though the amounts were small ($161 million for Ontario and $23 million for B.C. out of total assets of $7.5 billion), no one could put a price tag on the ABCP portfolios because the market is frozen. So the merger has been put off from the original date of Oct. 1, 2007.

Meanwhile, Coventree has had to make major cuts in its workforce to trim costs. Its stock is trading at just $1 – or 94 per cent below its 52-week high of $16.30.

All eyes will be on Montreal this week when the committee releases its report. Let's hope the uncertainty that has lingered since August will finally start to clear up.

Ellen Roseman's column appears Wednesday, Saturday and Sunday. You can reach her by writing Business c/o Toronto Star, 1 Yonge St., Toronto M5E 1E6; by phone at 416-945-8687; by fax at 416-865-3630; or at by email
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Postby admin » Thu Dec 06, 2007 11:34 pm

Wall Street Firms Are Subpoenaed
New York Examines Treatment
Of Debt Tied to Risky Mortgages
December 5, 2007; Page C2
New York state prosecutors have sent subpoenas to several Wall Street firms seeking information related to
the packaging and selling of debt tied to high-risk mortgages, people familiar with the matter say, the latest
legal woe to hit the stressed industry.
The subpoenas, sent by the office of New York state's attorney general, Andrew Cuomo, are broadly written
and request information from firms including Merrill Lynch & Co., Bear Stearns Cos. and Deutsche Bank AG,
people familiar with the matter say.
The review, part of a broader investigation into the mortgage industry, is examining how
adequately the investment banks reviewed the quality of mortgages before packaging
them into products that were then sold to investors, these people say. The subpoenas
also requested information about how the debt was pooled into securities, including the
banks' relationship with credit-rating firms.
A spokesman for Mr. Cuomo couldn't be reached. A Merrill spokesman declined to
comment on the subpoena, saying: "We always cooperate with regulators when asked to
do so." Bear Stearns and Deutsche Bank declined to comment.
The state-prosecutor inquiry is the latest twist in the fallout stemming from residential
subprime mortgages. A rise in defaults and foreclosures, particularly among low-end
borrowers, has whipsawed global stock and bond markets, led to the dismissal of two
Wall Street chief executives, and resulted in losses by banks, hedge funds and securities firms. The
Securities and Exchange Commission has opened about two-dozen investigations stemming from the
collapse of residential subprime mortgages, a person with knowledge of the situation said. In addition, the
role of credit-rating firms is being examined by federal and state regulators.
The role being played by Mr. Cuomo's office is reminiscent of the path taken by his predecessor, Eliot
Spitzer, who as New York attorney general shined a spotlight on conflicts of interest on Wall Street, trading
abuses at mutual funds and bid-rigging at insurance companies.
The inquiry into what role securities firms played in the current crisis is likely to look at Wall Street's
underwriting standards. In particular, the probe appears to be examining the relationships between
mortgage companies, third-party due-diligence firms, securities firms and credit-rating firms.
The inquiry raises questions about the extent to which securities firms are obligated to dig into the
mortgages before slicing them up to sell to investors. Many securities firms rely on third-party vendors to do
this work; among the questions is whether this effort was adequate, or if securities firms had a duty to do
further due diligence. Securities firms that underwrite securities have an obligation to make sure that
statements included in offering documents are accurate.
In a news conference last month announcing subpoenas to mortgage giants Fannie Mae and Freddie Mac,
Mr. Cuomo said "investment banks wanted the mortgages." That suggests he is raising questions about
whether banks turned a blind eye to what Mr. Cuomo says were inflated appraisals in order to package and
sell the products to make fees. "The follow-the-money expression is, 'follow the mortgage'" into the
secondary market, Mr. Cuomo said.
Write to Kara Scannell at
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Postby admin » Thu Dec 06, 2007 11:33 pm

UPDATE 4-CIBC stock battered by hedged subprime exposure
Thursday, December 06, 2007 6:09:33 PM (GMT-05:00)
Provided by: Reuters News
(Adds CEO quotes, analyst comment, closing share price)
By Lynne Olver and Nicole Mordant
TORONTO/VANCOUVER, Dec 6 (Reuters) - Canadian Imperial Bank of Commerce <CM.TO> posted an 8 percent jump in
fourth-quarter earnings on Thursday but its stock and reputation took further hits from the U.S. housing-derived credit
CIBC shares sank 5.4 percent in heavy volume after it revealed it expects more U.S. subprime mortgage-related
writedowns, and warned of potential "significant losses" from its hedged exposure to the troubled U.S. housing sector.
Chief Executive Gerry McCaughey, who has stressed risk-reduction measures since he took the top job in 2005, said
CIBC underestimated the meltdown of the subprime market.
"This, coupled with an over-dependence on the extremely high ratings of these securities, resulted in the build-up of
exposures that are too large for CIBC's risk appetite," McCaughey said on a conference call.
CIBC, Canada's fifth-biggest bank, said that as of Oct. 31 it had a notional C$9.3 billion ($9.2 billion) of subprime
mortgage exposure through derivatives contracts hedged with unnamed investment-grade counterparties. The fair value
of the hedged contracts was C$4 billion, the bank said.
The impact of economic and market condition changes on counterparties could mean "significant future losses," it said.
The bank "again showed its propensity to misstep," BMO Capital Markets analyst Ian de Verteuil said in a note. He said
CIBC could take another C$2 billion in subprime charges in the first half of 2008.
A number of unknowns in the release stoked fear, said Bruce Campbell, president of Campbell & Lee Investment
"The question that the market is now trying to come to grips with is what are those hedges, who are the counterparties
and how good are they?" Campbell said.
Shares in CIBC sank C$4.69, or 5.4 percent, to C$82.40 on the Toronto Stock Exchange. The stock is down 16 percent
year-to-date, the second-worst performer among Canadian banks.
CIBC has the largest exposure among Canadian banks to the U.S. subprime sector, which made home loans to customers
with poor credit records, many of whom are now defaulting.
Market conditions have worsened since Oct. 31, CIBC said, and it projected another C$225 million writedown for
But analysts said the C$9.3 billion in hedged subprime derivatives contracts -- or $9.8 billion in U.S. dollar terms on Oct.
31 -- grabbed their attention.
"This is a bit more on the risk side than people were expecting out of CIBC," Edward Jones analyst Craig Fehr said. "A
primary focus for CIBC in recent quarters and going forward has been the de-risking of the bank, and this seems pretty
inconsistent with that message."
Rating agency Moody's changed the outlook on CIBC's debt to negative from stable, citing concern about risk
management. Despite expected improvements, "it now appears the bank has not fully addressed appropriate risk-taking
at a senior, strategic level," Moody's said.
Blackmont Capital analyst Brad Smith said CIBC's disclosure of its gross subprime exposure confirmed market
speculation, and he said several credit insurers have been pressured due to concerns about their ability to honor
counterparty contracts.
CIBC said nearly half its hedged portfolio with exposure to subprime real estate was spread among five triple-A rated
Page 1 of 2
reutersnews://reuters/local?cache=1440&id={65890935-442F-48AB-8121-5F68D6F9DB97} 12/6/2007
guarantors, none of which rating agencies have downgraded. But a big chunk of it, with notional value of US$3.5 billion,
was hedged with one single-A rated counterparty.
Meanwhile, CIBC said it earned a net C$884 million, or C$2.53 a share, for the three months to Oct. 31, up from yearearlier
C$819 million, or C$2.32 a share, with gains driven by its retail business.
CIBC had previously said its unhedged exposure to the subprime market was about US$1.7 billion.
It updated that figure on Thursday, saying its net unhedged exposure to collateralized debt obligations and residential
mortgage-backed securities on Oct. 31 was about C$741 million, or $784 million in U.S. dollar terms.
($1=$1.01 Canadian)
(Reporting by Lynne Olver and Nicole Mordant; Editing by Rob Wilson)
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Postby admin » Thu Dec 06, 2007 11:30 pm

Scotia Capital named in ABCP lawsuits
DECEMBER 6, 2007 AT 6:05 AM EST
Canaccord Capital Corp. is alleging that Bank of Nova Scotia received material non-public information about third-party assetbacked
commercial paper in July and began reducing its own holdings of the paper, even as it continued to pitch the investment to
The allegations have arisen as part of two lawsuits filed by investors against Canaccord in the Supreme Court of British Columbia.
Canaccord brought Scotiabank into the suits because the bank sold the ABCP to Canaccord, which in turn sold it to companies and
individual investors.
Canaccord named Scotiabank's investment banking arm, Scotia Capital Inc., as a party to the suits, alleging that it made negligent
misrepresentations, failed to warn Canaccord and breached its fiduciary duty.
Scotiabank denies each and every allegation and plans to defend itself vigorously, spokesman Frank Switzer said yesterday.
"Canaccord is a sophisticated participant in the market, they understood the nature of the products they were buying, and they didn't
rely on us for advice," Mr. Switzer said, adding that Scotia Capital was not provided with any information it considered complete or
material. "We continued to rely on the DBRS rating, which did not change, as did others, including, presumably, Canaccord," he said.
The suits are among the first of a potential wave of litigation that could hit the banks and investment dealers if the a co-operative of
investors and banks known as the Crawford Committee (initially known as the Montreal Accord) fails to successfully restructure $33-
billion of stricken ABCP into longer-term investments.
Legal sources said dozens of companies that have been stranded with troubled ABCP, structured by non-bank firms such as Coventree
Inc., are furious that their banks sold them the notes in late July and early August when there were growing signs of turmoil.
These investors have quietly prepared potential lawsuits, but they have put the claims on hold until at least Dec. 14 when the Crawford
Committee is set to unveil its proposals to restructure frozen ABCP.
Jeffrey Carhart, a restructuring specialist with Miller Thomson LLP, said his firm currently represents numerous companies that hold
hundreds of millions of dollars in ABCP. "We really, really, really want the workout process to work, but if it doesn't it stands to reason
that there is going to be litigation," he said.
The B.C. suits against Canaccord were launched by two investors, Gregory Hryhorchuk, the chief financial officer of a gold exploration
company, and First Allied Development Corp., a B.C.-based company owned by Robert Madiuk.
Each suit names Canaccord and one of its salespeople as defendants for putting more than $100,000 of the investor's money into a
third-party ABCP trust called Structured Investment Trust III (SIT III).
The suits allege Canaccord was negligent and breached its duty to the investors for several reasons, including failure to do a reasonable
study of the securities and failure to warn of the purchase risks.
None of the allegations have been proven in court.
In its defence documents, Canaccord says that it did not guarantee the success of any advice it provided and that it was not a custodian
to the investors. If those investors did incur losses, "it was the result of unexpected market occurrences, and not the fault of the
defendant," it states.
It also cites the role of other parties, including credit rating agency DBRS, which gave SIT III commercial paper the highest rating
possible. Canaccord says DBRS failed to take into account that the exposure of SIT III notes to U.S. subprime mortgages could result
in a loss of confidence by the market, and therefore a lack of liquidity.
The rating agency also failed to take into account the limitations of the emergency lines of credit arranged for the trusts, Canaccord
alleges. DBRS has not been named as a party to the lawsuits.
Canaccord also cites Coventree Inc. and its subsidiary Nereus Financial Inc., which created the SIT III trust, for failing to disclose to
Canaccord the trust's actual exposure to U.S. subprime mortgages and for failing to limit the exposure. Neither Nereus nor Coventree
have been named as a party to the lawsuits.
Scotia Capital, the lead dealer for SIT III ABCP, was named as a party. Scotia Capital named in ABCP lawsuits Page 1 of 2 ... alEvents2/ 12/6/2007
It "actively and aggressively marketed [the paper] to Canaccord by means of frequent or daily written and oral solicitations and
communications," Canaccord alleges.
It further alleges Scotia Capital received material information about the trust's exposure to U.S. subprime in July, and acted on that
On July 24, Scotia Capital and other dealers received a Coventree e-mail disclosing some of its trusts' exposures to U.S. subprime
mortgage assets, including SIT III. Canaccord's defence alleges Scotia Capital received the same basic facts from sources before July
"In or about July, 2007, Scotia Capital began to reduce, limit or eliminate its own SIT III ABCP inventory, and the SIT III ABCP
owned by Scotia Capital clients, because of Scotia Capital's knowledge of undisclosed material information concerning the U.S.
subprime exposure of Coventree sponsored ABCP," it alleges.
Between July 10 and Aug. 13, Scotia Capital began offering a higher relative rate of return on the paper, it adds. "Scotia Capital failed
to disclose its knowledge to Canaccord that the rates were higher because Coventree and Nereus conduits, including SIT III, were
experiencing increasing difficulty in finding buyers to purchase new ABCP to fund the payment of maturing ABCP."
It also says Scotia Capital had an ethical standard to resign as a seller of Coventree and Nereus paper after it allegedly received the
material non-public information in July.
Close: unchanged at $15.15
Close: $52.15, down 44¢ ... alEvents2/ 12/6/2007
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Postby admin » Thu Dec 06, 2007 11:28 pm

Here is today's media on Canaccord adding Scotia Capital as a party to a lawsuit against it by two of its clients concerning Non Bank ABCP. Also, David Dodge spoke out today about the material contracts underlying the ABCP being restricted to DBRS and not accessible to the owners. He is finally calling for new transparency regulation for structured financial products. I have decided that complex structured investment products need to be sold by prospectus with public access to material contracts, even for products only sold to pension funds, governments and corporations.

Plus, New York Attorney General Andrew Cuomo has issued subpoenas for information from three Wall Street firms about their due diligence on securitized products and their relationship with credit rating agencies.

CIBC's stock dropped 5% today upon disclosure of another C$9.3 billion of subprime mortgage exposure through derivatives contracts hedged with unnamed investment-grade counterparties. There is market concern about whether the hedge counterparties will be able to pay their default damage claims. International banks who are counterparties to the credit default swaps in Canada, should be forgiving their claims for default damages from the Non Bank ABCP owners since these material contracts and the limited use liquidity agreements signed by the same banks were not adequately disclosed to the Non Bank ABCP owners and constituted unfair dealing.

Let's hope the vendor group does the right thing and offers make whole settlements to the Non Bank ABCP owners on December 14th.

Diane Urquhart
Independent Analyst
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Postby admin » Thu Dec 06, 2007 9:34 am

Goldman Sachs ...
seemingly on both sides of the collateralized mortgage obligation deals?


December 2, 2007
Everybody’s Business
The Long and Short of It at Goldman Sachs

Stuart Goldenberg
FOR decades now, as a writer, economist and scold, I have been receiving letters from thoughtful readers. Many of them have warned me about the dangers of a secret government running the world, organized by the Trilateral Commission, or the Ford Foundation, or the Big Oil companies or, of course, world Jewry.

I always scoff at these letters. The world is far too complex a place to be run by any one group. But the closest I have recently seen to such a world-running body would have to be a certain large investment bank, whose alums are routinely Treasury secretaries, high advisers to presidents, and occasionally a governor or United States senator.

This all started percolating in my fevered brain last week when a frequent correspondent, a gent in Florida who is sure economic disaster lies ahead (and he may be right, but he’s not), forwarded a newsletter from a highly placed economist at Goldman Sachs named Jan Hatzius.

That worthy scholar recently wrote a detailed paper about how he thought the subprime mess would get worse and worse. It would get so bad, he hypothesized, that it would affect aggregate lending extremely adversely and slow down growth.

Dr. Hatzius, who has a Ph.D. in economics from “Oggsford,” as they put it in “The Great Gatsby,” used a combination of theory, data, guesswork, extrapolation and what he recalls as history to reach the point that

when highly leveraged institutions like banks lost money on subprime, they would cut back on lending to keep their capital ratios sound — and this would slow the economy.
This would occur, he said, if the value of the assets that banks hold plunges so steeply that they have to consume their own capital to patch up losses. With those funds used to plug holes, banks’ reserves drop further. To keep reserves in accordance with regulatory requirements, banks then have to rein in lending. What all of this means — or so the argument goes — is that losses in subprime and elsewhere that are taken at banks ultimately boomerang back, in a highly multiplied and negative way, onto our economy.

As the narrator in the rock legend “Spill the Wine” says, “This really blew my mind.”

So I started an e-mail correspondence with Dr. Hatzius, pointing out what I believed were a few flaws in his paper. Among them were his hypothesis that home prices would fall an average of 15 percent nationwide (an event that has never happened since the Depression, although we surely could be headed in that direction), and that this would lead to a drastic increase in defaults and losses by lenders.

This, as I see it, is a conclusion that is an estimation based upon a guess. I found especially puzzling the omission of the highly likely truth that the Fed would step in to replenish financial institutions’ liquidity if necessary. In a crisis like that outlined by the good Dr. Hatzius, the Fed — any postwar Fed except perhaps that of a fool — would pump cash into the system to keep lending on track.

I mentioned this via e-mail to Dr. Hatzius. He generously agreed that there was some slight merit to my arguments and that he was merely pointing out tendencies and possibilities (if I understand him correctly).

BUT forecasting is tricky, and I have a hard time believing that financial events to come will be qualitatively different from those that have already happened.

I do want to emphasize Dr. Hatzius’s gentlemanliness and intelligence. But I also want to emphasize that, as I see it, his document was mostly about selling fear. A spokesman for Goldman Sachs categorically denies this point and says that the firm’s economic research is held to the highest levels of objectivity and that its economists’ views are completely independent.

As I interpret it, Dr. Hatzius was saying that the financial system would possibly not be able to adjust to a level of financial losses that are large on an absolute scale but small compared with aggregate credit or the gross domestic product. He is also postulating that lenders would have to retrench so deeply that lending would stall and growth would falter — an event that, again, has not happened on any scale in the postwar world, except when planned by the central bank.

In other words, with the greatest possible respect to Dr. Hatzius, his paper is not really what I would call a serious overview of the situation. It is more a call to be afraid and cautious based on general principles that he embraces and not on the lessons of history. (In this respect, he is much like many economic journalists and commentators who sell newsprint by selling fear. The common cause of journalists and Wall Streeters in this regard is a subject I will address in the future.)

Now, let me make a few small points here and then get to my own big point.

Goldman Sachs is a huge name in terms of moneymaking and prestige. I totally understand the respect it receives for its financial dexterity. The firm is a superstar in that regard, and I, a small stockholder, am grateful. But it has never been clear to me exactly why its people are considered rocket scientists in any other area than making money.

Dr. Hatzius’s paper is a prime example of my puzzlement. It shows extreme intelligence but basically misses the point: yes, there are possible macro dangers, but you have to go all the way around Robin Hood’s barn to get to them, and you have to use what I think are extremely far-fetched hypotheticals to get to a scary situation. (This is not to diminish the real risks in today’s economy, I’m just not as gloomy about them as Dr. Hatzius.)

Why, then, is his document circulating? Perhaps as a token of Dr. Hatzius’s genuine intelligence, which is fine. But to me, his paper seemed like a selling document in the real Wall Street sense of selling — namely, selling short. (Dr. Hatzius notes that he has long been bearish on housing, since faraway 2006, but I respectfully note that that is a lot different from predicting a credit catastrophe. The spokesman for Goldman also noted the company’s bearishness on housing since 2006. He also noted that in the recent past, Goldman Sachs has moved to a considerably larger short posture and that the firm is net short.)

More thoughts came to me as I read a recent piece in Fortune by my colleague Allan Sloan, a veteran financial writer. Mr. Sloan traces the life and death throes of a Goldman Sachs-arranged collateralized mortgage obligation. He shows how truly toxic waste was sold to overly eager investors who now have major charge-offs, and he also points out that some parts of the C.M.O. were indeed safe and were either current or had been paid off.

But what leaps out at me from this story is that Goldman Sachs was injecting dangerous financial products into the world’s commercial bloodstream for years.

My pal, colleague and alter ego, the financial manager Phil DeMuth, culled data from a financial Web site, (for “asset-backed alert”), that Goldman Sachs was one of the top 10 sellers of C.M.O.’s for the last two and a half years. From the evidence I see, Goldman was doing this for years. It might have sold very roughly $100 billion of the stuff in that period, according to ABAlert. Goldman was doing it on a scale of billions even when Henry M. Paulson Jr., the current Treasury secretary, led the firm.

The Goldman spokesman would not comment on this except to note that other firms sold C.M.O.’s too.

The point to bear in mind, as Mr. Sloan brilliantly makes clear, is that as Goldman was peddling C.M.O.’s, it was also shorting the junk on a titanic scale through index sales — showing, at least to me, how horrible a product it believed it was selling.

The Goldman Sachs spokesman said that the company routinely shorts the securities it underwrites and said that this is disclosed. He noted candidly that Goldman is much more short in this sector than usual.

Here is my humble hypothesis, even after talking to Goldman: Is it possible that Dr. Hatzius’s paper was a device to help along the goal of success at bearish trades in this sector and in the market generally? His firm says his paper, like all of its economists’ work, was not written to support any larger short-trading strategy. But economists, like accountants, are artists. They have a tendency to paint what their patrons, who pay them, want to see.

From what I have observed over the years, Goldman has a fascinating culture. It is sort of like what I imagine the culture of the K.G.B. to be. You always put the firm first. The long-ago scandal of the Goldman Sachs Trading Corporation, which raised hundreds of millions just before the crash of 1929 to create a mutual fund, then used the fund’s money to prop up stocks it owned and underwrote, was a particularly sad example. The fund, of course, went bust.

Now, obviously, Goldman Sachs does many fine deals and has many smart, capable people working for it. But it’s not the Vatican. It exists to make money for the partners and (much farther down the line) the stockholders. The people there are not statesmen. They are salesmen.

To my old eyes, the recent unhappiness about mortgages and Goldman’s connection with them are not examples of sterling conduct. It is bad enough to have been selling this stuff. It is far worse when the sellers were, in effect, simultaneously shorting the stuff they were selling, or making similar bets.

Doesn’t this bear some slight resemblance to Merrill selling tech stocks during the bubble while its analyst Henry Blodget was reportedly telling his friends what garbage they were? How different would it be from selling short the junky stock that your firm is underwriting? And if a top economist at Goldman Sachs was saying housing was in trouble, why did Goldman continue to underwrite junk mortgage issues into the market?

HERE is a query, as we used to say in law school:

Should Henry M. Paulson Jr., who formerly ran a firm that engaged in this kind of conduct, be serving as Treasury secretary?
Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster, which has caught up with some Wall Street firms but not the nimble Goldman?
When the Depression got under way, the government created the Temporary National Economic Committee to study just what had happened on the Street to get the tragedy going. Maybe it’s time for an investigation of just what Wall Street and Goldman did to make money as they pumped this mortgage mess into the economic system, and sometimes were seemingly on both sides of the deal.

Or is Goldman Sachs like “Love Story”? Does working there mean never having to say you’re sorry?

Ben Stein is a lawyer, writer, actor and economist. E-mail:
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do banks sell knowingly tainted products? Yes.

Postby admin » Thu Dec 06, 2007 9:15 am


December 6, 2007
Wary of Risk, Bankers Sold Shaky Mortgage Debt

As the subprime loan crisis deepens, Wall Street firms are increasingly coming under scrutiny for their role in selling risky mortgage-related securities to investors.

Many of the home loans tied to these investments quickly defaulted, resulting in billions of dollars of losses for investors. At the same time, many of the companies that sold these securities, concerned about a looming meltdown in the housing market, protected themselves from losses.

One big bank that saw the trouble coming, Goldman Sachs, began reducing its inventory of mortgages and mortgage securities late last year. Even so, Goldman went on to package and sell more than $6 billion of new securities backed by subprime mortgages during the first nine months of this year.

Of the loans backing the Goldman deals for which data is available, nearly 15 percent are already delinquent by more than 60 days, are in foreclosure or have resulted in the repossession of a home, according to data compiled by Bloomberg. The average default rate for subprime loans packaged in 2007 is 11 percent.

“There is a maxim that comes to mind: ‘If you work in the kitchen, you don’t eat the food,’” said Josh Rosner, a managing director of Graham Fisher, an independent consulting firm in New York.

The New York attorney general, Andrew M. Cuomo, has subpoenaed major Wall Street banks, including Deutsche Bank, Merrill Lynch and Morgan Stanley, seeking information about the packaging and selling of subprime mortgages. And the Securities and Exchange Commission is examining how Wall Street companies valued their own holdings of these complex investments.

The Wall Street banks that foresaw problems say they hedged their mortgage positions as part of their fiduciary duty to shareholders. Indeed, some other companies, particularly Citigroup, Merrill Lynch and UBS, apparently did not foresee the housing market collapse and lost billions of dollars, leading to forced resignations of their chief executives.

In any case, the bankers argue, buyers of such securities — institutional investors like pension funds, banks and hedge funds — are sophisticated and understand the risks.

Wall Street officials maintain that the system worked as it was supposed to. Underwriters, they say, did not pressure colleagues on trading desks or in research departments to promote securities blindly.

Nevertheless, the loans that many banks packaged are proving to be increasingly toxic. Almost a quarter of the subprime loans that were transformed into securities by Deutsche Bank, Barclays and Morgan Stanley last year are already in default, according to Bloomberg. About a fifth of the loans backing securities underwritten by Merrill Lynch are in trouble.

Data from another firm that tracks mortgage securities, Lewtan Technologies, shows similar trends. The banks declined to comment on the default rates.

The data raises questions about how closely Wall Street banks scrutinized these loans, many of them made at low teaser rates that will reset next year to higher levels.

The Bush administration is close to a plan to freeze mortgage rates temporarily for some homeowners who are threatened with foreclosure.

In recent years, Wall Street aggressively pushed into the complex, high-margin business of packaging mortgages. At the same time, banks expanded their roles to selling investments to clients while trying to make money on their own holdings. Now, with the collapse of the credit bubble, Wall Street’s risk management, as well as the multiple and often conflicting roles it plays, has been laid bare.

As early as January 2006, Greg Lippmann, Deutsche Bank’s global head of trading for asset-backed securities and collateralized debt obligations, and his team began advising hedge funds and other institutional investors to protect themselves from a coming decline in the housing market.

“He was really pounding the pavement,” said one hedge fund trader, who asked not to be identified because it could jeopardize his relationship with Wall Street banks.

Mr. Lippmann’s trade ideas — documented in a January 2006 presentation obtained by The New York Times — were not always popular inside Deutsche Bank, where the origination desk was busy selling mortgage securities. In the fall of 2006, Mr. Lippmann pitched bearish trades to the bank’s sales force at the same time the origination desk was bringing them mortgage deals to sell to clients.

Last year, Deutsche Bank underwrote $28.6 billion of subprime mortgage securities, according to Inside Mortgage Finance, an industry publication. In the first nine months of this year, the bank underwrote $12 billion.

Goldman Sachs also moved early to insulate itself from potential losses. Almost a year ago, on Dec. 14, 2006, David A. Viniar, Goldman’s chief financial officer, called a “mortgage risk” meeting. The investment bank’s mortgage desk was losing money, and Mr. Viniar, with various officials, reviewed every position in the bank’s portfolio.

The bank decided to reduce its stockpile of mortgages and mortgage-related securities and to buy expensive insurance as protection against further losses, said a person briefed on the meeting who was not authorized to speak about the situation publicly.

Goldman, however, did not stop selling subprime mortgage securities. The bank, like other firms, retains a piece of the securities it sells. A Goldman spokesman said the firm was not betting against the mortgage securities it underwrote in 2007.

Like Goldman, Lehman Brothers also started to hedge its huge inventory of home loans in the second quarter of this year, concerned about poor underwriting standards. But Lehman also continued to sell mortgage securities packed with shaky loans, underwriting $16.5 billion of new securities in the first nine months of 2007. About 15 percent of the loans backing these securities have defaulted.

At the center of the boom in mortgages for borrowers with weak credit was Wall Street’s once-lucrative partnership with subprime lenders. This relationship was a driving force behind the soaring home prices and the spread of exotic loans that are now defaulting in growing numbers. By buying and packaging mortgages, Wall Street enabled the lenders to extend credit even as the dangers grew in the housing market.

“There was fierce competition for these loans,” said Ronald F. Greenspan, a senior managing director at FTI Consulting, which has worked on the bankruptcies of many mortgage lenders. “They were a major source of revenues and perceived profits for both the originators and investment banks.”

The battle over these loans intensified in 2005 and 2006, as home prices approached their zenith. (Home sales peaked in mid-2005.) At the same time, buyers of these securities, which carry relatively high interest rates, were fueling demand. Lehman Brothers, the dominant Wall Street player in this field, underwrote $51.8 billion of subprime mortgage securities in 2006, followed by RBS Greenwich Capital, which arranged $47.6 billion of sales.

Not all banks continued to expand their subprime business. Credit Suisse, which had been a major player in 2005, pulled back aggressively, with its underwriting down 22 percent in 2006, compared with 2004.

But other Wall Street banks, pushing to catch these market leaders, reached out to subprime lenders. Morgan Stanley, which expanded its subprime underwriting business by 25 percent from 2004 to 2006, cultivated a relationship with New Century Financial, one of the largest subprime lenders. The firm agreed to pay above-market prices for loans in return for a steady supply of mortgages, according to a former New Century executive.

“Morgan would be aggressive and say, ‘We want to lock you in for $2 billion a month,’” said the executive, who asked not to be identified because he still works with Wall Street banks.

Loans made by New Century, which filed for bankruptcy protection in March, have some of the highest default rates in the industry — almost twice those of competitors like Wells Fargo and Ameriquest, according to data from Moody’s Investors Service.

Fremont General and ResMae, which also had high default rates, were big suppliers of loans to Deutsche Bank. Merrill Lynch had a close relationship with Ownit Mortgage Solutions, which filed for bankruptcy in December. Merrill also acquired another lender, First Franklin, for $1.7 billion in late 2006.

“The easiest way to grab market share was by paying more than your competitors,” said Jeffrey Kirsch, president of American Residential Equities, which buys home loans.

What is clear is that home loans were highly lucrative to Wall Street and its bankers. The average total compensation for managing directors in the mortgage divisions of investment banks was $2.52 million in 2006, compared with $1.75 million for managing directors in other areas, according to Johnson Associates, a compensation consulting firm. This year, mortgage officials will probably earn $1.01 million, while other managing directors are expected to earn $1.75 million.
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Postby admin » Fri Nov 30, 2007 5:38 pm

National Bank profit tumbles, more to come

TORONTO STAR November 30, 2007

Is it greed? Stupidity? Or simply the new Golden Rule in this era of financial corruption: "Do it to others, before they do it to you."

Fallout from questionable investments called Asset Backed Commercial Paper (ABCPs) is hitting everywhere in Canada -- and if Bay Street forensic accountant Al Rosen is right, this is just the tip of the iceberg.

Companies, pension plans, governments, small investors and even taxpayers are victims as these controversial debt instruments sink like the Titanic after sparking a liquidity crisis and market meltdown this past summer.

The latest fallout is the first loss in 15 years for National Bank, Canada's sixth largest bank, which yesterday reported it lost $175 million, or $1.14 a share, in the fourth quarter. Overall, National's 2007 profit was $541 million, down from a $871-million profit in 2006. But if it hadn't invested in ABCPs, its profit would have been $933 million.

Earlier this week, Bank of Montreal announced a 35% drop in its fourth-quarter profit to $452 million, down from $696 million a year ago.

Expect more bad news as the bank profit parade continues.

So far, only Toronto-Dominion Bank -- smart enough to steer away from ABCPs -- has been left unscathed, yesterday reporting a 44% jump in fourth-quarter profit, earning a whopping $1.09 billion.

But getting hit is not just banks -- whose brokerages, I'm sure, made sweet commissions selling these questionable investments.

In the Yukon, Ottawa's auditor general has been called in to investigate how the territory became exposed to $36.5 million in ABCPs. Buying these babies may have violated a federal act governing territorial government investments.

In Quebec, the head of Caisse de depot et placement, who manages Quebec's public pension fund, has been hauled onto the red carpet to explain how it became exposed to $13.2 billion in ABCPs.

The City of Hamilton -- already facing financial hardship -- is also taking a hit with a $97-million exposure in its $691-million investment fund. The city will announce a restructuring plan for its security holdings on Dec. 14.

But, so far, there's not a peep of a probe at Queen's Park, where there's also exposure to this mess, tied to the U.S. subprime crisis. Ontario Financing Authority was exposed by $700 million, Ontario Power Generation by $103 million though it's sold some of its ABCPs, and the Ontario Teachers Pension Plan by $60 million.

The Greater Toronto Airport Authority was exposed by $249 million.

Like Premier Dalton McGuinty's take on Ontario's faltering economy, the line on Bay Street is "don't worry, be happy." After all, the babies came with an R-1 credit rating from Dominion Bond Rating Service, the highest rating commercial paper can score.

But Rosen says the R-1 rating really can be a rating of lousy. "People didn't know the quality of the assets that was backing the paper, and now the losses are going to be fairly high in some situations," said Rosen, a principal with Rosen & Associates in Toronto.

Meanwhile, an investors committee headed by Purdy Crawford hopes to find a solution to the non-bank ABCP madness.

Others who've been exposed are Air Canada, Barrick Gold, Canaccord Capital, Canada Mortgage and Housing Corp., Canada Post, Canfor, Certified Management Accountants of Ontario, CP Rail, Credit Union Central of B.C., Credit Union Central of Ontario, Domtar Corp., Desjardins Group, Dundee Corp., Industrial Alliance Insurance and Financial Services Inc., MDS Inc., Nav Canada, Professionals' Fund Group, Sherritt International, the University of Western Ontario and many more.

The question is will the lowly taxpaying consumer and small investor end up picking up the tab for this debacle?

The answer is probably yes. There's already a credit crunch, with the cost of lending heading higher for overly-indebted Canadians, carrying record household debt at $1.1 trillion.

Investor advocate Diane Urquhart says many new bridges, schools and hospitals could have been built with the dollars lost by government. She wants Ontario's auditor general called in.

So, will there be a meaningful probe? Will heads roll?

Don't hold your breath. This is Canada, where it's OK to "do it to others, before they do it to you."
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The ABCP's of how to steal $32 billion.

Postby admin » Mon Nov 26, 2007 12:33 am ...

the above YOUTUBE video will tell you nearly 90% of everything you need to know about the sub-prime mortgage crisis, in under eight minutes.

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Postby admin » Mon Nov 26, 2007 12:25 am

Subprime mess is a crime story
Diane Francis, Financial Post
Published: Saturday, November 17, 2007

The subprime mortgage and asset-backed paper scandals constitute one of the biggest frauds ever perpetrated. They have resulted in mass foreclosures, writedowns, bankruptcies, firings and billions lost. The US$10-trillion U.S. home-lending sector was, and perhaps still is, rotten. At the top were mortgage lenders, then Wall Street and others who exported junk debts to lenders around the world after prettying them up.

At the bottom was a corrupt system that handed out mortgage broker licences like driver's licences, and then handed out mortgages like candy at Halloween. In between were crooked appraisers and organized crime.

The stories are now seeping out. A money manager friend of mine said his limousine driver in Chicago became a mortgage broker then made a fortune indiscriminately handing out mortgages to friends and relatives. He retired to Poland a multi-millionaire. In Cleveland, a church preacher moonlighted as a broker and put his parishioners into houses they could not afford, including a 78-year-old woman just kicked out of her home.

Miami police have uncovered a massive foreclosure fraud scheme involving appraisers, brokers and accountants who recruited straw buyers, inflated condo prices, drew up fake tax returns, got huge mortgages, paid developers less than the mortgage raised and pocketed the difference. The straw buyer was paid off and abandoned the property to foreclosure.

The press thinks this is a financial story. It's a police story. These scandals contain all the necessary elements that characterize all world-class frauds: 1. Many "little" people must be involved who don't know what others are up to or that they are party to a crime. That makes proving conspiracies and criminal intent difficult. 2. As many borders as possible must be put in place between the victims and the perpetrators. That makes investigation expensive or impossible. 3. Perpetrators should not be in the same country as victims. If victims are foreign, police investigations are less politically justifiable.

These three elements provide the "winning conditions" for every successful fraud because far-flung wrongdoing, involving many jurisdictions, frustrates the press, the law enforcement officials and makes litigation expensive or even impossible.

Offshore manoeuvres, like Enron or Bre-X's, allowed the frauds to grow undetected, giving the bad guys time to get away or to hide their ill-gotten gains. Some have had time enough to end up on a beach somewhere that doesn't have any extradition treaties.

This is why the RCMP did not "get their man" in the $9-billion Bre-X fraud. The case was too complicated and expensive to pursue and too many victims and the perpetrators were outside of Canada. Enron, by contrast, was heatedly pursued because the victims and the perpetrators were in the United States, plus there were links to the George Bush Presidency.

In the subprime mess, there seems little political will to do much of anything south of the border. Foreclosures dot the urban landscape, mostly affecting speculators or disenfranchised people. Wall Streeters get tossed from jobs, write down fortunes and collect obscene severance. It's all business and usual. I hope intermediaries will be sued out of existence by the deep pockets they damaged and defrauded. - Diane Francis blogs
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Postby admin » Mon Nov 05, 2007 11:17 pm

yes, the commercial asset backed crisis is indeed another example of a knowingly tainted investment product.

designed to deliver risks of failure to trusting customers of investment dealers, while delivering massive commissions to the middlemen, this video will explain pretty much everything the layman will need or want to know about the Asset backed commercial paper crisis

enjoy ...
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Postby admin » Fri Oct 12, 2007 3:11 pm

National Post - Think tank slams asset-backed market, October 12, 2007, says:
"The top international banking think-tank has slammed banks and regulators in Canada and elsewhere for the way they allowed the market for asset-backed securities to dry up earlier this year.

"The industry has to recognize that we were at fault big time," said Philip Suttle, a director at the Institute for International Finance, a lobby group for more than 360 of the world's major banks, including the five biggest in Canada.

"A lot of us were asleep at the switch, both regulators and market participants," said Mr. Suttle, who was speaking in an interview after the IIF submitted a letter expressing its concerns about the market to the International Monetary and Finance Committee -- a committee of the IMF that meets next week in Washington."

"...the IIF noted that the Canadian market in particular was "different because the back-up facilities that the securities had in the Canadian market were less complete than [elsewhere.]"

"The IIF's letter also takes a straight shot at the credit rating agencies that put a rating on asset backed securities.

"The sudden multi-notch downgrading and large price declines of some structured products that initially received high investment grade ratings have raised questions as the appropriateness of the methodology used to assign ratings to structured products," the letter states."

"The letter warns against an over reaction to the market turmoil in the form of too much regulation, and also calls for banks to develop better disclosure rules on asset-backed securities and an improved method of valuing the securities."

My conclusions about this report on the Institute for International Finance's letter to the International Monetary and Finance Committee:

(1) the pension beneficiaries, taxpayers and shareowners of Canada that pay the costs for damages from the frozen Third Party ABCP must be made whole, regardless of whether the buyers were accredited investors or not.

The damages, equal to the difference between the market values, when the frozen paper becomes restructured and traded in the open market, and the original face amount of the frozen paper, must be paid for by the Canadian Third Party ABCP conduit sponsors; the international and Canadian bank signatories to the defective Canadian liquidity agreements ; any additional Canadian investment bank distributors of the Third Party ABCP; and, DBRS.

(2) OSFI must immediately remove its OSFI Regulation B-5, so that liquidity agreements backing any Canadian-based investment product sold to both retail or accredited investors are not permitted to be of "limited to no use". The capital differential of 0% for the Made-in-Canada "limited to no use" liquidity agreement and 10% for the international standard 100% guaranteed liquidity agreement must be eliminated so that Canada's federal bank regulator is not providing an incentive for banks to skim fees for "limited to no use" liquidity agreements and is not giving the commercial paper vendor group the opportunity to deceive buyers who trusted that the securities they bought had sound liquidity agreements, were top rated and safe.

Transparency is not a sufficient solution. There should be no opportunity to sell investment products with "limited to no use" liquidity agreements since this enables banks to skim fees from Canadian investors for which there is no beneficial service provided.

OSFI B-5 Regulation says:

"Liquidity support is a commitment to lend to, or purchase assets of, an SPE in order to provide investors with assurance of timely payment of principal and interest. Liquidity support may include a general market disruption clause. A general market disruption can be defined as a disruption in the Canadian commercial paper market resulting in the inability of Canadian commercial paper issuers, including the SPE, to issue any commercial paper, and where the inability does not result from a diminution in the creditworthiness of the SPE or any originator or from a deterioration in the performance of the assets of the SPE."

(3) The Federal Parliament, through the Federal Minister of Finance, should appoint a qualified independent monitor to ensure that the interests of the pension beneficiaries, taxpayers and shareowners are being met in the decisions of the Montreal Accord Group and Pan Canadian Committee.

(4) The House of Commons Finance Committee must hold hearings on the lessons learned from the Canadian Third Party ABCP fiasco and the general malfunctioning of Canada's securities regulation and white collar crime enforcement system. The hoped for outcome of this hearing would be a new Federal Government securities law and a national securities commission. The existing investment industry SRO's and provincial securities commissions have failed to protect Canadians once again. Average Canadians can no longer afford to take more billions of dollar damages from Made-In-Canada defective investment products and white collar securities crime.

(5) Canada's top priority, however, is to develop a properly functioning independent RCMP white collar crime police unit, that has the confidence of international police forces and collaborates with municipal and provincial police forces throughout Canada. The RCMP must discontinue its reliance on referrals for criminal investigations from the investment industry SRO's and the provincial securities commissions.

Diane Urquhart
Independent Analyst
Mississauga, Ontario
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Joined: Fri May 06, 2005 9:05 am
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