INVESTOR INFORMATION - ABCP

Asset Backed Commercial Paper

In 2007 another financial fiasco threatened to cause calamity when Asset Backed Commercial Paper lost liquidity. Investors who invested for the short term were suddenly unable to cash in their investment because the underlying assets were of doubtful value. This created a liquidity crisis and caused great concern. So much that industry representatives sat down in Montreal to try to develop a solution that was called the Montreal proposal.

The concept was to convert the short term investment into long term investment so that holders would not have to liquidate at greatly discounted prices. However, not all the holders of the ABCP could simply wait long term to get their money. It was also revealed that a large number of small investors had invested their money in ABCP believing it to be secure and readily available. Also some companies had parked cash for the short term so they could get their money for planned development. The freezing of ABCP curtailed their plans.

The failure of the ABCP caused collateral damage to a wide range of organizations and a solution was needed to prevent a financial calamity, severe damage to the credit system and a lack of confidence in the investment industry.

A committee chaired by Purdy Crawford came up with a solution that would provide support for holders of the ABCP to recoup their money in the longer term. At the same time those who agreed to this solution would have to give up their rights to sue any of the organizations involved with this fiasco.

Although this seemed to satisfy the industry and most of the large investors it did little for small investors who needed their money in the near term and could not wait for many years. It seems that for this proposal to be implemented a majority of the ABCP holders would have to vote in favour.

Although small retail investors held only a minor portion of the ABCP, the numbers of small investors greatly exceed the large investors. Therefore the Crawford Committee needed to persuade the retail investors to accept the proposal and give up their rights to sue. However because there was no guarantee when they would get their money back or how much they would receive, the small investors were rightly reluctant to agree. Investors were scheduled to vote on the proposal April 25, 2008.

An article in the Globe and Mail in November 2007 The ABCP Black Box Explodes provides details of this crisis and the actions taken since August 2007. Some recent articles are appended that outline the situation quite clearly. Additional information is available on the www.investorvoice.ca website.

On April 9, Canaccord announced they would offer to buy back ABCP from 1430 clients at par. They have made a deal with a buyer to buy the ABCP at a discount of $39.5 million which Canaccord will absorb. This may be sufficient to make the Crawford Proposal work and resolve this crisis.

On April 18, Credential announced they would buy back ABCP from 335 clients at par. Coupled with the Canaccord announcement the restructuring proposal for ABCP will most likely be accepted. There will still be fallout from this latest crisis.

Let us hope that this ABCP fiasco will finally convince Government to take long delayed action to revise the regulatory system and more importantly to provide investor protection for all Canadian retail investors.

SIPA letter to Commons Finance Committee - 20080317

Options Dwindle for Burned Investors - Advisor.ca, 20080319

Highs 'n lows - The Sun, 20080319

Hog Farmers May Block $32 billion Debt Plan - Bloomberg, 20080320

Small Stakeholder Stokes Revolt - Financial Post, 20060320

Investors Face a Catch-22 - Vancouver Sun, 20080320

Credit Union's Position Worries Investor - Vancouver Sun, 20080322

Retail Investors Leery - Toronto Star, 20080324

Investors Pin Hopes on a Vote - Toronto Star 20080325

Financial Advice not Always Best - Toronto Star, 20080328

ABCP Buyback Too Big for Broker - Globe and Mail, 20080331

Investors Didn't See Pain Coming - National Post, 20080402