ORDINARY PEOPLE, AN EXTRAORDINARY MESS

		Guilt was just one of the emotions that racked Mr. Jones, whose mother died at age 92, just three months after the ABCP market seized up. “I was a little bit angry, but more disturbed and embarrassed, and obviously worried,” he recalls. Over the year since the ABCP crisis hit, both regulators and insiders in the investment industry have heard hundreds of similar stories from individual investors. One of the biggest surprises to emerge from the almost year-long restructuring process has been the discovery that so many ordinary, retail investors owned third-party ABCP – a complex product originally created for institutional buyers and sold in the so-called “exempt” market, which means it receives virtually no regulatory scrutiny. At least 2,000 retail investors owned the paper, based on investment firms' disclosures. While that's a tiny number compared with the more than two million people estimated to have full-service brokerage accounts in Canada, the financial pain and stress for each of those holders has been intense.
Purdy Crawford, head of the committee to restructure the frozen ABCP market, in a presentation to investors in Vancouver last April.

Interviews with retail ABCP holders paint a consistent picture of ultraconservative investors seeking safe vehicles for their money. Most went to their financial advisers asking for GICs, treasury bills or similar products. Instead, they ended up with a product that, despite guarantees and high ratings, collapsed when the market was blindsided by the credit crunch because the backing banks that were supposed to support the paper used an out clause.

Since the non-bank ABCP market collapsed last summer, teams of lawyers and top financial industry players have battled through high-stakes negotiations to try to restructure $33-billion worth of notes. A proposal received court approval in June, but it remains tied up in an appeal by corporate investors and will need a ruling by the Ontario Court of Appeal before it proceeds.

As the saga limps closer to a resolution, investors look for answers and where to lay blame. They have lots of suspects to choose from in the financial system, ranging from their brokers to regulators and the bond raters that facilitated the sale of ABCP, all the way to the companies that manufactured these instruments in the first place.

The customers relied on their brokers. Brokers, in turn, say they relied on their firms' stamps of approval to market the product. The firms involved in selling the paper say they placed their faith almost entirely in the top-tier ratings the products had received from debt-rating agency DBRS Ltd. And DBRS says it believed the paper was being sold in the exempt market to sophisticated investors.

As good as GICs

One common theme among retail ABCP investors is that most report they were pitched the product as something that was the equivalent of plain-vanilla GICs – fixed-term deposits with guaranteed principal protection and a set rate of return.

ABCP notes, while highly rated by DBRS Ltd., had no outright guarantee that the principal would be returned. Their interest payments and return of principal depended on the performance of a portfolio of assets underlying the notes. In some cases, those assets were familiar types such as credit card receivables and mortgages. For most of the frozen paper, however, the assets were far more complex financial derivatives.

There was a form of guarantee. Big banks such as Deutsche Bank AG and Canadian Imperial Bank of Commerce were under contract to buy the paper from investors if nobody else would, but when the market froze, most of the backing banks used a loophole in the contracts to avoid paying.

Gary Carter, 75, of Sahtlam, B.C., says he bought ABCP from an adviser at Credential Securities Inc., investing a big portion of his retirement savings.

“Like everybody else, it was sold to me as a GIC,” he says. “I've been a logger all my life, and I had sort of a rapport with a lady at Credential, and I guess I had too much trust, because when you don't know a whole lot about it, you just put your faith in.”

Mr. Carter says he would not have bought ABCP if he had understood it was not entirely safe.

“I would not have bought it if there was any risk, especially when you're getting, what, around 4 per cent? If you're going to go speculative, you get paid for it.”

Credential said it is not appropriate to comment on individual situations.

Mark Wasserman, a 54-year-old vice-president of marketing in Montreal, says he bought the paper from a broker at Canaccord Capital Inc. who, he says, used ABCP as a product interchangeable with a GIC.

He alleges his adviser put his money into ABCP without his written permission.

“He had free rein to put my cash assets into no-risk investments, that was the deal I had: ‘If it's no-risk, you don't have to ask me; if it's risk, you have to ask me,'” Mr. Wasserman said.

Documents support a wide array of anecdotal stories collected by The Globe and Mail that ABCP was routinely compared with GICs by financial advisers.

One illustration of the sales process can be seen in an e-mail sent to investors on Aug. 1 last year. It contains an investment pitch from former Canaccord Capital vice-president Mark Hewett, who explained to his clients that his firm had obtained a block of ABCP issued by Planet Trust.

Planet Trust was among the trusts that Toronto-based Coventree set up for its ABCP program, which had more than $16-billion outstanding in August. Each trust would issue commercial paper to investors, and use the incoming money to fund the purchase of assets that would back the paper.

The e-mail, with the subject line “money market rates – higher than 1-year GICs,” explains the benefits of Planet's ABCP compared to GICs.

“Liquidity: You can sell the Planet Trust at any time before maturity. GICs are non-redeemable,” the e-mail states.

“Protection of the capital. The rating on the Planet Trust is AAA credit. GICs are only insured up to $100,000.”

Canaccord chief operating officer Mark Maybank said the e-mail stemmed from an internal company communiqué letting advisers know the features of the product. He said it is common practice to compare investments with other, similar options, so it was not misleading to compare ABCP to a GIC.

“It is the role of the adviser to assess a broad range of investment products, so I don't think there was anything necessarily inappropriate or factually incorrect in that e-mail,” Mr. Maybank said.

It is only with the benefit of hindsight, he adds, that people have questioned the appropriateness of ABCP products for conservative investors.

“These money market vehicles were accepted in the marketplace as short-term, conservative protection of capital or protection of principal and fit those types of client profiles,” he says.

Calgary ABCP investor Brian Hunter, who has formed an association of small ABCP investors, is not sympathetic to that argument.

He believes firms like Canaccord should have done more to analyze and understand ABCP before recommending it to retail clients, noting that even some credit-rating agencies would not rate the product because they did not think bank liquidity guarantees were strong enough protections.

“It should never have been sold to retail,” he says. “Whether it should have been sold to anybody at all is a question, but certainly not to retail and not as a replacement for – or described in some cases as better than – GICs or [banker's acceptances]. What were they thinking?”

Mr. Hunter heard the pitch himself when he first invested in asset-backed commercial paper in early 2007. The Calgary oil and gas engineer had never heard of ABCP before his broker recommended the product – and he didn't even know he had bought it at the time.

He said he just wanted a safe place to park about $600,000 in cash during a period of stock market volatility.

“I was just told it was a T-bill equivalent product,” he says.

He said he only learned afterward that he even held ABCP, and subsequently learned that his so-called “asset-backed” paper also was not backed by real assets but by complex synthetic derivatives.

Even if he had been inclined to check into it at the time, Mr. Hunter believes he likely wouldn't have learned much because ABCP was sold as a so-called exempt product, which means there was no requirement to give a prospectus to investors explaining its details.

“The reality was with the due diligence, you weren't able to do it because there was no prospectus, there was nothing,” he said.

Now, after months of intensive research into the ABCP market, Mr. Hunter says he feels Canaccord, and indeed the whole financial sector, developed a “cavalier” attitude toward ABCP by 2007.

“The risk associated with this should have been recognized by Canaccord's risk management team,” he argues. “Having that kind of risk on your balance sheet, without taking a hard look at it, is completely ridiculous. They just dropped the ball on this.”

Earlier this spring, Canaccord and Credential retail investors involved in the ABCP restructuring process learned they will be repaid their funds. The repayment, however, has faced a lengthy delay due to a court challenge launched by corporate note holders who are opposing terms of the proposed restructuring plan. Investors still don't know when they will see their money.

Angela Speller, a 62-year-old retiree in Victoria, says she fears the matter may be appealed to the Supreme Court of Canada, leaving she and her husband waiting years to access their entire retirement nest egg of almost $1-million.

She says they invested their life savings in ABCP notes with a triple-A rating after their financial adviser assured them that “if these fail, the government of Canada would fail.”

With two adult children in university, and only a small pension to live on, the Spellers say they may not be starving, but they need their money.

“Some of us need these savings for dental work, medical expenses, education, and vehicles that are falling apart,” she says.

Who started all this?

When ABCP got its start in Canada in the late 1980s, the aim was to create a way for big lenders to offload loans from the balance sheets – mortgages, credit card receivables – and in the process to create a product that would be marketed to major investors.

The originators of the first paper were financial types at the securities arms of banks such as CIBC and Bank of Montreal. The banks won because they got cash up front by selling their loans, rather than having to wait around to collect on them, which also freed up the banks to make new loans.

The buyers, mostly big institutional investors in the early days, got a few more fractions of a percentage point in yield than they would get by purchasing more traditional assets such as T-bills or corporate commercial paper. That higher yield became increasingly appealing over the past decade of low interest rates in Canada.

But as ABCP became more popular, the industry also changed profile.

Independent players such as Coventree Inc. began to sprout up, seeking to profit from the market. Coventree and other so-called sponsors such as Newshore Financial Corp. and National Bank of Canada would seek out third-party assets, package them up and sell them as commercial paper.

And as the players changed, so did the product. From about 2003, a profusion of ABCP flowed forth that was backed not by traditional financial assets but by enormously complex financial derivatives, creating what has now become clear was a far riskier product than it had been previously.

In 2003, for example, about $5-billion of ABCP backed by derivatives was outstanding in Canada, jumping to $35-billion just before the market seized up in 2007. From a small sliver four years earlier, derivative-backed ABCP grew to about 30 per cent of the total ABCP market.

A final stage in the evolution was the swelling number of retail investors moving into the product.

The retail trend is hard to track because there is no central clearing agency to record the holders. But some companies have confirmed they began selling ABCP to retail clients only in the past few years.

For instance, Credential Securities Inc. – an investment dealer for the Canadian credit union system – began selling third-party ABCP in July of 2006. “With an R-1 High rating, ABCP was widely viewed to be of high credit quality, it offered a good yield and was available to meet short-term investment needs of clients,” officials at Credential said in an e-mailed response to questions from The Globe.

More than 30 retail ABCP investors told The Globe they bought their paper in 2006 or 2007. None had purchased any in 2005 or earlier.

By last summer, it turns out, thousands of retail clients held ABCP investments, although the total number is still not known because some were quietly bought out by their brokerage firms and did not become part of a market restructuring effort led by lawyer Purdy Crawford.

The Crawford committee, launched in September to find a way to restart the seized-up market, had already drafted its restructuring plan earlier this year before even it realized how many individual investors were out there, sources on the committee said.

Mr. Crawford told reporters in Vancouver in April that he only realized slowly during the month of March that there were almost 1,800 retail investors who still held frozen third-party ABCP.

“To be honest, my own understanding was I didn't know,” he said. “It blew my mind.”

Canaccord started selling ABCP to retail investors in 2004 after having the firm's product review committee look at the paper, Mr. Maybank says. The company took comfort from its high credit rating, served up by DBRS.

“In 2004, we basically had a policy that allowed it because it was triple-A,” Mr. Maybank said. “There are other things such as lower-rated and junk bonds that were not permitted in the system. But on the back of the triple-A and the R-1(high) ratings, that got it through the committee.”

He said if a product passes the committee, the firm usually lets its investment advisers sell it.Canaccord, founded in Vancouver by entrepreneur Peter Brown, has grown from a small shop with West Coast roots to the country's largest independent brokerage, with large operations in the United States and Britain.

Mr. Maybank said the firm trained its investment advisers on ABCP through “in-house lunch-and-learns” and by having the company's fixed-income experts visit large Canaccord branches to do presentations on money market products such as ABCP.

Canaccord also used third-party sources, such as information from ABCP wholesalers like Scotia Capital, and would send DBRS reports on trusts to its investment advisers as part of their training, Mr. Maybank said.

“They have no reason not to rely on DBRS, right? It's been successfully performing for a number of years and there's nothing to say not to,” he said.

As for selling Coventree products, the situation was similar, he argues.

“They went public, their share price was performing. They had lots of equity investors and lots of buyers,” he notes. “Everyone looks back with the benefit of hindsight.”

National Bank also relied on DBRS's rating. ABCP wasn't subjected to a review by a product committee because it was a short-term product that was highly rated, which made it eligible for distribution by the firm's money market sales desk, officials at the firm said.

“National Bank Financial, and I think it is fair to say the dealer community, regarded asset-backed commercial paper as a suitable investment for all investors, including retail clients with a conservative investing strategy,” said Ricardo Pascoe, co-CEO of National Bank of Canada's securities division.

“It offered investors a money market alternative that was among the highest-rated instruments, being both short term and liquid, with returns that were very competitive with other similar instruments.”

Follow the Money:

Who got rich?

While there were profits to be made from selling ABCP products, it's now clear retail brokerage firms like Canaccord were not making the big money when they sold third-party ABCP products to retail investors.

The creators of the ABCP made their profit thanks to the difference between what the assets earned in interest – the collections on all those loan payments – and the lower rate paid out to buyers of the commercial paper. At National Bank, for example, the firm oversaw trusts that issued about $3-billion of ABCP, which brought in about $15-million a year in revenue.

Some of the profit also went to pay commissions to the securities dealers who sold the product.

A small company like Coventree didn't have the wherewithal to distribute the product itself, so like any manufacturer, it struck deals with wholesalers.

“It was the highest commission that's paid to money market dealers for distributing money market paper in Canada, bar none, absolutely,” said David Allan, Coventree's head of capital markets.

Those wholesalers, such as Scotia Capital, National Bank Financial, HSBC Bank Canada and CIBC World Markets, could sell directly to their own clients, but they also sold ABCP to other companies that wanted to be able to offer the product. Canaccord, for example, got much of its paper from Scotia Capital.

Canaccord didn't make any significant money from selling ABCP to clients, Mr. Maybank says. The firm received no fees from Coventree for selling the paper because it wasn't a wholesaler.

For example, in the month and a half from July 1 to the Aug. 13 market meltdown, Canaccord processed more than 2,000 ABCP trades totalling about $300-million for clients, and made a modest $55,000 in gross commissions. In fact, most of the trades – 54 per cent – were done with no commission at all and charged to the client and 82 per cent of the trades didn't generate enough commission to cover the cost of processing, Mr. Maybank said.

The numbers are similar for National Bank of Canada, which earned little in the way of commissions for selling ABCP to retail investors. Of the 1,175 trades the firm processed for the 340 National retail clients who had their paper frozen, the average commission was tiny – 0.014 per cent of the principal – and 82 per cent of the trades were processed with a commission of $60 or less.

For its part, Credential said “the commission structure was in line with other money market instruments.”

Given the lack of revenue, Canaccord's investment advisers had nothing in the way of upfront financial incentive to sell ABCP, Mr. Maybank said. But like other products that generate little or no returns – such as banker's acceptances and government bonds – it was offered because the firm wanted to have a full array of standard options available for its clients, he said.

“We offer a number of products that we don't make a lot of money on – in some cases next to no money,” he said. “Why do you have them? Because you have to have a range of money market alternatives in your system.”

And brokers at Canaccord have the freedom to choose the best options for their clients, he adds.

“On this one, they weren't pushed, there was no grid, there was no push for fees on this,” Mr. Maybank says. “The brokers have the ability to choose the best product to suit their client needs. We didn't say you can't sell this – but I wish we had.”

By last summer, Canaccord had more than 1,430 retail clients with more than $138-million worth of ABCP, representing about 1 per cent of its total account base. Credential Securities had 335 individual investors with $48-million, meaning less than half of 1 per cent of its customers held ABCP. Credential has investment advisers in more than 135 credit unions in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario.

National Bank of Canada had 340 clients, out of a total of about 150,000 accounts, with about $170-million of affected paper when the market froze. National has already repurchased that paper at par, with accrued interest.

Other individuals – a number never publicized – owned asset-backed commercial paper last summer and had their positions bought out by their brokerage firms.

There were almost 20 firms that reported having clients with frozen third-party ABCP when the Crawford committee hired an independent group, Broadridge Financial Solutions Inc., to assess who held ABCP and how much.

Susan Wolburg Jenah, who heads brokerage industry regulator, the Investment Industry Regulatory Organization of Canada, said one firm, whose identity she cannot disclose, approached IIROC last August to seek the regulator's permission to buy back ABCP from its clients.

The cost raised concerns about the firm's capital adequacy, but the buyback was allowed.

“They had a reputational issue, and they were trying to do the right thing,” she said.

Surprisingly, even many involved in the creation of ABCP say they only realized earlier this year that hundreds of small investors had money stuck in their product.

One problem may have been the wholesaler system, which meant that the makers of the paper at Coventree and other firms didn't have a clear idea of who owned the paper. The dealers who directly sold the product were the only participants who knew who was buying it.

Mr. Allan of Coventree said his firm would not have known whether or not the product was being sold to retail investors, “and, honestly, we were finding out with everybody else,” he noted.

“Would we have known about some of the larger institutional investors? Sure. But most of the names, even the corporates, those would not have been names that were known to us.”

An official at rating agency DBRS, who insisted his name not be used, said the firm's only comment would be to note that third-party ABCP was sold as part of the so-called “exempt” market, so it was intended for sophisticated, experienced investors.

Unfortunately, a growing number were not so sophisticated.