John Greenwood

Friday, December 12, 2008

A proposal that the federal government provide a bailout for a restructuring of $32-billion of frozen asset-backed commercial paper has sparked anger among some holders of the frozen notes, who say that taxpayers' money should not be used to fix the problem.

"We were let down by the institutions who sold us this stuff and we were let down by the institutions who made this stuff; I don't see why they should be bailed out," said Brian Isler, a Toronto-based lawyer with $229,000 of his savings tied up in the frozen notes.

Members of the so-called Pan-Canadian Committee overseeing the massive restructuring met with Finance Department officials this week to plead for financial assistance to prevent the plan from falling apart, sources said.

The government is being asked to provide several billion dollars to cover potential margin calls on leveraged credit default swaps underlying the frozen ABCP. Failure to meet such a margin call would result in a collapse of the restructuring, which has been in limbo for nearly 16 months.

"There should be no bailout," said a senior executive at a company with more than $60-million of frozen notes. He said that instead, a clause in the restructuring taking away noteholders' ability to sue investment dealers who sold the stalled ABCP should be removed.

"They should just give us back our legal rights and we will deal with this," said the executive.

Even though the Finance Minister, Jim Flaherty, has said he would prefer a market-led solution, a spokesman for the Minister said that the federal government "takes a keen interest in maintaining financial stability and the health of our capital markets."

The spokesman added: "The role all along has been to support discussions among the parties and encourage progress."

While Mr. Flaherty may prefer to stick to his position, he can't ignore the storm in financial markets that has become so severe in recent months that, according to some insiders, the plan that was mapped out at the end of last year might not survive.

The ABCP market fell apart in August, 2007, after investors stopped buying the notes over fears that they might be linked to subprime mortgages. Under the restructuring, spearheaded by the Caisse de depot et placement du Quebec, the frozen ABCP would be converted to longer term notes.

All along one of the main stumbling blocks has been the leveraged credit default swaps that make up the largest chunk of assets underlying the ABCP. As part of the restructuring, the banks and institutions backing it agreed to put up $14-billion to cover potential margin calls on the CDSs. That was considered more than sufficient backing in the spring when the details were hammered out, but since then credit conditions have worsened so much there is concern that it won't be enough.

The spotlight is mostly on a group of foreign banks on the other side of the CDS deals. They're the ones who will make the collateral calls, and right now they are in no position to make concessions. In recent months, several have been bought or accepted government bailouts.

"Those banks would want to protect the new money that has been put into them, and to do that they would want to collect on all money that is owed to them," said Diane Urquhart, an industry expert working for some of the noteholders. "To the extent these banks have offered margin facilities; they would be examining the credit integrity of that margin facility. This is the new dynamic."

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