www.ebook3000.com BACK FROM THE BRINK LESSONS FROM THE CANADIAN ASSET-BACKED COMMERCIAL PAPER CRISIS This page intentionally left blank www.ebook3000.com PAUL HALPERN CAROLINE CAKEBREAD CHRISTOPHER C NICHOLLS POONAM PURI LESSONS FROM THE CANADIAN ASSET-BACKED COMMERCIAL PAPER CRISIS UNIVERSITY OF TORONTO PRESS Toronto Buffalo London © University of Toronto Press 2016 Rotman-UTP Publishing Toronto Buffalo London www.utppublishing.com Printed in Canada ISBN 978-1-4426-4192-1 rinted on acid-free, 100% post-consumer recycled paper with P vegetable-based inks Library and Archives Canada Cataloguing in Publication Halpern, Paul, author Back from the brink : lessons from the Canadian asset-backed commercial paper crisis / Paul Halpern, Caroline Cakebread, Christopher C Nicholls, Poonam Puri Includes bibliographical references and index ISBN 978-1-4426-4192-1 (cloth) Asset-backed financing – Canada. Banks and banking – Canada. Negotiable instruments – Canada. Capital market – Canada. Investments – Canada. Financial crises – Canada. Global Financial Crisis, 2008–2009 I Cakebread, Caroline, author II Nicholls, Christopher C., author III Puri, Poonam, author IV Title HG4028.A84H34 2016 658.15’224 C2016-900030-3 University of Toronto Press acknowledges the financial assistance to its publishing program of the Canada Council for the Arts and the Ontario Arts Council, an agency of the Government of Ontario Funded by the Financé par le Government gouvernement du Canada of Canada www.ebook3000.com an Ontario government agency un organisme du gouvernement de l’Ontario This book is dedicated to a handful of important people who supported the authors through this process It took years to complete and we experienced illness, death, and the birth of a new baby in the process This book is dedicated to: Purdy Crawford, the catalyst for the book and our biggest champion Irene Devine, who provided us with crucial support during the ups and downs of writing this book We wish she were here to see the final result James Mitchell, champion and supporter of this book who held down the fort and acted as a single Dad during many weekend hours This book is also dedicated to Andrea Nicholls, Jaiden, Amaris, and Shiloh This page intentionally left blank www.ebook3000.com Contents Preface ix Acknowledgments xi Introduction xiii PART ONE: The ABCs of a Crisis The Day Montreal Stood Still Not a Regional Problem 49 Enter Purdy Crawford 71 PART TWO: The Art of the Possible: Hammering Out a Deal A Proposal Is Born 87 Putting It Back Together Again 93 Selling the Deal 111 The Plan Gets Approved 123 It Almost Falls Apart 129 PART THREE: ABCP Afterlife: How Has the Market Performed? Evolution of a Liquid Market 147 10 Regulatory Fallout 159 viii Contents PART FOUR: Conclusions 11 Winners and Losers in the ABCP Debacle 185 12 Lessons Learned 201 Notes 219 Index 227 www.ebook3000.com Preface In a way, the restructuring story and the writing of this book faced similar existential threats The ABCP restructuring negotiations were impacted throughout by serious outside events that delayed and almost derailed its conclusion Similarly, the manuscript preparation was delayed by illness, childbirth, pressures from our real-life occupations, and one death Just as in the actual restructuring, we persevered, and although somewhat late, the story is here to read While the book is arriving about the same time as the maturity of the final underlying transactions in the ABCP, there are many reasons why it remains timely, useful, interesting, and – hopefully – a good read First, the restructuring negotiations are an interesting blend of financial and political theatre in which small retail investors held the power in the outcome of the restructuring While the large investors negotiated, the small investors organized and, using social media, exerted an important influence on the outcome Second, the restructuring used existing insolvency legislation in an innovative way The Companies’ Creditors Arrangement Act (CCAA) was intended to facilitate the restructuring of a company; here it was applied to an entire market This fact led to a lot of legal wrangling The CCAA decision also led to legal challenges Third, by design – and, in fact, fiat – the solution to the crisis was a private one, unlike the public resolutions found in other countries However, the federal government was crucial in the ultimate resolution of the crisis and ended up making money on the deal Fourth, the resolution required the creation and implementation of a new set of financial securities, which would ultimately trade in a liquid market More interesting is the private sector solution to introducing liquidity to this market after the restructuring Index 139–42 See also Bank of Canada; Finance, Department of Federal Reserve: and AIG Insurance, 130; Bank of St Louis, 36 Fedyna, Bil, 157 fiduciary duty/standards: for adviser profession, 209–11; for brokers, 180, 208–11; and credit ratings, 207; IIROC and, 208–11; for pension funds, 133; and retail investors, 209; SEC and, 180; Supreme Court in Hodgkinson v Simms and, 180; US Dept of Labor and definition of fiduciary, 210–11 Fiera Capital, 148 Fiera Quantum: and Canadian ABCP Fund, 148, 151; and MAV II notes prices/returns, 188; in secondary market, 151; and unwinding auctions, 156–7 Finance, Department of: and changes in restructuring terms, 140–1; and Crawford, 71; Emerson as consultant to, 74; entry into negotiations, 137; and funding MFF, 97; and intervention into crisis, 65, 66; observer status with PCIC, 74; at PCIC 10 December 2008, 135–6; as uninvolved, 113 Financial Industry Regulatory Authority (FIRA), 210–11 Flaherty, Jim, 119, 138, 188 Fong, Eugene, 121 Foss, Greg, 156 Foundation for Advancement of Investor Rights (FAIR), 180 Freddie Mac (Federal Home Loan Mortgage Corporation (FHLMC)), 62, 130 237 gap risk, 30–1, 32–3, 199, 220n13 Gemini Trust, 34 general market disruptions (GMDs): Barclays vs Devonshire Trust and, 46; definitions, 25, 201; federal government and, 68; and liquidity, 24–6, 46, 47, 56, 201, 209; MDEs vs., 25; and rolling of paper, 25–6 See also market disruption events (MDEs) GICs, ABCP compared to, 78–9, 112 Glenn, Martin, 222n1 global financial crisis: CDS spreads and, 129, 130–1; government and, 140, 142; and international cooperation, 141; and PCIC, 131; and potential for systemic risk, 214; and renegotiation of deal, 136; and risks, 131; and standstill agreements, 131; subprime mortgage crisis and, 129–30 GMP Capital, 83, 148 Golden Tree, 151 Goldman Sachs, 151 Goodmans, 72, 135, 187 Greece, economy of, 12–14 Group A assets: about, 102–3; in MAV II, 104–5; in MAV I/II, 103 Group B assets: creation of, 102; in MAV III, 103 Guay, Richard, 41, 43, 131, 132 Halperin, Steve, 90, 92, 114, xi Hamilton, City of, lawsuits, 90 hedge funds: ABCP investor transactions with, 83; about, 161; and MAV notes, 187–8; Montreal Accord and, 158; and original paper, 80; PCIC and, 187; and PPNs, 161; and risk, 187; and 238 Index secondary market, 150, 151, 158; and spreads, 50; and unwinding, 150, 152–3, 156; as “winners,” 186, 187–8 Hewitt, Mark, 78 Heys, Bradley, 170 Hill + Knowlton, 140 Hodgkinson v Simms, 180 Hoffman, Jay, 75 Howard, Peter, 139 HSBC: as asset provider, 7; and Caisse situation, 133; and Coventree’s ABCP, 33; as liquidity provider, 29; as LSS provider, 135t; and MFF, 101t; OSC settlement with, 165; and renegotiation of deal, 133; Skeena Capital Trust and, 94 HSBC Bank USA: at 15 August 2007 meeting, 53; as liquidity provider, 29; and Montreal Accord, 55 Hu, Henry, 214 Hunter, Brian, 76–8, 112–14, 115–16 IIROC (Investment Industry Regulatory Organization of Canada): 2008 review by, 180; and broker fiduciary standards, 208–11; compliance sweep, 159–60, 161, 208–9; and Deutsche Bank, 173; and due diligence, 208–9; monitoring role, 211; and penalties refunded to investors, 166; “Regulatory Study, Review and Recommendations,” 208; and retail investors, 79, 159–60, 161, 208–9; settlements, 165; study on ABCP crisis, 39; and third-party vs bank-sponsored ABCP, 209; and training/special material for representatives selling ABCP, 209; on unawareness of nature of liquidity guarantees, 209 IKB, 37 Indy Mac (Independent National Mortgage Corporation (FDIC)), 62, 129–30 ineligible assets, 102–3, 104–5, 157 institutional investors: and Coventree ABCP, 34; as “losers,” 191–2; restructuring proposal and, 113; retail investors compared, 78; third-party ABCP and, See also smaller corporate/institutional investors International Organization of Securities Commissions (IOSCO), 177–8; Code of Conduct for Credit Rating Agencies, 204 Investment Advisers Act of 1940, 209–10 investors, diversity among, 190 Ironstone Trust, 88, 103, 118–19 iTraxx index, 15 Jacques, Arthur, 115 Jean Coutu, 5, 76, 116, 119 Jerome-Forget, Monique, 138 J.P Morgan: about role, 187; accessing database information, 93; Ad Hoc Committee and, 117; additional services, 143, 144; and Bear Stearns, 62, 89; and CDSs, 12; estimation of value of eligible assets in trusts, 109–10; fees, 187; as financial adviser to PCIC, 73–4, 143–4; growth of costs, 143–4; and MFF, 99, 189; payments to, 143, 223n1; Restructuring Report, 107, 221n8; in secondary market, 151; www.ebook3000.com Index and Washington Mutual, 130; as “winner,” 187 Juroviesky, Henry, 90, 115 King Street Capital, 151 know your client (KYC), 161, 180, 209 Kresse, Andrew, 74, 105, xi Laporte, Pierre, 67, 72 Laurentian Bank, 33, 166 lawsuits: Ad Hoc Committee members and, 75; assumption of risk vs., 128; bankruptcy, 51–2; Barrick/Sun Media and, 118–19; in Canada vs US, 74; CCAA and, 90–2; chain reaction, 125; City of Hamilton v Deutsche Bank Securities, 90; class action, 115; corporate ABCP holders and, 76; counterproductivity of, 208; and DBRS, 208; dissenting groups and, 111; fear of, 87; liquidity calls and, 60; misrepresentations and, 206; as omnipresent threat, 56; PCIC and, 90, 91; against rating agencies, 196; restructuring plan and, 51–2, 96; retail investors and, 115; retention of right to, 127–8; and signing of Montreal Accord, 73; against S&P, 207–8; spread-loss vs mark-to-market triggers and, 108; subprime exposure and, 119; US Department of Justice v S&P, 179 See also Barclays; Devonshire Trust lawyers: numbers involved, 186–7; as “winners,” 186–7 legal liability: CCAA and, 202–3; and credit rating agencies, 179, 205–8; 239 and Deutsche Bank, 198; expert status in, 206–7; rating agencies and, 196; restructuring plan and, 96; under Securities Act, 205–6 legal releases: Ad Hoc Committee and, 117–18, 119, 123–8; Ad Hoc Retail Investor Group and, 118; banks and, 189; carve-outs from, 124; CCAA and, 91–2, 99; claims process and, 124; DBRS and, 179, 196; effectiveness of, 127; fraud carve-out from, 117–18, 119, 124–7; and negligence claims, 124, 125; PCIC and, 92; rating agencies and, 196; restructuring plan and, 92, 96; for third parties, 124–5, 126, 127; in US, 222n1 Lehman Brothers: bankruptcy, 62, 73, 119, 130, 132; consideration by PCIC as financial adviser, 73 leverage: of CDSs, 16; and collateral, 30, 52; conduits’ credit protection provision and, 16; in LSS structures, 101; in MAV structures, 101; and risk, 30, 31 See also LSSs (leveraged super seniors) LIBOR, 8, 142 liquidity: about, 22–4, 158; arrangements akin to insurance policies, 23; and auction process, 158; Bank of Canada role in preservation of, 66; banks and, 102, 189; and Barclays vs Devonshire Trust, 26–9, 176; Caisse and, 132; Canadian- vs global style guarantees, 209; Canadian-style (see under general market disruptions (GMDs)); changing contracts and, 40–1; commercial paper and, 6; in 240 Index CSA proposals, 216; Deutsche Bank and, 17; due diligence and knowledge of arrangements, 52; enhancements, 22–3; global-style vs Canadian, 24–6, 168; GMDs and, 24–6, 46, 47, 56, 209; lack of transparency and terms of, 52; of LSSs, 201; and market value, 109; and maturity mismatches, 102; of MAV III notes, 103; MDEs and, 25, 26, 27, 28, 40, 42; and Montreal meeting, 53; and onset of ABCP crisis, 40–1; ratings and, 56; risk, 24, 27, 194; and rolling of paper, 23, 24, 25–6, 42–3, 56; secondary market and, 147, 149–50; short-term notes on longterm underlying assets and, 28–9, 102; spreads and, 60, 61; standstill agreements and, 89; unwinding and, 152–8, 188 liquidity calls: conflict of interest with collateral calls, 198; failure to roll paper and, 47, 48; and lawsuits, 60; standstills/moratoria on, 54–5; termination, 60 liquidity providers/provision: Bank of Canada as, 102, 189; and Barclays vs Devonshire Trust, 174–5; DBRS and, 94; Deutsche Bank as, 198; GMDs and, 201; and liquidity calls terminations, 60; LSS mark-to-market triggers and, 201–2; in LSS structure, 20; refusal to pay, 68; and risk shifting, 201; as signatories to Montreal Accord, 55; to third-party ABCP conduits, 29 litigation See lawsuits Loke, Huston, 53 Long-Term Capital Management (LTCM) collapse, 39, 40 loss triggers, 106, 134 LSSs (leveraged super seniors): attachment points, 194; Barclays and, 16, 17t; and Barclays vs Devonshire Trust, 174; and cash flows, 19–20; CDS spreads and value of, 31–2, 61; CDS trades, 157; CDSs vs., 21–2; changes in trigger levels for, 93; and collateral, 19–20, 30; collateral calls on, 52, 88; concern/criticism regarding, 22; and conduits, 21–2; Coventree and, 17, 18–20; cross-collateralization of, 97; DBRS rating, 177; Deutsche Bank and, 135, 197–8; leverage rate in, 101; and liquidity, 201; liquidity provider in, 20; as major ABCP problem, 16; market in, 22; and mark-to-market triggers, 32, 56, 63, 102, 201–2; maturity, and MFF fee, 98; in MAV I/II, 103; notional amount of swaps, 100–1; notional amounts outstanding, 135; and risk, 22, 63, 194, 201; and spread-loss triggers, 106–7; spreads on, 31–2, 52, 61; super senior tranches vs., 18–19; TD and, 98; as toxic underlying assets, 157; transparency and, 158; unwinding, 134–5, 152, 154; as worst of market, 88 Macklem, Tiff, 53, 137, 140–1 Magna, 76 Maranda, Bruce, 77 Margin funding facility (MFF) See MFF (Margin funding facility) www.ebook3000.com Index market disruption events (MDEs): Bank of Canada and, 42; and Barclays vs Devonshire Trust, 27, 28, 46, 174, 175, 176–7; Coventree’s failure to disclose and risk of, 170; definition, 26, 27, 102; difficulty in observing, 52; federal government and, 69; GMDs vs., 25; and liquidity, 25, 26, 27, 28, 40, 42, 102; and Montreal meeting, 53–4; and rolling of paper, 25, 27; Skeena issue of notice, 94 See also general market disruptions (GMDs) market freeze, 4, 47, 50, 52, 56 mark-to-market triggers: about, 29– 33; alternative to, 102; and Caisse’s losses, 131–2; and collateral, 30, 31; and collateral calls, 44–5, 50, 52, 57, 88, 106, 108, 134, 190, 201–2; DBRS and, 196; legal releases and, 92; loss-only triggers replacing, 134; LSS and, 32, 52, 56, 63, 102; and models to estimate values, 221n5; spread-loss triggers vs., 106, 108, 199; and transparency, 108 Marriott, Jerry, 50 material change, 169–70, 171 material fact, 168, 169 maturity: of A1/A2/B/C notes, 104; and assets left in collateral pool until final maturity, 98; extension, 56–7; and liquidity enhancements, 23; of LSS transactions, 98; matching, 56–7, 59, 93; and MFF fee, 98; mismatches, liquidity and, 102; of SFF, 141–2; spread-loss triggers and, 107–8 MAV I vehicles: and A1/A2/B/C notes, 103–4; Caisse and, 194; 241 collateral and, 100, 101–2; creation of, 96; and Group A trusts, 103; holders of, 96; investors, and restructuring deal, 132, 133; and LSS, 103; and “put” concept, 136; and risk, 133; and self-insurance, 96, 100, 101–2, 103, 104 MAV II vehicles: and A1/A2/B/C notes, 103–4; allocation to underlying trusts’ investors, 109; Caisse and, 133, 194; collateral arrangements for, 101–2; collateral calls and, 96–7, 98; creation of, 96; Group A assets in, 103, 104–5; leverage risk of, 98; and LSS, 103; and MFF, 96–7, 100, 105; payment to funding facilities, 142–3; poststructuring performance of, 203; and “put” concept, 136; and risk, 133; secondary market in, 147–8 MAV III vehicles, 103, 121, 136 MAVs (master asset vehicles): A1/ A2/B/C notes, 103–4, 109–10; about, 96–7; collateral in, 100–2; DBRS and, 196–7, 208; distribution of, 109–10; and fairness, 109, 111; hedge funds and, 187–8; market for, 108–9; rating of, 121–2, 196–7; secondary market in, 147–50, 148–50, 158; strips, 147, 149, 152–6, 223n1; synthetic CDO percentage, 14, 17; total, 100, 101t; transparency of, 121; unwinding of, 149–50, 152–8; value of, 109–10 Maybank, Mark, 65, 75, 79, 112, 115 Merrill Lynch: at 15 August 2007 meeting, 53; Bank of America and, 62, 130; DBRS and liquidity arrangements, 26; as liquidity provider, 29; as LSS provider, 242 Index 135t; and MFF, 101t; and Montreal Accord, 55; and renegotiation of deal, 133; and threat by dealers to pull support, 139; US High-Yield Index, 148 Metcalfe & Mansfield Capital Corp., 26 MFF (margin funding facility): additional provision of, 136–7; amount of, 97; backers of, 97–100; banks and, 97–100, 189; Caisse and, 133; collateral calls and, 97, 98, 185, 186; and contingent funding for insurance fee, 105; Deutsche Bank and, 198; fee, 98, 189, 190; as insurance policy, 97; MAV II participants and, 96; in MAV II structure, 105, 143; and payouts, 98; and risk, 189; and SFF, 136–7 Miles, Mike, 79 Miles, Wynne, 79 Milken, Michael, 9, 12 Moelis & Company LLC, 153 Montreal Accord: 15 August 2007 meeting, 53–5; about, 57; Barclays and, 55; CDS spreads and, 60; data room, 72–3; dealer group, 67–8; and fairness, 111; as framework for restructuring negotiations, 55, 57; hedge funds and, 158; and increases in CDS spreads, 61–4; investors’ group, 66–7, 70, 71, 72 (see also PCIC (Pan-Canadian Investors Committee for ThirdParty Structured Asset-Backed Commercial Paper)); and liquidity calls termination, 60; and margin provisions under LSS swaps, 59; and matching of maturities, 59; principles of, 59; signing of, 55, 58, 73; speed of, 60–1; and standstills, 59–60, 89; Steiner’s criticisms of, 81 See also restructuring plan/ process Montreal Consortium, 77 Moody’s, 11, 24, 148–9 moral hazard, 66 Morgan Stanley, 151 Mortgage Bankers Association of America, 36 mortgages: Alt-A, 129–30 See also subprime mortgages National Bank Financial (NBF): and ABCP spreads widening, 39–40; AMF settlement with, 166; and Coventree’s ABCP, 33; entry into third-party ABCP market, 18; and Perimeter, 80, 83; and Quanto, 220n16 National Bank of Canada: at 10 August 2007 meeting, 41; Bloom’s action against, 127; buyback of ABCP from small retail investors, 58–9; and Caisse, 49, 65; as co-host of Montreal meeting, 54; and Coventree, 18, 34, 38, 40; Deutsche Bank and, 49, 53; at heart of ABCP market, 5; as investor, 190; and LTCM collapse, 40; making investors whole, 78; and MFF, 99, 101t; and Montreal Accord, 55; numbers of ABCP clients, 78; and onset of ABCP crisis, 4; and Perimeter, 83; repurchase of ABCP, 40; and restructuring proposal, 95; and retail investors, 49, 58–9, 78, 185; settlements, 119; and SFF, 137, 139; and small corporate www.ebook3000.com Index customers, 49, 58–9; special committee to oversee ABCP dealings, 58–9; as sponsor of three trusts, 34; “Support Program” for corporate/commercial investors, 191; “war room,” 64–5; writedowns, 224n3 National Housing Act (NHA) insured mortgages, 189 National Instrument 25–101, 204, 206 Nationally Recognized Statistical Rating Organizations, 177 NAV Canada pension fund, Nereus, 34 net asset value (NAV), 152, 153f Newbould, Frank, 175–7, 220n1 new/restructured notes See MAVs (master asset vehicles) NEX, 193 9/11 terrorist attacks, 39 Nomura Holdings, 130 non-bank-sponsored ABCP See third-party ABCP non-recourse transactions, 27, 32–3, 119, 201–2 Office of the Superintendent of Financial Institutions (OSFI), 224n13; Guideline B-5, 24–5, 196 Office of Thrift Supervision, 130 Olympia and York, Ontario Court of Appeal: and Barclays vs Devonshire Trust, 46; Cornish/Tai and, 173; and fraud carve-outs, 126 Ontario Financing Authority, 5, 74 Ontario provincial government, and SFF, 140 Ontario Superior Court of Justice: and Devonshire Trust vs Barclays, 243 175; recognition of Ad Hoc Committee, 75; restructuring plan hearing, 123–7 originate to hold, acquire to distribute vs., 18 OSC (Ontario Securities Commission): and Coventree, 166–72, 173, 192, 193; criticisms of, 159, 161–2, 163; and debt-like derivatives, 160–1; investigation of ABCP market’s key players, 159; order prohibiting short-selling, 164–5; and penalties refunded to investors, 166; settlements with banks, 165; Standing Committee on Government Agencies and, 159, 161–2, 163 overcollateralization, 22–3 Owl Creek, 151 Pascoe, Ricardo, 40, 41, 50, 54 PCIC (Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper): 10 December 2008 meeting, 135–6; Ad Hoc Committee membership vs., 75–6; and ad hoc groups, 111; Administrative and Management Agreement, 120–1; agreementin-principle, 136; alignment of interests among parties within, 89; Allan and, 84; approach, 73; and banks, 97; Bergeron replacing Rousseau, 119; and BlackRock as administrator, 120–1; Canaccord and, 79–80; and CCAA, 90; compromise within, 87, 88; corporate holders as non-members, 75–6; and 244 Index Coventree, 84; credit unions as members, 75–6; DBRS and, 196–7, 208; and dissenting groups, 111; establishment of, 72; expansion of membership, 75–6; and federal government, 137–8; financial adviser, 73–4; global crisis and, 131; and hedge funds, 80, 187; and lawsuits, 87, 90, 91; and legal expenses, 187; and legal releases, 92; mandate, 73; and market for new/restructured notes, 108–9; member holdings, 74; and moratorium on trading, 80; negotiations/discussions, 87–90; payments to, 223n1; and pooled approach vs separate restructuring of each series, 93, 94–5, 105–6; proposals for possible solutions submitted to, 83–4, 93; and rating of new paper, 121–2; release of restructuring plan, 96; and renegotiation of deal, 133–4; and retail investors, 75–6, 77, 79–80, 190; and Skeena restructuring, 94; split into two groups, 95; standstills and trading by investment dealers, 81; types of investors in, 190 pension funds: Allan’s goodwill/ buyout strategy and smaller, 84; and due diligence, 207; extent of ABCP holdings in, 211–12; as fiduciaries, 133; heads at 15 August 2007 meeting, 53; and renegotiation of deal, 133; and risk, 195 Perimeter Financial, 80–3 PIMCO, 22 Pipilis, John, 132 Plan Implementation Order, 127 Planet Trust, 78 Pocock, Chris, 121 Polak, Jonathan, 80–1 Popescu, Manuela, 121 Posner, Eric, 214 Power Corp., 119 PriceWaterhouseCoopers (PWC), 117, 224n3 principal protected notes (PPNs), 161 prospectuses: credit ratings in, 206; defined, 160; exemptions, 23–4, 159–61, 167, 180, 181, 202, 204, 215–16; R1 rating and, 22; requirements, 180 Public Service Pension Plan (PSP): at 10 August 2007 meeting, 41; Barclays and, 27; federal government and, 134; at heart of ABCP market, 5; and Montreal Accord, 55; and renegotiation of deal, 133–4; thirdparty ABCP holdings, put: concept of, in restructuring, 136; options, 34–5 Quanto Financial Corporation, 26–8, 46, 220n16 Quebec: Court of Appeal, 126; Mondial product, 132; Société générale et financement, 119; sovereignty referendum, 8, 39; Superior Court, 127 Quebec provincial government: and Caisse, 138; contribution relative to federal government, 139, 140; and SFF, 140 RAC Trust, 7, 18 rating agencies See credit rating agencies www.ebook3000.com Index rating(s) See credit rating(s) RBC See Royal Bank of Canada (RBC) receivables, Resolution Trust, 73–4 restructured notes See MAVs (master asset vehicles) restructuring plan/process: agreement in principle, 136; approval of, 123; as art of possible, 136, 185, 203–14; banks and, 113, 189; Barclays opting out, 46, 55, 173–4; Caisse and renegotiation of, 132–8; Caisse/Deutsche Bank dominance in, 202; as Canadian solution to Canadian problem, 201; CCAA and, 123, 202–3; collective vs individual interests in, 202; compromise and, 128; Devonshire Trust opting out, 173–4; dissenting groups, 111, 123; elimination of risk of collateral calls, 106; implementation, 144; as individual vs market problem, 68; and institutional investors, 113; J.P Morgan and, 107, 143–4, 187; legal releases and, 92; and making investors whole, 147; MAV I investors and, 132; Montreal Accord as framework for negotiations, 55; outcome as zerosum game, 185; papering of, 129; PCIC improvements in, 136; Plan Implementation Order, 127; as private vs public sector problem, 202; “put” concept and, 136; and retail investors, 112–14, 147; “road show,” 111, 114–16; and saving assets, 202; and secondary market in MAV II notes, 108–9, 147–8; 245 and separate restructuring of each trust series, 93; Skeena Trust as first successful restructuring, 94–5; and small investors, 114–15; sucess of triggers, 157; termination date, 135–6; threat by dealers to pull support, 139 See also Montreal Accord retail investors: ABCP structure as inappropriate for, 214; ad hoc committee of, 111; Allan’s goodwill/buyout strategy and, 84; banks and, 188; Canaccord and, 76–8, 79–80, 190–1; CCAA and, 92, 112; Coventree and, 78; credit ratings and, 181; and debt-like derivatives, 160–1; Desjardins and, 58; and due diligence, 77, 181; fiduciary standards and, 209; Hunter and, 77, 112–14; IIROC members and, 208–9; impact of freeze on, 190; institutional investors compared, 78; and lawsuits, 115; as “losers,” 190, 192; making whole, 58, 78, 114–15; misrepresentations and, 205–6; National Bank and, 49, 58–9; PCIC and, 75–6, 77, 190; primary protection for, 161; in restructuring plan, 112–14, 147; role of brokers in selling ABCP to, 208; and securities appropriate in form vs substance, 160–1; standstill calls and, 67; statutory best interest duty to, 211; thirdparty vs bank-sponsored ABCP and, 159–60 See also smaller corporate/institutional investors Reuters, Rhineland Funding, 36–7 246 Index Riccoboni, Lou, 140 risk management: about, 212; and board-level risk engagement, 213; Caisse and, 4, 41; and compensation of managers, 213; gap, 194–5; in investment decision-making process, 195, 212; and monitoring investments’ risks over time, 212; need for investment framework, 211–13; and risk committees, 213 risk(s): ABCP and, 5, 6–7, 194; accountability gap, 213; assumption of, and lawsuits, 128; avoidance vs accurate pricing of, 195; and bank- vs non-banksponsored ABCP, 39; banks and, 189; CDO tranches and, 56; collateral and, 32; collateral calls and, 60, 106; creep, 41, 212; DBRS rating of ABCP and, 204; federal government and, 188; gap, 30–1, 32–3, 199, 220n13; global financial crisis and, 129, 131, 214; hedge funds and, 187; of inaction, 51–2; leverage and, 30, 31; liquidity, 24, 27, 194; LSS and, 22, 63, 194, 201; mark-tomarket vs spread-loss triggers and, 106; and MAV II investors, 133; MFF and, 98, 189; in MFF vs SFF funding, 142; pension funds and, 195; and pooled approach vs separate restructuring each series, 93; rating/value of new/ restructured notes and, 109–10, 122; retention, 216; SFF and, 140, 141–2; sophisticated investors and, 191–2; spread-loss triggers and, 189; spreads and, 8, 60, 64, 131; standstills and, 131; subprime, 36; synthetic CDOs and, 16; third-party ABCP and, 3, 39; tranches and, 9, 11, 15–16; transparency and, 5; unleveraged assets and, 30; US subprime mortgages and, 88 Ritchie, Lawrence, 162 Rocket Trust, 34, 105, 220n15; Series A, 109–10 rolling of paper: by banks, 38–9; Barclays vs Devonshire Trust and, 28; Caisse and, 37–8, 43; credit enhancements insufficient for, 23; extension of maturity and, 23; global- vs Canadian-style liquidity and, 24; GMDs and, 25–6; liquidity and, 23, 24, 25–6, 28–9, 42–3, 56; liquidity calls and, 47, 48; MDEs and, 25, 27; National Bank and, 40; short-term notes built on long-term underlying assets and, 28–9; through marketmaking lines, 34 Romano, Roberta, 165 Rousseau, Henri-Paul: and asset class on Caisse’s balance sheet, 4; and Bank of Canada, 42; bringing together all key players, 50, 51; as Caisse CEO, 4, 41; as chair of 15 August 2007 meeting, 54; on collective vs individual interests, 202; and Crawford, 71; and crisis as global, 50; and federal government intervention, 65, 66; and government assistance, 42; and hedge funds, 50; as leaving Caisse, 119, 131; meeting with DBRS, 49–50, 55; and onset of ABCP crisis, 42, 43, www.ebook3000.com Index 49–50; and Power Corp., 119; and restructuring plan, 95–6; and retail investors, 59; succeeded by Guay, 131 Royal Bank of Canada (RBC): at 10 August 2007 meeting, 41; at 15 August 2007 meeting, 53; as asset provider, 7; and Coventree’s ABCP, 33; Dominion Securities, 35; as liquidity provider, 29; as LSS provider, 135t; and MFF, 101t; Skeena Capital Trust and, 94, 97; and Storm King Trust, 27 Royal Bank of Scotland, 29, 134 Rubenstein, Gale, 90, xi Russian financial crisis, 8, 39 Ryan, Timothy, 73–4 Schroeder, David, 49–50 Schroeder, Walter, 197 Scotia Capital: and Coventree’s ABCP, 33, 34; IIROC settlement with, 165; and Nereus, 34 Scotiabank See Bank of Nova Scotia (BNS) Seaport, 151 SEC (Securities and Exchange Commission (US)): about, 162–3; and brokers/dealers under same duties as investment advisers, 209–10; Canadian securities regulation vs., 162–3; and Deutsche Bank, 199; disclosure paradigm, 214; Dodd-Frank Act and, 180, 209–10; and fiduciary duties for brokers, 180, 210; and rating agencies, 177, 178; rethinking of disclosure paradigm, 214; short-selling ban, 165 247 secondary market: buyers in, 151; credit default spreads in, 148–9, 150f; hedge funds and, 150, 151, 158; and liquidity, 147–8, 149–50; progress of, 158; rationality of, 149; in restructured notes, 147–50, 158; sellers in, 151; transaction sizes in, 151; volatility in, 149 Securities Act (Ontario), 165, 168, 171, 205–6 securities regulation: calls for enhanced, 214; CSA and, 215–16; enforcement, 162–3; inefficacy of provincial, 165; and mandating full disclosure, 213–14; national, 163–5; regulators’ role, 159–66; settlements, 165–6; transparency and, 213–14 securitization: of ABCP, 6, 7; defined, 6; of receivables, 7; and subprime crisis, 36 senior funding facility (SFF): about, 136–7, 185; creation of, 136; Deutsche Bank and, 198; federal government and, 138, 139–41; funding of, 137, 138, 139, 140, 141t; maturity of, 141–2; and profit, 142; provincial governments and, 138, 139, 140; revenue, 143; and risk, 142; standby fee for, 142 Skeena Capital Trust, 80, 94–5, 97, 198 Slate Trust, 34 smaller corporate/institutional investors: Allan’s goodwill/ buyout strategy and, 84; Desjardins and, 58; making whole, 58, 114–15; National Bank and, 49, 58–9; restructuring proposal and, 248 Index 114–15; standstill calls and, 67; and third-party ABCP, 18 social utility, 214 soft landing approach, 42–3, 45–8, 49 sophisticated investors: and credit rating agencies, 192, 207; DBRS R-1 (high) rating on ABCP and, 3, 195–6; and due diligence, 3, 192, 196, 207; as “losers,” 191–2; and risk, 191–2; and transparency, 196 S&P (Standard & Poor’s): 500 Index, and standstill renewals, 89; downgrade of US government debt, 148; refusal to rate Canadian ABCP, 24; and SIVs, 37; US Dept of Justice lawsuit against, 179, 207–8 special purpose entity (SPE), 25 spread-loss triggers: about, 32, 106–8; and banks, 189; collateral calls and, 106, 107–8, 190, 199; mark-to-market triggers vs., 106, 108, 199; maturity and, 107–8; and MAV II notes, 106–7; and MFF, 189; positive effects on MAV II market securities, 158; risk and, 106, 189; SFF and, 140; and transparency, 108; widening of spreads in, 32, 136 spreads: and CDOR, 8; and collateral calls, 19, 57, 132, 134; defined, 8; and duration periods of standstill agreements, 131; and global financial crisis, 129, 130–1; and Greek economy, 12–14; increase in, 16; and liquidity, 60, 61; and LSS, 31–2, 52, 61; and LTMC collapse, 40; and market freeze, 52; and market value, 31; and mark-to-market values, 60; and Montreal Accord, 60, 61–4; and onset of ABCP crisis, 43–4; and PCIC, 131; and risk, 8, 60, 64, 131; and secondary market, 148–9, 150f; and spread-loss triggers, 32, 136; on super senior tranches/ structures, 44–5; US economic crisis and, 89; and US mortgage crisis, 62–3; widening of, 39–40, 52, 60, 88, 89, 90, 129, 130–1 Standing Committee on Government Agencies (Ontario), 159, 162, 163 Standing Liquidity Facility, 189 standstills: agreements as pivotal, 89; banks and, 81–2; call for abidance by, 67; decision regarding, 54–5; Deutsche Bank and, 198–9; duration periods, 131; durations, and risk, 131; elimination of risk of collateral calls, 106; first 60-day, 55, 59–60; global crisis and, 131; and liquidity calls terminations, 60; questioning of, 90; renegotiations of, 89, 131; renewals/extensions of, 89, 95; and retail/smaller corporate/ institutional investors, 67 Steiner, Doug, 80, 81 Sterne Agee/Stifel: in secondary market, 151; Structured Products Commentary, 157 stink bids, 81 Storm King Trust, 27–8 strips: about, 147, 223n1; unwinding, 149, 152–6 Structured Asset Trust (SAT), 34 structured financial asset-backed (SFA) transactions, 168 Structured Investment Trust III (SIT III), 34, 79, 134 www.ebook3000.com Index structured investment vehicles (SIVs), 37 subprime mortgage crisis: ABCP crisis compared to, 53; about, 36–9; Caisse and, 37–8; and Canadian ABCP crisis, 22, 37–8; causes, 36; and CDO senior tranches, 36; Coventree and, 38–9; and global ABCP market, 36–7; and global financial crisis, 129–30; and housing markets, 37; and Moody’s, 11; onset of, 36, 129–30; rating agencies and, 179; securitization and, 36; and SIVs, 37 subprime mortgages: in ABCP market, 36, 38, 88, 102; Coventree and, 4, 170–1; DBRS and, 88, 196; and global financial crisis, 129–30; as ineligible assets, 102–3; and litigation, 119; in MAV III, 103; and non-performing loans, 129–30; rating agencies and, 179; receivership/bankruptcies, 62–3; and risk, 36, 88; and toxic assets, 157; US ratings on, 196 Sun Media, 118–19 super senior tranches/structures: about, 15–16; and Group A assets, 102–3; LSS vs., 18–19; spreads on, 44–5, 88 See also LSSs (leveraged super seniors) Supreme Court of Canada: and Barclays vs Devonshire Trust, 46; and Bhasin v Hrynew, 220n1; and Canadian Securities Act, 164; in Hodgkinson v Simms, 180; and Plan Implementation Order, 127 Swiss Re: Financial Products Group as liquidity provider, 29; as LSS 249 provider, 135t; and MFF, 101t; and Montreal Accord, 55 synthetic assets: CSA proposals and, 215; in Group A assets, 102; inclusion in pooled assets, 105–6; in LSS transactions, 30 synthetic CDOs: about, 14; Barclays and, 16–17; CDOs vs., 14; CDS indices and, 14–15; Coventree and, 17; Deutsche Bank and, 17; as percentage of market, 88; popularity in non-bank ABCP market, 14; and risk, 16 synthetic derivative contracts, 131 Tai, Dean: as Coventree shareholder, 170, 172, 193; and Coventree’s disclosure committee, 171; decision to defend self at OSC hearing, 166; founding of Coventree, 17–18, 166; indemnity agreement with Coventree, 173; legal advisers, 172; sanctions against, 171, 173 TAO Admin Corp, 121 TD Bank: lack of third-party ABCP exposure, 53, 98, 100; and MFF, 99–100, 101t Third Point, 151 third-party ABCP: banks and, 188; bank-sponsored ABCP vs., 3, 39, 159–60, 209; and brokerage due diligence, 180; brokers’ role in selling, 208; as collateral, 42; complexity of, 3–4; conduits and sponsors, 57t; Coventree as first issuer of, 17–18; credit rating agencies and, 204; DBRS as only rater of, 202; extent of, 64; lack of knowledge of market 250 Index in, 3, 55–6; as loss-leader service, 209; and prospectus exemption, 215–16; and risk, 3, 39; risk-averse investors and, 5; and securities regulators, 160–1; smaller companies and, 18; TD and, 98–9; third-party suppliers and, 3; within total amount of ABCP, 7; traditional bank-sponsored paper vs., timely securities disclosure obligations, 168–9 Toronto Stock Exchange (TSX): Coventree and, 192, 193; order prohibiting short-selling, 165 Toten, Kenneth, 121 toxic assets, 36, 157 tranches: about, 9–11; credit rating agencies and, 11; equity, 15; of MAV I/II structures, 103; and profits, 11; and returns vs losses, 9–10; and risk, 9, 11, 15–16; senior, 15; super senior, 15–16 Transat A.T Inc., 5, 116, 119 transparency: BlackRock and, 158; confidentiality agreements and, 179; DBRS and, 179; mark-tomarket triggers and, 108; of new/ restructured notes, 121; Perimeter market for ABCP and, 81; rating agencies and, 179; and risk, 5; and securities regulation, 213–14; and shortcomings in ABCP structure, 214; sophisticated investors and, 196; spread-loss triggers and, 108; terms of liquidity arrangements and, 52; underlying LSS trades and, 158 Treasury bills (T-bills), 7, 76–7, 79, 130 Turner, James, 162 UBS AG: at 15 August 2007 meeting, 53; as asset provider, 7; and liquidity funding, 28; as liquidity provider, 29; as LSS provider, 135t; and Montreal Accord, 55 United States: Bankruptcy Code, 127; Bankruptcy Court for the Southern District of New York, 127; collapse of banking institutions in, 129–30, 132, 141; Department of Justice fraud suit against S&P, 179; Department of Justice on fiduciary duty of financial professionals, 181; Department of Labor fiduciary definition under ERISA, 210; Food and Drug Administration (FDA), 214; government financing in, 138; Securities and Exchange Commission (SEC) (see SEC (Securities and Exchange Commission (US)); and thirdparty releases, 127 See also subprime mortgage crisis unwinding: about, 152–3; auctions, 154–7; hedge funds and, 152–3, 156; and liquidity, 152–8, 188; of LSS transactions, 152, 154; of MAV notes, 149–50, 152–8; original owners of MAV notes and, 153 Urquart, Diane, 115 Vachon, Louis: and 15 August 2007 meeting, 51; and changes in assets underlying ABCP, 41; and failure of soft landing, 49; and federal government intervention, 65, 66; and market freeze, 50; and www.ebook3000.com Index National Bank “war room,” 64; on National Bank’s buyback, 58, 59; and onset of ABCP crisis, 40, 43; ownership of ABCP, 59; and retail investors, 59; and widening spreads, 40 Verville, Luc, 41, 43 volatility: and global financial markets, and crisis, 129, 130–1; Lehman bankruptcy and, 130; in secondary market, 147–8, 149 volatility index (MVX), 130 Voorheis, Wes, 166 vulture funds, 187 Wagner, Richard, 127 Warburg Pincus, 197 Washington Mutual, 130 Westaim Corp., 83 Weyl, Glen, 214 White, Mary Jo, 210 Wilson, David, 162 Woods, James, 119 Y2K, bank-sponsored ABCP as collateral, 42 YBM Magnex, 172 Zandi, Mark, 37 251 ... recycled paper with P vegetable-based inks Library and Archives Canada Cataloguing in Publication Halpern, Paul, author Back from the brink : lessons from the Canadian asset- backed commercial paper crisis. . .BACK FROM THE BRINK LESSONS FROM THE CANADIAN ASSET- BACKED COMMERCIAL PAPER CRISIS This page intentionally left blank www.ebook3000.com... supporting the senior tranches at the top, making them enticing to investors 12 Back from the Brink The Rise of CDSs As the market for Milken’s CDOs boomed, the Wall Street firm J.P Morgan took them