Affordable Housing Institute : US

[Continued from yesterday's Part 1.]

 

In yesterday’s post, we saw hold the large Canadian financial institutions pulled together, via the Montreal Accord, to recapitalize their assets by pooling them into a new shared vehicle that I first heard about when sharing an International Union of Housing Finance panel with Andy Asselin of Canada Mortgage and Housing Corporation.  They put the whole structure all together, and the deal was ready to go, when … they got sued.

 

One more tort for the road?

 

As reported in the Financial Times, they got sued for what appears to be a good reason:

 

Reid Moseley was unhappy with the meagre C$13-a -month interest his C$50,000 nest-egg was earning on deposit at one of Canada’s big banks. So the retired Calgary schoolteacher complained early last year to a friend who was an investment adviser at Canaccord Capital, a non-bank securities dealer.

 

You know you’re in PR trouble when the story begins, ‘a retired Calgary schoolteacher’ …

 

“He said: ‘I’ve got this nice little 30-day rollover thing’,” Mr Moseley recalls. “He told me it was as good as gold. He said it would pay a lot better than $13 a month.”

 

Mr Moseley transferred his funds to Canaccord, but within only a few months he was to become a casualty of the global credit-markets meltdown that began with the implosion of the US sub-prime mortgage market.

 

Anyone who’s ever got close to securities litigation knows the investors always say they were told things by their brokers. 

 

Canaccord alleges Scotia misrepresented ABCP and failed to warn of risks. “At all material times, Scotia Capital actively and aggressively marketed . . . ABCP to Canaccord by means of frequent or daily written and oral solicitations and communications,” says a court document.

 

Unfortunately, anyone who’s ever got close to securities litigation knows that the investors’ memories are sometimes dead right.

 

Dead right can still  mean dead

 

Mr Moseley is one of 1,400 Canaccord clients whose savings, worth a combined C$269m, found their way into Canada’s non-bank asset-backed commercial paper (ABCP) market. Another several hundred small investors put their money into ABCP through other firms.

 

The C$32bn market has been frozen since August by the so-called “Montreal accord”.

 

Arithmetic time!

 

 

Class, what percentage of the Montreal Accord was being held up by these brokerage clients?

 

That’s right, Cha-Cha – zero point eight percent.  The Montreal Accord had 99.2% participation.  But that wasn’t enough:

 

Now, by a quirk of Canada’s bankruptcy laws, Mr Moseley and his peers have the power to pass or to block a planned restructuring that will almost certainly see them take losses on investments even as they forfeit their right to sue.

 

Their vote, scheduled for April 25, will have repercussions far beyond an apparently remote corner of Canadian finance. If a deal is not reached, the conduits are likely to be forced into a fire sale of structured finance assets on still weak global markets.

 

This, children, is known as ‘leverage.’

 

Why can’t you see it my way?

 

Collapse of the conduits’ trades here would seriously disrupt trades held by banks, hedge funds and investors otherwise unconnected with the situation.

 

More leverage.

 

More than half the conduits’ total assets are invested in leveraged bets on the safest, or most senior, slices of synthetic CDOs. Leverage levels of between 10- and 40-times mean the conduits’ C$17.2bn-worth of investments gives them exposure of almost C$217bn, according to a report from JPMorgan, advisers to the restructuring effort.

 

Beat me again.  Please.

 

Actually, don’t hit me again

 

Anger among retail holders about how they ever ended up with such exposure erupted at a series of meetings with small investors last week. It appears to make a “no” vote more likely unless the banks and other large investors involved – who stand to lose much more than the retail investors – were to come up with a compensation scheme to buy passage to the restructuring.

 

Just as every Ross Thomas novel has a moment when you realize, There are no innocents here, in many a Manichaean newspaper story with a too-obvious protagonist there is a moment when you realize, there are no innocents here.  The banks, from whom Mr. Moseley is seeking to extract money, will lose more than he has.

 

Mr Moseley, for one, intends to vote against the proposal, which would convert ABCP into longer-term floating-rate notes with the goal of preserving value and spurring a secondary market.

 

Banks, he says, will be swayed by the principle he would apply to his modest retirement business trading military insignia: “If I can pay a small amount of money to save a large amount, that seems logical. I can’t see why the big banks wouldn’t pay us out to save their asses.”

 

The power of the microscopic minority.  If they are squeezable, squeeze them.

 

Just because I look squeezeable, don’t squeeze me, okay?

 

Credit Mr. Moseley with percipience, however.

 

Purdy Crawford, chairman of the restructuring committee, told reporters after the fractious final meeting in Vancouver that a top-up plan for small investors was on the cards. Observers say a payment of a few tens of millions of dollars at most to save possibly a few billion for the bigger investors seems like “a no-brainer”.

 

It is a no-brainer, if measured solely in economic realpolitik – which, when you’re 99.2% there already, it is.

 

That would also avoid the potential for lawsuits by small investors, which would raise potentially embarrassing questions about whether such exposures were ever suitable.

 

In the US, ’suitability’ is normally determined by SEC registration; perhaps Canadian law is different.

 

Are you sure that suits you?

 

A “no” vote by retail investors would leave them able to sue but could also result in claims and counter-claims among all the big players.

 

Small investors’ claims could get lost among a flood of much bigger suits.

 

Mr Moseley has little quarrel with his investment adviser friend – “I don’t think he was a party to all of this” – or with Canaccord.

 

Except that Canaccord is the one who structured the investment, and Mr. Moseley’s investment adviser is the one who made the alleged misrepresentation. 

 

Just what’s the bank’s crime?  Anything more than having money?

 

He blames the banks and authorities in Ottawa: “Government literally gives crooks in pin-striped suits a licence to burn people.”

 

Who’s the crook?

 

I am not a crook

 

Canaccord says Scotia marketed ABCP even as the bank began to unwind its own exposure last summer.

 

Now we have the sponsor accusing the bank of being smarter than the sponsor, as if this somehow exculpates the sponsor!  Actually no – it merely drags in the bank.

 

It also accuses Scotia of failing to disclose that ABCP spreads were widening due precisely to liquidity problems.

 

Bank of Nova Scotia said it “acted simply as a placement agent for professional dealers, such as Canaccord. The agent is not expected to carry a fiduciary duty”.

 

What good is logic when you’re 99.2% home, and the 0.8% can read the position?

 

Almost there

 

The committee overseeing the restructuring said it was confident that investors would agree to waive future claims as part of the deal [To pay them more – Ed.]and that this was crucial to securing co-operation of the banks and dealers.

 

It would be – why pay a premium to avoid litigation if it doesn’t give you insurance against litigation?

 

The Crawford committee has been advised by JPMorgan, one of the few Wall Street banks not tainted by the credit markets meltdown.

 

JPMorgan declined to comment.

 

Translation: Shut up and pay them.

 

Pay heem.  Pay dis man hees munny

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