Oops! wrong again …" [Canada's central banker Mark Carney] has a good empathy for the folks that are in this thing," Mr. Hunter said. "It was clear that he was working to get this done, and he clearly understood that, sure, we could survive this, but we didn’t want to." [8]

On Oct 7th the Fed announced [1] a new Funding Facility (CPFF) for the US commercial paper market, and late last week Japan’s central bank initiated an aggressive program to buy CP to stimulate their economy.[2]

Meanwhile, after more than 16 months, Canada’s Asset-Backed Commercial Paper (ABCP) market remains as frozen as Narnia in The Lion, The Witch & The Wardrobe or, well, Canada.  A job for Paulson’s Bazooka? No, Flaherty’s Flyswatter.

 

SUGGESTION: Housing Doom post "Sorry, Charlie! Subprime Mortgages Like Subfresh Fish Seize Up Debt" (Aug 22, 2007) has links to a number of stories from near the start of this issue, including Calculated Risk’s classic "Coventree Fails to Sell Asset-Backed Commercial Paper" (August 13, 2007) (don’t miss the comments!)

 

Doomers may wonder why I am constantly harping on this relatively trivial farce, but it’s more important than it looks. Because ABCP was the first market to freeze in the world-wide credit crunch, any way that we manage to extricate ourselves from the grip of illiquidity will serve as a powerful precedent as the larger bits of the world financial system try to come unstuck. A handy rule of thumb for putting Canadian events into American context is that many of the Canadian parameters (population, GDP, etc.) run at about 1/10th the heft of their American counterparts. Canada’s ABCP sector is nominally valued at C$32 billion, and it’s very comparable (including in how it seized up) to the $300 billion US Auction-Rate Securities (ARS) business. You could almost say that we’re a beta-test site for some of the Fed facilities and Treasury’s TARP.

Roughly a week ago, Finance Minister Jim Flaherty (our equivalent to Paulson) invited selected Provincial governments to consider contributing to a facility to back-up an ABCP rescue.[3] American Doomers who have become used to Ben Bernanke’s activist central bank interventions may raise an eyebrow at how unengaged is Mark Carney, or Bank of Canada chief. The largely foreign banking interests that make up the bunk of ABCP investors had been insisting on a facility worth C$9.5 billion. In American terms, this would translate into the Fed’s CPFF capping its exposure to ARS at about $95 billion. I don’t see a real number for that facility’s exposure, but it doesn’t sound too unreasonable. In an EconBrowser article cited in a Tim Iacono piece they’re tossing around related figures that suggest even bigger bets: "… the Fed created a lot of new deposits, for example, $318.8 billion from the Commercial Paper Lending Facility alone."

My own recent "scientific wild-a##ed guess" was that Ottawa would beat the banks down to an C$8 billion figure, so it was startling to see reports of a deal struck at the C$3.5 billion level,[4] barely a third the size the banks were asking for. Having been so completely wrong the last time, I’m now guessing that Flaherty realized he had to keep the ABCP bailout off the front pages, and therefore it was essential to keep the figure below the approximately C$4.5 billion level of the intensely debated auto-industry bailout also happening now. Perhaps the big ABCP stakeholders think the important part of the process is getting Ottawa and the Provinces on the hook for any non-trivial amount. With that qualitative change in the bag they’re firmly attached to the taxpayer teat, and can suck harder further down the road.

And that’s indeed how it may play out. The retail ABCP investors, who seem to have been mere spectators at the negotiations, are now jumping up and down claiming that even this small bailout means the problem has moved from the private sector’s lap to Government’s, and they now have the right to be made whole as a matter of public policy.[5] [6]

This story has unfolded largely in the dark; perhaps because the details are so complex and boring few bothered to examine what was going on, or maybe because the affair was so sordid [7] that the grownups were actively trying to keep a lid on it. Now that real if relatively modest amounts of taxpayer monies have been put in harm’s way, public awareness of ABCP might even move off zero.

 

UPDATE: Overnight the Globe & Mail has a new blizzard of leaks and counter-spin [8] that suddenly places Carney at the centre of the story. … "almost impossible" … hmmmm …

________________________

Notes and References

[1]: "Commercial Paper Funding Facility (CPFF) Press Release", Federal Reserve, October 7, 2008.

 

[2]: "BOJ cuts key rate, plans to buy corporate debt: Japanese central bank adopts new measures to boost liquidity", by Chris Oliver & V. Phani Kumar, Boomberg, December 19, 2008.

The Bank of Japan cut its key interest rate to 0.1% from 0.3% Friday and said it would begin buying corporate debt and expand its purchases of government debt, after downgrading its assessment of the economy and warning a deepening recession lies ahead.
…

The BOJ said the purchasing of commercial paper is a temporary measure, and that it will also look into "how other corporate financing instruments may be employed."

 

[3]: "Alberta, Ontario, Quebec urged to contribute to ABCP backstop", by Paul Vieira and John Greenwood, National Post, December 17, 2008.

Finance Minister Jim Flaherty has formally asked Alberta, Ontario and Quebec to contribute toward a government-backed $9.5-billion standby facility that would clinch a deal in the 16-month restructuring of wonky commercial paper.
…

The $32-billion restructuring of asset-backed commercial paper now hinges on Ottawa’s ability to provide a $9.5-billion standby facility. Otherwise, the restructuring could unravel.

Meanwhile, the Bank of Canada governor, Mark Carney, weighed in, suggesting the Canadian economy is strong enough to withstand the restructuring’s collapse. However, Mr. Carney said that was not an outcome he was advocating.

 

[4]: " Ottawa brokers last-minute deal to free up short-term debt: $32-billion to be unlocked as foreign banks agree to credit lines, investor protection", by Boyd Erman, Toronto Globe & Mail, December 22, 2008.

The deal, which comes after Ottawa and three provincial governments agreed to provide about $3.5-billion in credit lines, means that investors should get access to their money in January, barring any last-minute complications.

 

[5]: "Retail Noteholders Seek Immediate Relief as Condition for Governments Provision of ABCP Backstop Guarantee", Press Release, Newswire.ca, December 22, 2008.

It is our strenuously held view that Government intervention to support the Plan utilizing public monies causes the Plan to no longer be a private sector agreement. In the public interest, the retail customers owning more than $ 1 million of Non Bank ABCP should receive full cash settlements from the applicable securities dealers who have not yet fully cash settled with all their retail customers, including those retail noteholders that own greater than $1 million of the ABCP Notes.

 

[6]: "Retail investors want part in any ABCP settlement: report says deal reached", Canadian Press, December 22, 2008.

[7]: "Where have all the capitalists gone?", by Jim Middlemiss, National Post, December 22, 2008.

The latest to the taxpayer trough is the Pan-Canadian Investors Committee, which at press time appears to have snookered the federal, Quebec, Ontario and Alberta governments for a credit line worth $3.5-billion to backstop the frozen $32-billion asset-backed commercial-paper market. That’s much less than the $9.5-billion first sought, but certainly not chump change.

Let’s call this what it really is, a bailout of the principle players in this saga — National Bank of Canada, Caisse de dépôt et placement du Québec, Canaccord Capital Corp. and the country’s credit unions. They are the organizations that will be hurt the most if this market fails.

But don’t kid yourself, the neatly coined legal-immunity releases that go with this stinky deal mean the government financing effectively backstops a litigation bailout of Canada’s investment dealers and financial institutions, which manufactured and sold investments they didn’t understand — or perhaps did, but didn’t disclose details

– to unsuspecting investors.

 

[8]: "Mark Carney: Paper tiger — With the agreement to restructure the ABCP market on the verge of collapse, Bank of Canada Governor Mark Carney hit the phones, taking a tough line with foreign banks and stakeholders to stave off massive losses for investors", by Boyd Erman, Toronto Globe & Mail, December 23, 2008.

The biggest risk was clear. The foreign banks wanted Ottawa on side because they thought that once the government was in, no matter for how much, it would never let the deal go down. That raised the spectre of the government funding a bottomless pit of losses like the U.S. government faces in the wake of bailing out failing insurer AIG.

Mr. Carney had to avoid that. He did it by demanding terms that make the chances that Ottawa and the provinces will have to pay "almost impossible," said a second person involved in the talks.