Secret Santa Canada in C$3.45 Billion Xmas Eve ABCP Stocking-Stuffer

December 2008
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By John M.

The deal will be welcomed in global markets because it will prevent a fire sale of derivatives originally valued at more than $200-billion that would have threatened to further destabilize the financial system. [1]

Tonight visions of sugar-plums (and unfrozen RIFs — that’s Canadian for 401(K) unwinds) are dancing in the heads of retail investors of Canada’s Asset-Backed Commercial Paper (ABCP) market. Who wouldn’t be ecstatic at this definitive language that their 16+ month ordeal is nearly over?

"… As a result of these latest developments, we can begin the process of completing this restructuring with the posting of documents today." [2]

However, it’s hard to avoid the feeling that confirming details of a multi-billion-dollar government bailout on Christmas eve [2] signals a strong aversion by some of the parties to the public inspecting the deal.

The latest driblet fixed government involvement at C$3.45 billion, and confirms former BoC Governor David Dodge’s speculation of around C$200 billion on leveraged assets lurking behind the commercial paper. With the amount of public money at risk of the same order as for an auto-industry bailout that has generated extensive coverage and debate, its quite disturbing that this process is tip-toeing around the Xmas tree like the most shy little mouse.

Canadians’ liabilities are supposed to be senior to $17.82 billion of private facilities, but I just have the idea that most of the risk (starting at about $100 per Canadian) will now be socialized. We’ve touched it? We own it

———–

[1]: "ABCP investors to get access to money early in 2009: committee", by Boyd Erman, Toronto Globe & Mail, December 24, 2008.

[2]: "ABCP Investors Committee Welcomes Government Support for Restructuring Plan – Agreement reached for additional back-stop facility", Press Release, Pan-Canadian Investors Committee for Third-Party Structured ABCP, December 24, 2008.

twist says:

December 24th, 2008 at 9:40 pm

John-

I’ve learned in the past year to be suspicious of anything the government does on the weekend, a Christmas Eve deal has got to be even worse.

Igor’s feeling sad- and he’s not even a Canadian taxpayer!

John M. says:

December 25th, 2008 at 6:13 am

More coverage (frankly, I’ve got better things to do than follow this stuff):

“Canadian commercial-paper plan takes step forward”, Reuters, December 24, 2008.

Canada’s federal government and three provinces have agreed to provide C$4.45 billion ($3.65 billion) in backstops to support a plan to restructure C$32 billion in asset-backed commercial paper that has been frozen for more than a year.

The margin facilities provided by Ottawa and the provinces of Quebec, Ontario and Alberta bring the total guarantees for the restructuring to $17.82 billion, the investor committee that organized the plan said in a statement on Wednesday.

“Ottawa, provinces provide $4.45B for ABCP rescue”, by Philip Ling, Vancouver Sun, December 24, 2008.

The government support “were vital for the conclusion of this agreement,” said Fernand Perreault, Caisse’s acting president. “The closing of the restructuring plan is very much in sight.”

Finance Minister Jim Flaherty said Tuesday that he would have preferred it if the government did not have to provide financial backing to support a deal to restructure frozen ABCPs held by Canadians.

“This was a private sector created problem, and I would have preferred a private sector solution,” Flaherty said.

“Having said that, as minister of finance I am responsible for the systemic integrity of our financial system in Canada and my conclusion was that we needed to participate.”

“The Caisse de dépôt et placement du Québec comments on the restructuring of canadian third-party ABCP”, Press Release, Newswire (Canada) -source: Caisse, December 24, 2008.

“The involvement and support of the governments of Québec and Canada in
particular were vital for the conclusion of this agreement. I should also like
to point out the excellent effort by the Caisse teams, which made a remarkable
contribution to the work of the Pan-Canadian Committee,” Mr. Perreault added.

“Governments to back ABCP deal with $4.45B”, by Rita Trichur, Toronto Star, December 25, 2008.

Canadian non-bank ABCP, a type of short-term commercial debt, has been in crisis since seizing up in August 2007. The market experienced a dearth of buyers over worries that American subprime mortgages were among the assets backing the securities.

“Canadian Government Agrees to Backstop Commercial Paper Plan”, by Sean B. Pasternak, Bloomberg, December 24, 2008.

The governments and other parties will provide a total of C$4.45 billion in additional margin facilities, the group charged with restructuring the paper said today in an e-mailed statement. The margin facilities for the plan now total C$17.8 billion.

“‘Tentative’ ABCP plan touted: $32-Billion Frozen; Investors committee has funding deals with governments”, by Jim Middlemiss, National Post, December 24, 2008.

It’s deja vu all over again in the asset-backed commercial paper saga.

One year ago to the day that the Pan-Canadian Investors Committee first claimed victory by announcing a “tentative” deal to restructure the frozen $32-billion market, the committee has confirmed it has a new “tentative” agreement that would lead to some investors being paid in full and others left holding long-term notes that will pay back their capital in eight years or so.
…

“It’s very difficult to polish a turd … maybe these guys have done the unthinkable. Maybe they actually polished a turd, who knows. If they do, I will be very excited to get my resources back,” he added.

On Dec. 23 last year, after missing a number of self-imposed deadlines, the committee announced it had a deal in place to turn the short-term paper into long-term notes, which would see investors repaid their capital if they held them to term, about eight years.

“Court extends deadline for ABCP restructuring as panel confirms deal”, Canadian Press, December 25, 2008.

The documents were made available by the court-appointed monitor, Ernst & Young Inc. on its website (www.ey.com/ca/commercialpaper).

“Xmas present for ABCP holders courtesy of federal and provincial govts”, KenOnCanPolitics blog, December 25, 2008.

It seems that the old free market let losers fail philosophy is now being abandoned by govts. in power no matter what their political stripes. Of course this is all just temporary. …

December 26th, 2008 at 10:24 am

Bay Street is just ecstatic that they sneaked this puppy through without Canadians noticing.

“‘A long, tough struggle’ ends finally, with deal: Crawford praised for his steady leadership”, by Boyd Erman, Toronto Globe & Mail, December 26, 2008.

The broad terms of the plan, which required last-minute government support and backing from banks in Canada and abroad, came together last weekend, but the final details had yet to be ironed out, with a year-end deadline approaching. It wasn’t until late on Christmas Eve that the committee announced that finally, the terms were set and there was a new plan to get investors access to the $32-billion that’s been locked in frozen ABCP since August, 2007.

The judge overseeing the restructuring must still sign off on the plan, but that’s expected to happen in early January, clearing the way for the seized-up paper to be exchanged for new bonds.

Many small investors should receive cash under relief plans offered by their brokerages soon after. Although the process has had a few false starts, Mr. Crawford is confident the deal is finally done.

“This is not going to be held up,” he said. [translation: before it was premature to hold a public debate and by Monday it will be too late]
…

Dealing with the government was also difficult, because Finance Minister Jim Flaherty at first wanted to avoid using public money. [uh, what about the public's attitude on their own money ... oh never mind]

“Getting the government involved was a lot of time over about three or four weeks,” said Mr. Crawford, who stressed that without Ottawa, the deal may not have succeeded.

“Bugged” is right, Igor.

Housing Doom

“He who defends everything defends nothing.” – Frederick the Great

Secret Santa Canada in C$3.45 Billion Xmas Eve ABCP Stocking-Stuffer