The asset-backed commercial paper meltdown touched every corner of the financial services industry. From debt rating agencies to government watchdogs, upstart financiers to major pension funds and global banks, there were all sorts of actors on stage. Here are the major players.
DBRS Ltd.
The rating agency
This Canadian-based credit-rating agency was founded in the late 1970s by Walter Schroeder, who built up a firm that now has more than 300 employees and rates thousands of debt issuers. The company is still entirely owned by the Schroeder family, and Walter’s son David is the chief operating officer.
DBRS became the only credit-rating agency to rate third-party asset-backed commercial paper in Canada, where the emergency funding provisions differed from those that became acceptable in other countries around the world. Other agencies, such as S&P and Moody's, refused to rate paper that was issued with the so-called Canadian style of liquidity, which effectively made it less likely that the emergency funding would have to be paid.
As the third-party ABCP sector exploded last year, DBRS took measures to reel in some of the riskier practices it was seeing at the beginning of 2007. The rating agency attended the Aug. 16 meeting that led to the Montreal Accord. Huston Loke, DBRS’s head of global structured finance, has been spearheading the agency’s reaction to the crisis.
OSFI
The regulator
At the root of the problem are three words: general market disruption, a clause that enabled many banks to decline emergency loans to commercial paper trusts. The Office of the Superintendent of Financial Institutions has come under fire for writing general market disruption into the system in 1994, as rule B-5.
But Julie Dickson, the Superintendent of Financial Institutions, argues that regulators around the world agreed to the "general market disruption" clause - a provision that effectively meant emergency funding only had to be provided if there was a disruption in the entire ABCP market. The idea was to protect the banks, which is OSFI’s role, Ms. Dickson has suggested. "It’s the regulator’s job, both here and internationally, to say ‘okay, if you do not want to put capital up, then there needs to be conditions here that would make it very unlikely that these [emergency funding] lines would ever be drawn,’" she said. Close to 90 per cent of the banks that were supposed to provide emergency funding here were foreign, while Canadian banks - which are under OSFI's purview - only agreed to provide about $1.8-billion, she said.
The Caisse
The pension fund giant
Henri-Paul Rousseau heads up The Caisse de dépôt et placement du Québec, the biggest pension fund manager in Canada. It is also the country’s largest holder of third-party ABCP.
While it has consistently refused to say how much of the paper it has, sources peg its holdings at about $14-billion.
When a lack of liquidity caused the market for this paper to disintegrate in August, the Caisse took charge of gathering affected troops and putting together a plan to restructure the sector. "In any crisis, we must avoid panic and work with all stakeholders," Mr. Rousseau stated in September.
Credit-rating agency Standard & Poor’s has said that, "in our opinion, the Caisse has ample liquid assets with which to meet its liquidity needs regardless of liquidity issues with Canadian non-bank-sponsored ABCP assets."
Next three...
National Bank
The Canadian bank
It wasn’t long after Louis Vachon stepped into the CEO’s job at Canada’s sixth-biggest bank that chaos erupted in the commercial paper market. In an effort to head off any damage to its reputation, the bank announced fairly early on that it would be buying back roughly $2-billion in third-party ABCP from its mutual funds and clients, having recommended the paper as an investment. The bank’s money market funds had up to 40 per cent of their assets in the sector. "Whatever our decisions were, the consequences should not be borne by our clients," Mr. Vachon stated.
National Bank also signed on as one of the 10 financial institutions that agreed to create an initial proposal to restructure the market.
The bank first began dealing with Coventree back in 2000, when that company approached Alter Moneta - an equipment leasing firm owned by National and the Caisse - to securitize some of its receivables.
HSBC
The global heavyweight
This British-based financial giant is one of the 10 institutions that banded together with the Caisse to conceive a restructuring plan for the third-party ABCP market in August: the so-called Montreal Accord. The bank had agreed to provide many Canadian third-party ABCP trusts with funding in the case of an emergency, or disruption. Deutsche Bank was the largest provider of such backstop agreements.
HSBC Bank Canada took a small writedown in October related to the $379-million worth of paper it holds in its own account, but declined to specify the size of the charges. The bank’s client list includes numerous firms that say they bought ABCP on the bank’s advice. In October, Aastra Technologies Ltd. launched a lawsuit against HSBC Securities (Canada) Inc. and one of its investment advisers for selling it $8.5-million of commercial paper that wound up frozen. Prior to that, HSBC said it was recommending the paper based on the ratings it received from DBRS.
Coventree
The bit player in a starring role
Founded in 1998 as a competitor to the domestic banks, Toronto-based Coventree is known as an innovative packager of corporate debt. It was set up by a corporate lawyer, Geoffrey Cornish, and an ex-IBM financier, Dean Tai. The pair got the backing of the Caisse de dépôt et placement du Québec, and started selling short-term commercial paper that was backed by long-term debt, such as mortgages, auto loans and credit card payments.
Last November, Coventree went public in a share sale that saw the Caisse reduce its ownership in the firm from 30 to 9.9 per cent. In January, former CIBC asset-backed finance specialist David Allan joined the executive team. At its peak in the spring, Coventree was worth $270-million. The collapse of the third-party ABCP market means the company is now worth a fraction of that amount, and it recently laid off 25 employees, a third of its work force, as it struggles to survive.
Previous three...
