Earlier this year, the Pan-Canadian Investors Committee helped develop a solution that will likely end the asset-backed commercial paper crisis in Canada. We asked Purdy Crawford, committee chair, to reflect on the path the credit crisis has taken and the lessons learned from this experience.

In your view, what led to the non-bank asset-backed commercial paper credit crisis?

PC: It all started in the U.S. with the subprime mortgages. There started to be defaults and foreclosures, and the subprime mortgages were mostly in conduits in the U.S. And investors stopped rolling over their short term paper there, and the investors got nervous in Canada and refused to roll over their short-term paper, or stopped investing in the paper. So there was a liquidity crunch. And some of the major institutions that had bought the paper, i.e. pension funds and others, reached a deal in late August with what we call the dealer banks (the asset providers who had provided long-term mortgages, etc.)—mostly foreign banks—for a standstill. I was appointed in early September as chairman of the committee that did the negotiation. The paper in Canada (there was very little U.S. subprime involved) was, on the whole, from a credit point of view, pretty good paper. It was more of a liquidity issue—i.e., people got nervous and stopped reinvesting in the short-term paper.

How much of the issue was a case of people not knowing what they were invested in?

PC: Obviously, the lack of transparency was a factor. The reality is that pretty sophisticated investors bought the paper based upon the AAA credit rating, as well as a lot of smaller investors. The small investors that bought from Canaccord or Credential or others—even if there had been transparency, it would be like a 300-page prospectus. It wouldn’t mean much to them or to me. However, if there had been transparency from the beginning the rating agency might not have been used as a surrogate for due diligence.

Why did you agree to get involved?

PC: It seemed like a challenge. To be honest with you, I had no idea it would take so long. There has never been anything like this—certainly not in Canada. And to do it without the lever of anything other than negotiations with people having the same ultimate objective but different ideas about how to get there has been very hard and arduous. But it’s been quite an experience.

What has the experience been like?

PC: It’s been pretty hectic. And a lot of ups and downs. I’m sure this happened many times…you leave the office feeling pretty good because you’ve had a breakthrough, you get home and look at your BlackBerry and some other issue has raised its head. And there’s been a lot of that. But I feel pretty good about it. I don’t feel down—I’m exhilarated and raring to go.

What was the most difficult part?

PC: After we retained JPMorgan [as financial advisor], they had to get their hands on all of the relevant information…the backup to all this paper, and this was a frustrating experience. People not wanting to release it, and signing confidentiality agreements… now we’re in a position, many months later, of reasonably full transparency.

Are you glad it’s over?

PC: Well, it’s not quite over yet. We have an appeal to the Ontario Court of Appeal probably coming up, which is very important. This is an appeal from the approval of the restructuring by Judge Campbell. It is no slam dunk.

What was the key to dealing with all of the diverse interests involved?

PC: I think the key is patience—how do they say, ‘Speak softly and use a big stick’?

Did you have to use a big stick?

PC: Well, I spoke softly. I’m a great believer in the soft skills of leadership, and my style is not to combat people. If we had gone public with some of my annoyances, we would never have gotten anywhere.

What were some of those committee meetings like?

PC: We had a lot of them—since last September, we have had over 50 meetings. I think, over time, myself and our advisors reached a point where we had the respect of all the committee members and life became easier.

Are you happy with the outcome?

PC: Yes, on the whole, provided we are successful. It’s impossible to get a perfect solution. I think the people who hold the paper long term will do quite well. I think the markets since we got involved have strengthened, so there will be a secondary market for those who want to sell. And I think if the current economic trends continue, it’ll be a fairly strong market.

Who came out of this crisis the best and who is the least happy?

PC: Currently, I think the least happy people are some of the corporate investors, who don’t like the idea of having a compromise where you give up your right to sue. They’d like to have their cake and eat it, too.

What can we learn from all of this?

PC: I think it starts right at the board and officer level of the financial institutions. More concern about risk, more know-how to understand what you’re doing and more control over those who are creating new financial products. You’ve got to think about a reform that strengthens the position for the future because the next crisis will not be this one. And one thing is also clear: this cannot be only an Ontario reform or a Canada reform. Much of this has to be dealt with internationally on a fairly uniform basis.

Should anything be done in Canada on the regulatory or legislative front?

PC: I think the Canadian securities regulators, with their counterparts around the world, are looking at what should be done about the exempt market, which is where this paper was sold. I think the Office of the Superintendent of Financial Institutions can strengthen their resources so they can be stronger in anticipating developments and maybe get in an expert advisory committee to advise them about what’s happening in the marketplace concerning financial products, etc. and what sort of capital the banks should be allocating to deal with those products and reputational risks.

Could this happen again?

PC: Not this one, but something like this happens every 10 years or so. Nothing quite as widespread as this, unless you talk about the Depression. I mean, here we have the UBS, Union Bank of Switzerland, regarded as one of the most stable banks in the world—near the end, they bought, I think, some $80 billion dollars of this paper. Not exactly the same paper as here, but a lot of it subprime U.S. assets. And nobody at the senior level in the bank apparently knew about it or understood it. And I think they’ve already taken a write-off of some $40 billion. So it’s quite widespread. And I think the initiative in the U.S. and worldwide to provide liquidity to financial institutions has been very important. It wasn’t a matter of saving Bear Stearns from going down; it was a matter of dealing with a lot of Bear Stearns’ entanglements and what it would have done to the whole marketplace.

In hindsight, who is accountable for this? Is there blame to be assigned?

PC: If it is, it’s worldwide—or at least, it’s Western-worldwide. I wouldn’t want to assign blame to anybody.

What advice would you give to investors for the future?

PC: Do your due diligence. And if you don’t understand what you’re buying, you shouldn’t buy it.

For more information on the whole ABCP story, click here to visit our special section, The Paper Chase.

Don Bisch is editor of Benefits Canada and Alyssa Hodder is managing editor of Benefits Canada.
don.bisch@rci.rogers.com; alyssa.hodder@rci.rogers.com

For a PDF of the original article that appeared in the magazine, click here.

© Copyright 2008 Rogers Publishing Ltd. A shorter version of this article first appeared in the June 2008 edition of BENEFITS CANADA magazine.

 

Copyright © 2018 Transcontinental Media G.P. This article first appeared in Benefits Canada.