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Caisse-led bailout met with cautious optimism Central bank and Finance Minister welcome Montreal proposal TARA PERKINS and JOHN PARTRIDGE AND HEATHER SCOFFIELD August 17, 2007 Already coined the "Montreal proposal," the Caisse-led plan to bail out a battered $40-billion portion of the commercial paper market is not a sure-fire solution yet. Jerry Marriott, managing director of asset-backed securities at DBRS Ltd., was blunt when asked whether the proposal is a complete answer to the crisis in the third-party asset-backed commercial paper (ABCP) sector. "We don't know," he said in an interview yesterday. Many details of the rescue package still have to be worked out, and it needs more support. But the participants believe they have bought some time and a final deal is in the cards. The agreement was brokered yesterday by the Caisse de dépôt et placement du Québec during a series of meetings in Montreal. The other nine signatories range from heavyweight global banks such as Deutsche Bank AG and HSBC Holdings PLC to Canadian players such as National Bank. DBRS, the sole debt-rating agency to rate these securities in Canada, was present for the meetings but says it was not an active participant in devising the plan. DBRS has been taking some heat for its role in building up the sector. Key elements of the plan are to convert short-term debt into longer-term instruments, while also slapping a temporary moratorium on both investors trying to get their money out of the trusts and on issuers seeking financial injections from their lenders to keep the paper afloat. The third-party ABCP market - the portion of the ABCP market not administered by the banks - has been hammered by a sudden exodus of investors and a refusal by many banks and other lenders to honour agreements to provide backup liquidity. The Bank of Canada and Finance Minister Jim Flaherty put out statements yesterday welcoming the Montreal proposal. The plan to pursue an orderly restructuring of the Canadian ABCP market "provides an opportunity for parties to work through the many complex issues related to the market," the central bank said. It also welcomed confirmation from Canada's big banks that they will support their own bank-sponsored ABCP programs. The third-party segment accounts for about one-third of the total ABCP market, while the other two-thirds is dominated by bank-sponsored trusts. "Together, these initiatives should help support the functioning of financial markets in Canada," the central bank said. But sources suggested that the central bank and Finance Department were unimpressed that Canada's big banks weren't further involved in the initiatives to bail out the non-bank ABCP market. An escalating crisis would likely have led to a forced liquidation of the assets in these trusts - a situation that could spread trouble into the broader economy. Mr. Flaherty said in a press release that it's "in the best interest of all involved that sponsors, liquidity providers (including large international banks) and investors (including large pension funds) engage constructively to pursue orderly market solutions to this liquidity situation." He added that one of the attractive features of the proposal is that it "provides time for full information and analysis of these securities." The creation of the long-term notes, which might carry maturities as long as 10 years, is expected to reduce the amount of liquidity risk in the ABCP market, Huston Loke, head of global structured finance at DBRS, said yesterday. Dealers that are part of the consortium have indicated that they would assist in making a market for these notes, "so should implementation of the proposal be successful, it is likely that investors looking to liquidate could do so at a time of their choosing, reducing the likelihood of selling at distressed prices or into a highly volatile credit environment," he said.