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Caisse-led bailout met with cautious optimism


Central bank and Finance Minister welcome Montreal proposal



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.

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ABCP plan similar to Montreal Proposal



John Greenwood and Duncan Mavin, Financial Post


Published: Monday, October 15, 2007

Even as backers of the so-called Montreal proposal struggle to reach agreement on something as basic as how much time they need, a group of Wall Street banks is already well on the way to resolving a credit crisis in the United States that bares striking similarities to the seized-up asset-backed commercial-paper market on this side of the border.


The Wall Street banks, including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co, have agreed to put together a capital pool, said to be as big as US$100-billion, to buy the assets of troubled issuers of commercial paper. The U.S. Treasury Department, also a backer, applauded the deal, saying in a statement that it is "pleased with the response of the private sector to enhance liquidity in the short term credit markets."


The fund will buy assets of troubled debt issuers called SIVs, or structured investment vehicles. Paper issued by such SIVs is not backstopped by liquidity agreements requiring banks to step in with emergency funding in the event that market demand for the securities dries up. By acting as a purchaser, the fund ensures the assets are not sold off at firesale prices, thereby maintaining investor confidence in the market.


News of the U.S. deal came the same day as an investors' committee overseeing the Montreal Proposal was expected to announce that it had been given more time hammer out its rescue plan. At press time, Purdy Crawford, the chairman of the committee, declined to comment directly on the matter. "We're in good shape," he said in a telephone interview.


Analysts said they expected Mr. Crawford will be given what he has asked for, but they said the fact that the answer has taken so long -- the 60-day standstill agreed to by signatories of the Montreal proposal when it was unveiled back in August officially ended last night -- is an indication of how difficult the job is proving.


The Montreal proposal was unveiled by a group of major financial institutions, spearheaded by the Caisse de depot et placement du Quebec, believed to be the biggest holder of illiquid commercial paper, with as much as $20-billion of exposure. The Caisse along with several of the banks in the proposal also played important roles through their links to ABCP sponsors. Under their rescue plan, the paper would be converted into longer term debt with maturities linked to the underlying assets. Analysts such as Royal Bank's Andre-Philippe Hardy have criticized it, noting that investors end up shouldering the risk while leaving issuers and other players relatively unhurt.


The Canadian market for ABCP froze on August 13 after investors stopped buying debt securities with exposure to U.S. subprime mortgages. Since then, invstors have been unable to sell their paper. Holders include companies and funds from across the business spectrum, from junior mining companies and tour operators to giant pension funds.


Some of them say Canada should take a good look at how the credit crunch in commercial paper is being handled in the United States.


"There are some big parallels" between the two markets, said a senior executive of a Canadian company that has been hurt by the ABCP meltdown. But in the United States, the federal government has taken an active role in the solution of the problem, unlike the government of this country, which has done its best to keep its distance. As well he noted, the U.S. banks are taking on more of the risk by forming their rescue fund.

Financial Post

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