Thank you.
Monsieur Mulcair.
Evidence of meeting #19 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was securities.
A recording is available from Parliament.
Evidence of meeting #19 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was securities.
A recording is available from Parliament.
April 2nd, 2009 / 9:40 a.m.
NDP
Thomas Mulcair NDP Outremont, QC
Thank you, Mr. Chair.
First of all, Mr. Bethlenfalvy, I would like to apologize for how we massacred your name on the name card prepared for you, but I take some solace in seeing how DBRS also massacred your name, at least in the signature of the French version. That must happen to you a lot.
I would like to come back to what my colleague, Mr. McCallum, was saying, because I think it is very important. As you can see, we do not always have enough time to really delve deeply into these matters. I would like to come back to something you said in English. You justified the triple A rating you granted to asset-backed commercial paper, citing credit quality. Also, referring to the absence of any conflict of interest, you said you were in no more of a position of conflict than the lawyers who prepared the contracts in question.
For six years, I was president of the Office des professions du Québec, a regulatory structure responsible for overseeing all professional occupations and ensuring that these professionals do their job to protect the public. I can assure you that I am very familiar with the subject and I have never heard this theory whereby the group that performs an assessment, and is paid to do so, is in no more of a position of conflict of interest than the lawyer who prepared the contracts.
Can you explain to me how, with this notion of credit quality—to use your terminology—you could have granted a triple A rating to that paper? I am a lawyer, and spent most of my career practising corporate and commercial law. I think it was very clever, from a marketing perspective, to call these “asset backed” transactions. That evoked the notion of some sort of guarantee, while it was nothing of the sort. No one was in a position to follow the owner of that truck all over the place.
Please use clear terminology so that everyone will understand. Even though I have been working in this field for a very long time, I must admit, I am having a hard time understanding your justification of triple A credit quality for something that caused one of the worst economic disasters this country has ever seen.
9:45 a.m.
Co-President, DBRS
Thank you for the question. I'll deal with the second one first and then come back to the conflict of interest.
With regard to credit quality, I think in simple terms you can make a loan--for example, asset-backed securities include auto loans or credit card receivables, and so on. So if you were to take out a loan with me for a credit card, I'd assume credit card risk with you. But if everyone here took out a credit card and I knew your payment histories and I could pool the risk, I'd be in a better risk position just by the process of diversification.
So simply put, securitization is about diversification of risk. That's what we're good at. We understand credit risk and we understand the principles of diversification. What I guess was not as well understood was what happens if the capital markets disappear.
9:45 a.m.
NDP
Thomas Mulcair NDP Outremont, QC
Hold on. You tried that one with Mr. McCallum before. It doesn't work. It's not a question of what the capital markets did. You keep talking about credit quality. In the same breath you refer to an international crunch. It doesn't work. What happened with this so-called asset-backed security--that terminology in and of itself evoked security, and you went along with that--was that you had to pursue every credit card holder, the owner of the pickup truck, and everything else. This was all bundled together. It had no credit quality because it was not something that could be executed as a debt. And that's the problem here. Through reams of contracts, individual and otherwise, you were supposed to have something that, when bundled together, represented credit quality. Simply put, it did not.
I don't find it honest of you to sit here today and claim that the problem is something in the international markets and not recognize the fact that the DBRS gave a triple-A rating to hogwash, because you couldn't realize on those assets. When you meet the smart people in the world of finance and the world of investment who looked at this stuff, they never invested in it. Jarislowsky is a good example, because, simply put, he realized there was no way to execute on those guarantees.
Are you telling us that the creditworthiness of every individual credit card holder, every individual pickup truck owner who was financing...? Is that the only thing you look at to determine credit quality? You're not looking at the value in terms of the executable quality of what's there as a legal product? That's none of your concern? Is that what you're telling this committee?
9:45 a.m.
Co-President, DBRS
No, not at all. I guess we're going to have to agree to disagree on the value of the securitization market, both in Canada and globally. I think it does serve. They're real assets. The pooling of those assets is a real vehicle. The Governor of the Bank of Canada talked about it in his speech--
9:45 a.m.
NDP
Thomas Mulcair NDP Outremont, QC
One by one, you're going to go after every credit card owner, and it's going to cost you--
9:45 a.m.
Co-President, DBRS
There are ways to.... You know, in loss given default, it's not that you get zero cents on the dollar. I think if investors really felt they would get zero cents on the dollar, they'd sell even at 50¢ or 25¢. There is real value. There is liquidation value.
I would also say that we rate a whole range of securities based on our analytic capabilities, based on our methodologies and our models, and these--
9:45 a.m.
NDP
Thomas Mulcair NDP Outremont, QC
With respect, your analytical models and your abilities, it seems to me, simply put, preclude you from understanding that the legal structure put in place can have a serious effect on credit quality. You have blinders on. You say no, no, these are individual credit card holders; this is the person who's put up decent collateral and has a good credit rating for a pickup truck. But how do you realize on those assets without it costing you a disproportionate amount? That has to be part of your analysis of credit quality.
9:50 a.m.
Co-President, DBRS
It is part of the analysis. We do that. If you default on the mortgage, there's still a loss given default. Now it's pooled. So it does happen. I think that's a fundamental part of the process of our analysis. It does occur.
9:50 a.m.
Conservative
The Chair Conservative James Rajotte
Thank you, Mr. Mulcair.
I think we'll go to the next round, a five-minute round.
Mr. Bethlenfalvy, there are some questions here with respect to the rating, and I admit, I would agree with my colleagues here. I'm not sure that the financial crisis is the explanation for that. I assume you're going to get more questions on that. I think the crux of what members of this committee are asking is the question of why that rating was given. I don't think the answer is in the financial crisis.
We'll go to the next round, with Mr. McKay.
9:50 a.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Mr. Bethlenfalvy, you seem to be a popular boy this morning.
9:50 a.m.
Voices
Oh, oh!
9:50 a.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Unfortunately, as we go forth, pretty well all the questions have been explored. I can't believe I'm agreeing with Mr. Mulcair.
9:50 a.m.
Voices
Oh, oh!
9:50 a.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
The issue here is that you gave a triple-A credit rating, and a lot of people were seriously damaged by this credit rating. Others who weren't damaged, most notably the TD Bank and Ed Clark, said, “Well, I just didn't really understand the product. If I didn't understand the product, there's no way my bank was going to invest in it.”
The problem with the rating as you gave it is that you in effect induced people to do it. We've had people here who didn't really understand what the investment was, but because their financial adviser--some very senior financial advisers--said it was rated well by the DBRS, it was given a good rating, it must be a good product....
It seems that whether it's intentional or unintentional, it's based on a model whose validity has expired. It almost conjures up images of Ph.D. mathematicians going through their models in the basements of these buildings and producing a model that on the face of it appears to be perfectly sensible and warrants a rating, yet when exposed to the light of day, the reality of what credit is, it's absurd.
Square the circle for me, Mr. Bethlenfalvy. How is it that you could provide a triple-A rating to a product where very senior people say, “I don't get it, I don't understand it, so we're not investing in it”?
9:50 a.m.
Co-President, DBRS
First off, TD bank is a big issuer of asset-backed commercial paper, so it's not correct. We continue to rate it, and other rating agencies rate it. In fact, they rate it triple-A today. There's $50 billion outstanding, of which TD is a big participant. That's a fact.
The second thing I would say is that one of the big lessons learned from the whole process was the need for greater transparency and disclosure. The evolution of disclosure is that the banks wanted to keep a lot of the information confidential for competitive reasons, so they'd give it to the rating agencies and then you would have that. When the crisis hit, people wanted to know exactly what was in the portfolios. In the absence of consistent disclosure rules and confidentiality agreements, which precluded our.... For example, if a corporation gave us forecasts, we couldn't just publish those. There was a lack of transparency.
I think one of the key things now is that--
9:50 a.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Back me up over that. You said there's a lack of transparency because of disclosure rules?
9:55 a.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
So even though you may have within your pool of knowledge the actual content, you can't disclose that information to people who are saying this paper is not saleable anymore?
9:55 a.m.
Co-President, DBRS
There's a certain confidentiality that is required of the bank--the pricing of the assets, the nature of the specific individuals or companies with those assets. We said okay, if you're going to do that, we're not going to rate it anymore.
9:55 a.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
If you're going to disclose it, you're not going to rate it?
9:55 a.m.
Co-President, DBRS
If you're not going to disclose it to us, and we can't disclose it to the market, we're not going to rate it anymore.