I am an independent financial analyst speaking today on behalf of the retail customer group. It's 1,800 families, it's approximately $350 million.
Yesterday an offer was made; the offer is incomplete. The banks and other brokerages need to come to the table and complete the offer.
Only some families are being paid. Numerous families have been left out, particularly the Credential Securities customers who still have asset-backed commercial paper, who still have sleepless nights, who still have their wives working in nursing homes to make ends meet.
Therefore, this problem was not resolved yesterday, despite the positive press coverage. There are also families in Quebec who have missed the arbitrary cut-off that the National Bank Financial has provided. Anyone who has $2,000,001 gets nothing, and anyone who has $1,999,999 gets it all. Similarly in the Canaccord settlement yesterday, anyone up to $1,999,999 gets it, and anyone with $2,000,001 gets nothing.
So we still have a tremendous amount of work to do to negotiate a remedy for all the individuals who were placed in this paper on the basis of it being safe and triple-A, getting their money back, getting their accrued interest, and having their legal costs paid.
Art Field, president of the National Pensioners and Senior Citizens Federation, is dismayed at how brokers put elderly people into asset-backed commercial paper as a triple-A savings product. It was said to be as safe as treasury bills and GICs. I have the support of the National Pensioners and Senior Citizens Federation, representing one million seniors throughout all the provinces of Canada, in saying that Canada has failed to protect the savings of seniors in this case.
This time a broad swath of Canadians were hit by a scheme they had no idea they were exposed to. No one in the Canadian financial industry and no government regulators spoke out about the obvious cracks in this cash product. Bridges with cracks eventually collapse. Financial products with design cracks break down too. This is what has happened.
The failure of non-bank ABCP is a systemic problem in the financial industry and among our regulators. This problem, once resolved--and it will be resolved, because it is too egregious not to be resolved for the Canadian families who have been impacted--will require that we engage in dialogue here at the finance committee to develop system reform at the federal government level, which will prevent this from ever happening again.
In my presentation I'm going to deal with the flaws in the product and the repairs that are needed in the regulatory system.
First, international banks should not be permitted to operate schemes in Canada that expose Canadians to billions of dollars of losses. Deutsche Bank, HSBC, and Merrill Lynch are names that need to be associated with this crisis. Deutsche Bank is the counterparty for over 50% of the credit derivatives inside the trust that are currently under bankruptcy protection.
International banks. Julie Dickson, Superintendent of Financial Institutions--the Office of the Superintendent of Financial Institutions is known as OSFI in Ottawa--has indicated she is not responsible for regulating international banks. She needs to have a new job description. We cannot let international banks engage in these contracts that have that impact and the authority to make margin calls, call defaults, and seize the collateral assets of trusts, which are the savings of ordinary Canadians.
These collateral assets, such as the life savings of Murray and Cindy Candlish, the maintenance capital budget of the Beaver Creek Housing Co-op, the retirements savings plans of Wynne and Mike Miles, who are in their own businesses--their money went into the trusts. That money went into collateral assets, collateral being assets that people have access to in order to have their debts repaid. They won't lend you money if they think you don't have collateral to pay it back. So that's how the scheme operated.
International banks now want to collect the debts that are associated with their derivative contracts. And collect them they certainly have the power to do. It is because they have the authority now to seize the collateral, Canadian savings, that the pan-Canadian committee had no choice on March 17 but to enter the CCA bankruptcy protection process. Had that not occurred, Deutsche Bank, Merrill Lynch, and HSBC Bank had the power to pull the plug, had the power to say, “We're entering default, and your collateral assets are now our collateral assets; your savings are now our profits. We're going to be in a position to take $8 billion, in the case of Deutsche Bank, out of the country upon default.” The losses of these people who had their savings in these trusts are to the direct gain of the international banks that are the counterparties to the credit default swaps inside these trusts.
Why can't Julie Dickson regulate the affairs of the international banks who got access to our Canadian savings in order to make collateral calls to seize these savings to be taken out of the country?
Retail customers owning ABCP had no idea that they had insured the bad loans of international banks. Canadians were unknowingly insuring the credit losses of Deutsche Bank, HSBC, Bank of America, Wachovia Bank, and others—hardly a Canadian bank on the list—on a leveraged basis. For every $100 that these people put into the trusts, there was $1,300 of international credit portfolios that got insurance from these Canadians. So you just have to have a small amount of loss on that international credit portfolio. If you had a 5% loss on the international portfolio, with 13 times leverage, you get a 65% loss of Canadian savings. That's how leverage works. Leverage is good when everything is going well, but I think everybody knows that when you borrow money and the value of the asset goes down, you get wiped out. That is what occurred here.
Once the investment banks, in the summer of 2007, saw the dramatic rise in interest rates, and once they got the memorandum from Coventry, which is one of the major sponsors, that indicated that net asset value impairments were ahead, the experts in the investment industry knew that there was leverage, knew that there would be margin calls, knew that if new money didn't get put into the trust there would be defaults. Notwithstanding that knowledge, the risk managers of the major banks of Canada, Scotia Capital in particular, made a decision that it would be better for the customers to own this impaired paper than for the banks to do so. So Scotia Capital is alleged to have made a decision to shift out $150 million of the asset-backed commercial paper, post the July 24 memo, sold to Canaccord. Canaccord then sold it to Credential, and then both the retail subagents got it into the retail customer base. This was after there was knowledge that the product was already tainted.
Can you imagine if a food distributor was distributing tuna, and the tuna was tainted, and the distributor made the decision, “We're going to continue to sell the tuna because we don't want to own the tuna; we've already bought it, so we're going to take the loss. Let's not take the loss. Let's get it out to the customer base, because the way our system works in our country, they'll never be able to sue us, because they don't have means.” Worse than that, for this set of distributors and banks, one of the side benefits they got in going into the bankruptcy protection proceedings—they got it because they asked for it; it wasn't enabled within the bankruptcy laws—was what The Globe and Mail refers to as the mother of all immunity deals.
What that means is that these individuals who were sold the tainted product now have losses of at least 50¢ on the dollar in order to realize cash, and they fell into what will be an extremely depressed secondary market after this yes vote. They are being asked to take the notes and give up their rights to sue. The basic wording is, give up your right to take any action for the remedy of any type of damage through any type of process in front of any type of forum, and you're not to receive remedy from any administrative or enforcement procedure. So that pretty much says it all. “We sold it to you. You should have figured out how not to take possession of it. You own it now. It's your problem. Don't sue me. In fact, you won't be allowed to, because the institutions are going to vote yes, and your group, unfortunately, is going to be carried along.”
What should the federal government also be doing? I would suggest that the House of Commons engage a legislative process to rescind immediately the Bank Act regulation B-5. This is the act that governs asset securitization procedures. OFSI specifically has a regulation that describes what a liquidity agreement looks like. A liquidity agreement is a bank guarantee. These international banks would not have had access to Canadian savings through vehicles such as Rocket Trust, Planet Trust--through very bizarre names--if it was not for the fact that there was a liquidity agreement.
The brokers probably sincerely thought that because there was a triple-A rating and a bank guarantee, the bank guarantee would kick in. The federal government had a liquidity agreement definition that was full of holes in the Bank Act regulations themselves.
These international banks came to Canada in the size that they did because the Canadian liquidity agreement was the weakest of the world. It became known as the Canadian-style liquidity agreement. What I wanted you to note, however, was that the banks that signed the liquidity agreement were the same international banks that were the counterparties that took your money in the form of paying for their credit losses because these trusts agreed to ensure those losses.
Just think of the situation that you were put in. You were faced with the collection agent at the front door who said, “Okay, I'm here to collect my debt. You owe me $1 billion, to use a nice round number.” You ran to your rich uncle at the back door to get the money so you could pay the $1 billion debt to the man who was at the front door. When you got to the back door, to your horror, you found that your rich uncle was the same guy as the collection agent at the front door, and the rich guy was saying, “Sorry, I'm not going to bail you out of your problem. I have this document here that says I don't have to, and by the way, the Government of Canada told me I should write this document this way.”
The Government of Canada did so because they said, “We're going to protect the balance sheets of the banks. We don't want you to have a real liquidity agreement that you're going to get paid for, Mr. Bank--Deutsche Bank or the Royal Bank of Canada--because if you do, you may lose money. So why don't you write a liquidity agreement that allows you to walk? And if you write it this way--this is this general market disruption clause idea--every dollar in the commercial paper market could not roll over before it is going to be the case that the bank is obliged to pay for the paper that Murray and Cindy's family was placed in.”
When they couldn't find a customer, they were supposed to be able to go to the Deutsche Bank, as an example, and say, “Deutsche Bank, you pay us back. The Canadians at the moment don't want to buy it.” Deutsche Bank said, “What a fool. Did you not know that the liquidity agreement that I signed doesn't oblige me to pay you off, because there seems to be bank commercial paper still trading?”
In the time that's here, obviously I can't get into the details of that whole thing. People will ask me questions.
I would like to express the view that it's my belief that the asset-backed commercial paper was sold in the Canadian market unlawfully. It should have been sold with a prospectus. At the time, Standard & Poor's, in 2002, wrote a major research report called Leap of Faith, in which they concluded that the entire Canadian non-bank asset-backed commercial paper market, all 20 of the trusts in the market at the time, were below investment grade.
You heard earlier from other speakers that DBRS found it to be high-grade, their top grade. Standard & Poor's, on the other hand, said it was so low that they refused to rate it. So that violates provincial securities acts, and as Larry indicated, the provincial securities commissions have done nothing. They stood by blindly while this continued to be sold into the market unlawfully.