Finance Committee on June 16th, 2008

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Laforest.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you, Mr. Chairman.

Good afternoon, Ms. Dickson. In your opening statement, you talked about the measures which the Office of the Superintendent of Financial Institutions is taking to determine which measures should be implemented in the future. You listed three points. In the second point, you say: “there was no consensus that the ABCP market posed a significant risk to investors”.

Can you tell us who specifically did not reach a consensus? I imagine this involved several parties.

[Julie Dickson]

I was referring to the assessments that have been done of the market. The rating agencies had views, and there were others who commented on the market. We would be at conferences as well. Up until August, the market had been working well, with a lot of sophisticated investors willing to put money into it in significant amounts.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Would you, who work for the Office of the Superintendent of Financial Institutions, have an opinion on that at this point? You said that even the credit rating agencies had diverging views. Did your office have a position on the issue before August 2007?

[Julie Dickson]

What we were focused on was the exposure of banks to that marketplace. Whenever there is discussion about a market, whether it be real estate, telecom, you name it, what we're focused on primarily is banks' exposure to that market, because if something happens...it's often difficult to predict exactly what will happen. But if something does happen, you have to make sure that banks have solid capital and are able to withstand whatever may come their way.

If you look at the asset-backed commercial paper market, I think there were not as many signs there as there often are in other markets. You can look in the past at the dot-com bubble, for example.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

I will ask you another question right away, because our time is limited. In your third point, on the same issue where you talk about measures, something surprised me a great deal. You say:

Third, much more is known today than before about factors that were important for investor safety. For example, after the events of last August, it became apparent that the strength of the sponsor [...] was extremely important.

I am surprised that you only recognize now that the strength of the sponsor is extremely important, whereas I thought it always was important. I don't understand. Does this mean that before, the strength of the sponsor was not important?

[Julie Dickson]

I can elaborate on that. My message was that when banks set up conduits, asset-backed commercial paper conduits, the theory was that they had transferred the risk completely to investors. When Coventree, an unregulated player, set up a conduit, the theory was that it had transferred risk completely to investors, so that the only thing investors had to look at was what was in the conduit, what mortgage loans or car loans were in the conduit. You didn't have to worry about who had set the conduit up. But what we've seen internationally is that if banks set up a conduit, you would be far better off if you had been investing in paper issued by a bank.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

But the investors trusted the credibility of the guarantor and the credibility of the product they were buying. You are telling us that the buyers were assuming the risk, regardless of the credibility of the seller. And that is where people were had.

[Julie Dickson]

The investors who were investing in these products legally were relying on the conduit only. I think some of the ratings given to conduits may have implicitly taken account of the fact that the bank was a sponsor, but at the end of the day, perhaps not as much as it could have, because the paper issued by unregulated conduits was given the same kind of rating as paper issued by bank conduits.

What really mattered, at the end of the day, and what we saw, not only in Canada but around the world, was that if you were strong and were able to walk in and say, “Don't worry, I will look after you”, the investor was better off.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Could you say that...

[The Chair, Conservative, Rob Merrifield]

Sorry, your time is gone, so we have to move on.

We'll go to Mr. Dykstra.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you, Mr. Chair.

I have a couple of questions. First, the OFSI mandate, if you look at the second point, is to “[p]romptly advise institutions and plans in the event there are material deficiencies and take, or require management, boards or plan administrators to take, necessary corrective measures expeditiously”.

How long did it take, from the day you realized that there were issues in terms of asset-backed paper to the day you actually recommended to banks...or at least recommended changes?

[Julie Dickson]

When did we recommend changes? It depends on what “changes” are.

This problem began to surface on Friday of a long weekend, so we were meeting on the long weekend with the Bank of Canada and others. I think immediately steps started to be taken to find out who owned this asset-backed commercial paper, particularly among the institutions and pension funds we oversee. Starting on Tuesday, we were collecting as much information as we could.

I don't have the chronology in front of me, but the market drove a lot of the change for a few weeks in August. By “the market”, I mean investors and large banks, for example, which started to say that they were going to convert all the liquidity lines to global-style lines in an effort to ensure that everyone knew that investing in asset-backed commercial paper was okay. So some of it was market-driven.

We began last summer I think constantly talking to international regulators about the whole capital framework as it pertains to conduits and liquidity lines. I don't have the chronology in front of me, but it was there in such a big way that we were doing a lot, right from day one.

[Rick Dykstra, Conservative, St. Catharines, ON]

One of the points you've made in your presentation—I'm trying to link these two together—is listed under “OSFI Actions”, the things you've done. In the last sentence it says, “We are looking at whether bank involvement with such conduits can create the impression that ABCP issued by unregulated entities is sponsored by them.”

I'm not so sure this is an action, so I wanted to know what you meant by that. Certainly, to me, you would look at that before you actually recommended an action. So I wondered why you thought it was so important to look at this issue without really taking any action on it.

[Julie Dickson]

Well, we are going to issue a revised B-5, and that's one of the issues we're going to deal with in B-5, which has been written. We'll put it out quickly. B-5 originally dealt with the kinds of roles banks play in setting up conduits. We read a few newspaper articles that suggested that certain conduits were bank-sponsored when they were not. So we felt we ought to go in and make it very clear that if you're involved in setting up conduits, you have to be very explicit about exactly what you're doing with them if you want to reduce the risk to your reputation.

[Rick Dykstra, Conservative, St. Catharines, ON]

Despite the fact that you oversee the institutions and the pension funds, obviously your comments on these issues, your recommendations, your issues for action are going to be listened to by more folks than just those institutions or pension funds. Regardless of whether or not you report directly to them, would it not be a consideration that you make your reports rather public rather quickly, so that even those who aren't necessarily under your jurisdiction would be able, hopefully, to garner a lot of goodwill, or at least be able to take action as quickly as they can, based on what you provide?

[Julie Dickson]

Yes. Guideline B-5, as an example.... The market is not changing right now, in the sense that it's not growing and people aren't developing new products, etc. From that perspective, we didn't need to get that guideline out within two weeks of this crisis hitting. But for sure, all of our material goes on our website. We try not to keep any secrets.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Your time has gone.

Mr. Mulcair, you have five minutes.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you for your indulgence, Mr. Chair. I appreciate it.

Ms. Dickson, I would like to come back to a statement you made earlier regarding an institution you referred to as being unregulated, namely Coventree.

Since these institutions are not regulated today, who should regulate them?

[Julie Dickson]

Well, it was an issuer of securities, so from that perspective it comes under the jurisdiction of securities commissions. When I say it's not regulated, I mean it's not regulated by us for solvency. No one is making sure that Coventree is regulated like a bank for safety and solvency, but all the securities that are issued are covered by securities laws.

[Thomas Mulcair, NDP, Outremont, QC]

There was an obvious problem which everyone can see today. Interest rates posted by the banks were so low that the banks' clients, including companies which sold the products of those banks, felt that it was in their interest to remove their money from a system which duly protected it, that is, a bank account, and to invest it into products sold by the banks or their subsidiaries. You saw that.

This is my question: What did you do when you saw this happening? Even if this not fall within your mandate, did you raise the alarm? Did you say that there obviously was a problem in the structure of these papers and that something had to be done quickly? Did you warn the government?

[Julie Dickson]

Around the world, it was clear that with low interest rates investors were searching out new products that offered higher yield. Again, this market worked well for 17 years in Canada, and I think as long as sophisticated investors continued to put money in it, as long as the securities were rated triple-A, it continued to drive the market and investors as well.

[Thomas Mulcair, NDP, Outremont, QC]

You mentioned around the world, but I'd like you to concentrate, if you wouldn't mind, Ms. Dickson, on you, on your role, on the agency we've confided in you. You're heading up a very important organization called the Office of the Superintendent of Financial Institutions in Canada. You have a role.

When you saw this happening, did you or did you not warn the government, the elected members, your minister? Did you sound the alarm? Did you say we have a problem, we have people who are covered when they're depositors, but they're not covered when they're investors, because they've moved it out of a savings account into this vehicle that the banks, which we regulate federally, are telling people is an asset-backed commercial paper, and doesn't that sound secure? But you know it's not. You have the sophisticated people on your staff to tell you that.

Did you tell anybody else, and if so, who and when?

[Julie Dickson]

People are covered. If you are an investor in a security in Canada, you are covered by the securities commissions. My job is to look after banks and bank depositors. If you're an investor, you're covered by securities commissions.

[Thomas Mulcair, NDP, Outremont, QC]

The way you explain it, it's almost as if there were no problem, as though there were no individuals who haven't been put in a very precarious position by having invested in asset-backed commercial paper. But we all know that's not the case. We all know there are a lot of people who bought through banks or their affiliates something called “asset-backed”, despite the fact that it's a misnomer and was clearly misleading.

Now you're telling us that not only did you not sound the alarm, but it is your view that it was not only not part of your job but was strictly a provincial matter. Is that the view you're putting here before this committee this afternoon?