Vive Le Canada

Canadian Credit Crisis Is Worse Than US
Date: Friday, September 28 2007
Topic:


INTRO POINTS ONLY:

Smith calculated that Canada's big six banks are on the hook for total liquidity facilities worth $135-billion.


The Quebec Pension fund Caisse holds between $13-billion and $20-billion of the $35-billion of these loans


The Montreal Accord proposal to contain this problem was launched on Aug. 16 - at this stage appears to be a pipe dream.


Canada's bank regulator -- the Office of the Superintendent of Financial Institutions -- did not return calls

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SUMMARY POINTS ONLY:

Asset backed commercial paper (ABCP) has grown out of proportion in this country partly thanks to Canadian rules

......"They were effectively able to earn fees from supplying liquidity without ever having to supply the liquidity or set aside capital," said a source.


Barclays Bank and Deutsche Bank exploited the gaps in the Canadian ABCP rules to make big profits at lower risk to themselves

In Canada, liquidity suppliers did not have to provide funding except in catastrophic circumstances.


Unlike regulators in other countries - the Canadian banking regulator did not ask the liquidity supplier -- the bank -- to set aside any capital


Mr. Smith calculated that Canada's big six banks are on the hook for total liquidity facilities worth $135-billion.


Canada's bank regulator -- the Office of the Superintendent of Financial Institutions -- did not return calls


The Quebec Pension fund Caisse holds between $13-billion and $20-billion of the $35-billion of these loans


The Montreal Accord proposal to contain this problem was launched on Aug. 16, three days after the non-bank sponsored ABCP market was hit by contagion from the subprime mortgage crisis in the United States, triggering a string of default warnings from issuers.

......The agreement between some of the players to convert short term debt to long term debt as the solution to the crisis is now on the ropes as a Stalemate threatens the Montreal rescue plan.


Uncertainty over the future of the frozen $40-billion ABCP is spilling over into the rest of the credit market in Canada, driving down demand and forcing companies to cancel projects because of the soaring costs of funding.


A workout at this stage appears to be a pipe dream.

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Canadian Credit Crisis in a nutshell

$40-billion in ABCP is frozen.


The Québec Pension Plan (Caisse) and the Ontario Teachers' Pension Plan are on the hook as are 40 other trustholders, mining companies, paper companies, etc all of which thought they were buying short term easily marketable notes.


What they were really buying was toxic waste from troubled mortgage loans in the U.S.


A workout plan called the Montreal Accord was originated by Caisse. The proposed solution was to convert short term debt to long term debt some of which stretches out all the way to 2015, just to break even.



While this may suit the needs of Caisse, some companies need money now to fund mine operations and the like. Those companies do not want their money tied up for years.


"Most noteholders [still] don't know what they're holding."


Uncertainty over the frozen $40-billion ABCP is spilling over into the rest of the credit market in Canada, driving down demand and forcing companies to cancel projects because of the soaring costs of funding.

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HOW “ASSET-BACKED PAPER” WORKS

- A bank packages a collection of mortgages, credit card balances, or lines of credit into an ABCP that matures in 30 days.


- The bank sells ABCP for a fee to an intermediary that assumes all the risk associated with the underlying assets.


- The intermediary sells pieces of the ABCP to investors, including pension funds or corporations or individuals.


- Investors are paid interest and assume there will be a buyer for their piece of the ABCP after 30 days.


- For a fee, the bank supplies funds to buy the ABCP if there are no other buyers


- In Canada, this feature did not work in August when investors could not find a buyer.

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SOURCE - A MUST READ:

Global Credit Crisis Canadian Style


GREAT SOURCE FOR OTHER ECONOMIC NEWS:

CCNWO – Economy News








[Proofreader’s note: this article was edited for spelling and typos on October 1, 2007]

Global Credit Crisis C... CCNWO – Economy News



This article comes from Vive Le Canada
http://www.vivelecanada.ca

The URL for this story is:
http://www.vivelecanada.ca/article/92757465-canadian-credit-crisis-is-worse-than-us