Sunday, November 18, 2007

Ponzi scheme?, No, rather ABCP was a virtual cheque kiting scheme

"We are monitoring the ABCP situation very closely."

There are those who benefit form falsely maligning income trusts as ponzi schemes. Then there are those, like the banks who stand idly by, and say nothing to counter this utterly false portrayal. It would appear that one of the greatest threats to our financial system is the silence of the banks, as they are content to constantly play both ends against the middle. The parties who suffer from this duplicitous behaviour are the clients of those very banks and the integrity of our capital markets. One would think the banks would be the parties most desirous of protecting the integrity of our markets and their clients. Such is clearly not the case as we have recently learned.

I learned from the income trust tax incident that the banks are happy to sit back and allow the government to employ FALSE premises to destroy a market that they themselves had a major role in facilitating (as opposed to creating) and for which they earned $4.1 billion in underwriting fees alone over 10 years. The income trust market was created by profound investor need, not by the banks who simply facilitated that need, and brokered deals between investors and issuers. The 70% of Canadians without pensions need a source of pension income. The government has destroyed the best vehicle that exised to fill that need. All Canadians will suffer from the lnevitable loss of $7.5 billion in ANNUAL tax revenues. A perfect Stephen Harper lose lose lose policy outcome.

Now we learn that in the case of the Asset Backed Commercial Paper (ABCP) market, the banks were major players in what is nothing more that a monumental check kiting scheme, where short term paper up for maturity was funded through the issuance of new short term paper, whereas the interest was funded by long term assets. Asset Backed Commercial Paper meltdown meets Long Term Capital Management meltdown. Don’t people learn? In the case of ABCP, we learn that the entire market’s viability turned on the ability of the placement agents (banks) to roll the paper over, every thirty days, making the ABCP market the virtual equivalent of cheque kiting, which is a criminal act.

Worse than the fact that ABCP was a virtual cheque kiting scheme is the knowledge that the placement agents were happily going about placing new paper at the very time that they were concerned about the viability of the market itself. In that respect the placement agents were playing the equivalent of musical chairs, except their clients were the ones who ran the risk of having no where to sit when the music stopped.

This is another shameless chapter in the sad world of the Canadian financial services market place and Canada’s chartered banks. Heads should role on this one, when it is reported in the press (Globe) that:

“Some banks continued to sell ABCP in the weeks prior to the August meltdown even though many buyers were unaware of troubling warning signs that were evident to banks and discussed at senior levels.”

This clearly meets the definition of insider trading where “a person with a fiduciary duty has private information, and is trading on it.”

Meanwhile here is the definition of cheque kiting;

“Check kiting or cheque fraud refers to a category of criminal acts that involve making the unlawful use of one or more check or checking accounts in order to illegally acquire or borrow funds that do not exist within the account balance or account-holder's legal ownership. Most methods that are used by violator involve taking advantage of the float (the time between the negotiation of the check and its clearance at the check-writer's bank) to draw out these funds. Such acts are often colloquially referred to as check kiting or paper hanging.”


Dr Mike said...


Where is our knight in shining armor Jim Flaherty now--I thought he was as our Lord & master --a protector of all that is right & good in this country--a savior to the little guy on the street with his paltry wages or even more paltry pension income.

He is the slayer of that dragon called tax leakage foisted upon an unsuspecting public thru those ponzi scheme investments called income trusts.

Thank God Jim was there to protect us --he saved the day--all is right with the world.


Jimmy , I think you may have missed some of the Tax leakage that seems to be able to sneak up on you when you least expect it.

Jim , it appears that it is not only a group of greedy old people who are shafting the poor old government out of its hard earned money.

There are these things called ABCP which are about to cost the government huge amounts of lost tax revenues as everyone involved writes off losses.

Good one Jimmy--how did you miss this one??

You must have been too busy stomping on the lives of those greedy old bastard trust investors to notice.

I guess that huge crowd of petrified old folks standing in line to buy cat food probably blocked your vision somewhat.

That`s ok Jimmy , we realize that it is not your fault--those trust investors were an inconvenient lot & needed to be moved aside to make room for your buddies at the banks & other financial groups hocking their fist full of subprime mortgages.

We thank you Jimmy--thank you for making the cat food purchase our top priority & shoving any plans for a mortgage or a loan to the bottom of our list.

Subprime mortgages & loans--who needs em.

Pass the can opener.

Robert Gibbs said...

To quote numerous others:

"[Flim-Flam] Jim Flaherty is out of his depth."

And Jimmy's "depth" is as shallow as a child's wading pool.

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