Wednesday, December 17, 2008

Reality check: Why do you think they called it Asset Backed Commercial Paper, and not de facto T-Bills?

This afternoon, we have Boyd Erman of the Globe arguing in support of the government bail out of the ABCP cheque kiting scheme, in the name of the “little guy”, when in fact less than 1% of the ABCP paper was sold to "little guy" retail investors. Nice try Globe and Mail. The very paper that abandoned the “little guy” income trust investor, who was scammed by the Harper government with Flaherty’s fraudulent argument of “tax leakage”, widely promulgated by the good folks at the Globe and Mail.

Boyd Erman’s logic is no better than the ABCP scheme itself. If, as he argues, that “some very, very smart people who have been through the structure say there's a very low risk of that [$10 billion government backstop being called upon]”, then why is the backstop required? If we as taxpayers are asked to assign no risk to this backstop being drawn upon, they why are others asking for it in the first place? Obviously those parties who benefit are assigning considerable value to it. Meanwhile why is the government becoming a party to a transaction that serves to absolve the banks and brokers from selling practices that would otherwise be subject to legal action?

Meanwhile Boyd Erman is bemoaning the fact that these investors stand to lose some of their investment value. Is Boyd Erman not aware that this is occurring all around us? These ABCP investors, absent a bailout, will receive 100% of what they are entitled to, namely a lot of long dated bonds that were the assets that backed this commercial paper game of musical chairs. If these assets are no longer worth the 100 cents worth of commercial paper that was issue against them, so be it. Why are we now introducing some government “top up” that was never part of what was “bargained for” in the first place, to quote the Supreme Court of Canada in the case of the BCE bondholder dispute?

Meanwhile, the Caisse and the other pension funds have large portfolios of long dated bonds. What’s the problem with more of the same, which will be the result once this ABC Paper scam is wound up and the Caisse receives, in kind, the very assets that backed their Asset Backed Commercial Paper? After all, why do you think they called it Asset Backed Commercial Paper, and not de facto T-Bills, which these people are now desperately lobbying for?

Meanwhile what “success fees” are being paid to folks like Purdy Crawford, Steve Halperin et al, if this insane government bailout of ABCP takes place? Absent the government, these “success fees” would be zero, which is exactly what they should be if the government pursues this idiotic deal to its ultimate insane conclusion.

The ABCP Calculus: Why Ottawa should step in

Boyd Erman, today at 1:31 PM EST
Globe and Mail

Covering the asset-backed commercial paper mess for 16 months, I've tried to stay neutral on what I think is the best course of action. Like any human (and journalists are human) I do have my opinions, but I've kept them under wraps as best I could, leaving it to the players in the drama to tell the story.

But with a deal finally in sight, assuming the governments in Ottawa, Quebec City and Edmonton get together this week to provide some backstop credit, I will say this: on a cost-benefit basis, the governments should go ahead and do it. I say this as a taxpayer, whose money is potentially on the line. It's the smart call.

Let's put ideology aside and just look at the numbers. What will it cost the governments to do it? At the most, $9.5-billion, assuming they are actually called to put up the capital in a future emergency and it's a total loss. But some very, very smart people who have been through the structure (and who are not investors in ABCP who are conflicted by their desire to get the deal done) say there's a very low risk of that.

What are the costs of not doing it? Well, almost instantly, $25-billion or more of wealth will disappear from the pockets of Canadians as the paper vaporizes. Those losses will come from individual investors, and from big pension funds like the Caisse de depot et placement du Quebec, who, one must remember, are just agglomerations of little investors. They may have been badly served by the folks who run their investments, but those small investors shouldn't be punished for that.

And at a time when the federal government is looking at trying to find $15-billion to $30-billion to spend to prime the economic pump, $25-billion of lost wealth from ABCP alone could wipe out any boost to the economy from Ottawa's next budget. And the cost wouldn't stop there. Investors who lost money will pay less tax. Caisse contributors will likely have to pay more off their paychecks to make up the losses. Alberta taxpayers will bear the hit to Alberta Treasury Branch.

All of that means less money in government coffers, and less in Canadians' bank accounts. Some estimate the total cost would be more like $50-billion when you factor in lost tax revenue and all the other ancillary effects. Is that number realistic? It sure sounds reasonable.

So, yes, maybe on a philosophical level you can argue that the government should let 'em hang. Caveat emptor and all that. But an economic crisis is not the time to be doctrinaire. It's a time for pragmatism. The numbers say do the deal, Messrs. Flaherty, Stelmach and Charest. Do the deal.

1 comment:

Dr Mike said...

This same argument can be used for reversing the income trust tax--it fits the scenario to a tee except for the fact that the loss to the economy has been far greater.

What ever happened to common sense -- is this something that the gov`t does not have or has lost -- it is impossible to suck 35 Billion + out of the economy without the ramification of lost tax revenue & lost ability to fund services.

I would like to sit down one on one with Mr Flaherty & ask him why he was so adamant about the trust tax going thru , so much so , that he would not let it stand alone as a single piece of legislation & have it live or die on it`s own merit.

Only when you have a policy that will not pass the smell test do you have to hide it behind something else that others have to almost certainly vote for.

This is certainly a cowards way out!!!!!

Dr Mike.