Asset-Backed Commercial Paper (ABCP) FIASCO

The news media are rampant with news and unwanted/sarcastic advice about the ABCP fiasco, for example, Ms. Deirdre Mcmurdy IN HER ARTICLE:
http://finance.sympatico.msn.ca/investing/deirdremcmurdy/article.aspx?cp-documentid=6671588A $34 billion made-in-Canada mess

Stated:

“There are plenty of lessons for investors and for the investment industry from a made-in-Canada credit crisis. No one ever wants to take responsibility when things go wrong. Blaming someone else for your bad decision is Human Nature 101. But in this case, that reality pretty much guarantees that the individual ABCP investors learn yet another painful lesson from this experience: Main Street and Bay Street almost never intersect. Ms. Mcmurdy goes on to state that allowing these people “so much clout - this is, after all, a $34-billion mess - in the hands of people who are angry, inexperienced and, in the grander scheme of things, relatively small players….They feel their losses entitle them to special treatment. …… For investors, the lessons are basic ones: risk is as closely tied to reward as fear is to greed; you should always question your financial advisor closely and ask for explanations until you really do understand the product and its provenance; you should make sure your advisor understands your risk threshold and investment horizon instead of assuming anything; regularly review your portfolio statements and follow-up on items you don't understand; if your gut tells you an advisor or an investment is wrong for you - listen to it; if you think you want a piece of the "real action" and can handle products that have traditionally been reserved for the pros - like ABCP - be prepared to get bruised".....

To actually compare a 34 billion dollar fiasco to the sale of a washing machine says it all about the Ms Mcmurdy’s disrespect for these small investors as she continues in her article to state,

“But then, that happens to consumers all the time. Is a mutual fund really that different from a washing machine? We all buy things we need, even if we're not sure how they actually work. We then trust that warranty or the vendor, will help us out if it ceases to work in short order.”

Ms Mcmurdy goes on to reprimand the small investors by insulting their intelligence stating that it was

“Somewhat surprisingly, the 1,800 small investors who own the paper have been given equal voice and vote with the bigger fish like pensions funds and corporations. And that gives them some rare leverage in terms of upsetting the whole wobbling apple cart”.

Has Ms Mcmurdy ever heard about 1 share, 1 vote?
Is this the advice and the opinion of a “columnist for the National Post, Canadian Business magazine MSN Money and co-anchor of MoneyWise”??

So what are some solutions to the ABCP Credit Squeeze?
We need to investigate who are these financial advisors Ms. Mcmurdy is referring?
What are their qualifications?

These advisors in many instances are only concerned with their bonuses, salaries and commissions. For example, In HSBC's statement of defence HSBC stated that Aastra would not have cared even if it knew that the ABCP it bought was backed by complicated derivatives such as credit default swaps and collateralized debt obligations. Aastra was interested only in the credit rating on the notes and the yield (http://www.financialpost.com/creditcrunch/Story.html?id=275411).

This is a prime example of governance at its worse and it starts at the top.
Who are the directors?
What are the directors doing to help these investors?
How many boards do they sit on?
Do they have the time to know what is actually going on with investors’ paltry $ 34 billion, and do they care????
Do they have the knowledge of what an ABCP is?
Do they care?
How many actually reside in Canada?
What decision – making process did they go through to formulate these ABCPs?
Or do they know that ABCP’S exist at the companies on which they sit as board members. Please note some of these directors have JOB SECURITY FOR THE NEXT TWENTY YEARS(below)!!!!!!!!!!!!!!!
What is management doing?

If an asset-backed commercial paper (ABCP) program is composed of a bankruptcy-remote special purpose vehicle (SPV), or conduit, that issues commercial paper (CP) and uses the proceeds of such issuance primarily to obtain interests in various types of assets, either through asset purchase or secured lending transactions. And if an ABCP program includes key parties that perform various services for the conduit, credit enhancement that provides loss protection, and liquidity facilities that assist in the timely repayment of CP. Then it is prudent that an ABCP seem to be fully protected or bonded, contrary to Ms Mcmurdy’s scornful remarks to investors.
(http://pages.stern.nyu.edu/~igiddy/ABS/fitchabcp.pdf).

In this instance some of the “key parties” include, HSBC Securities Canada; Canaccord Capital Corp.; Scotia Capital Inc., and Scotia Capitaux Inc., National Bank of Canada . who were supposed “to provide the liquidity needed in the first place to roll over the paper”.

Read my article for solutions:
Critiquing and contrasting “moral” stakeholder theory and “strategic” stakeholder: implications for the board of directors

Findings – “Value” for shareholder and stakeholder may not be mutually exclusive in some instances. MST may hold the key to giving the board a more useful, comprehensive framework of the firm's utility and purpose to society.
Practical implications – Organizations may be selected on their ethical performance by investors. Depending on whether ethical criteria are included in the definition of “firm's value”, decisions about which stakeholder theory to use become an issue of strategic importance to all organizations.
Originality/value – The paper illustrates how the board of directors as the governing body of the organisation may find that continuous assessment of the company's stakeholders is valuable in reducing risks.
http://www.emeraldinsight.com/Insight/viewContainer.do;jsessionid=AFFFA9B264B7619EFFD296FC452108FB?containerType=Issue&containerId=6012734 Critiquing and contrasting “moral” stakeholder theory and “strategic” stakeholder: implications for the board of directors
Dr. Rookmin Maharaj (pp. 115-127) Keywords: Boards of directors, Decision making, Market value, Stakeholder analysis

Please take a look at the board members for some of these companies (HSBC Securities Canada; Canaccord Capital Corp.; Scotia Capital Inc., and Scotia Capitaux Inc., National Bank of Canada).

The role of the board of directors is a complex and challenging task that is weighed down with conceptual, methodological and practical difficulties. Corporate governance has become progressively more important in the business world and has become inextricably linked to the process of decision-making within corporations.

The BOD being the top level of any corporation is therefore, the body whose responsibility it is to rigorously examine and advise management about high risk and the adverse affects of packaging and reselling debt such as these asset-backed commercial papers.
The institutions that packed and re-sold the debt as a savings product - principally Scotiabank and Canaccord Capital - should UPHOLD their responsibilities, HONOUR THE TRUST; ACT IN A FIDUCIARYCAPACITY TO INVESTORS, and HONOUR the reputation of THEIR RESPECTIVE firms.
Dr Maharaj’s Corporate Governance Decision-Making model indicates that tools (Skills Matrices, Evaluations and Interconnections) and variables (Knowledge, Groupthink, and Values) have positive relationships with Decision-making. These findings have important implications for board formulation and corporate governance in the future AND MAY REDUCE THE PROBABILITY OF fiascoes like ABCP happening in the future.
Read my article:
http://www.palgrave-journals.com/ jdg/ journal/v5/n1 /abs /2050074a.html


Dr. Rookmin Maharaj has developed a unique and revolutionary model that can identify the characteristics requisite for effective Corporate Governance within an organization that strikes the ideal balance between the formal and informal rules and regulations. Dr. Maharaj has researched with the top oil and gas, mining, chemical, and pipeline companies in North America. She continues to transform ideas into actions, ultimately increasing the bottom line for organizations.

The US IS IN A DEEP RECESSION!!!!

With the US IN DEEP RECESSION!!!! (http://www.financialpost.com/ story. html?id=326071)
Dr. Rookmin Maharaj’s Corporate Governance Model may be one of the solutions to bringing the US economy back on tract. Dr. Maharaj’s research work examines the characteristics (knowledge, groupthink, and values) and tools (interconnections, evaluations and skill matrices) can be used to select candidates to be nominated to the board to improve corporate governance Qualitative interviews with chairs, board members, CEOs in the leading energy, coal, pipeline, and chemical industries in Canada were conducted. The Quantitative phase included a survey questionnaire, which was sent to 1200 US and Canadian executives, data were collected and statistically analyzed. The findings indicated a temporal linkage between board characteristics, and tools, on decision-making, the Formal rules (SOX related rules) had no significant relationship with decision-making. Dr. Maharaj’s research is unique, as this is the first time that board characteristics have been operationalized and a model developed to test the effectiveness of directors serving on boards. “Boards and Management can no longer expected to be decorative, but are expected to exercise more influence and power and become more engaged with management, other board members and all stakeholders of the organization”(Maharaj, R., 2008).
Dr. Maharaj’s articles and blogs are a must read.
1) International Journal of Disclosure and Governance - Corporate Correspondence: ... I thank Dr James Gillies, Professor Emeritus of Policy, and founding ...www.palgrave-journals.com/jdg/journal/v5/n1/full/2050074a.html
2) http://corporategovernancesoxboards.blogspot.com/
3) Corporate Governance - Critiquing and contrasting “moral” stakeholder theory and “strategic” stakeholder: implications for the board of directors Rookmin Maharaj (pp. 115-127)
http://www.emeraldinsight.com/10.1108/14720700810863751
Purpose – This paper aims to critique moral stakeholder theory (MST) and to contrast it to earlier strategic stakeholder approach (SSA). Design/methodology/approach – Interview data were gathered from top executives at 12 companies in the energy sector in Canada and an in-depth literature review was conducted on MST and SSA. Findings – “Value” for shareholder and stakeholder may not be mutually exclusive in some instances. MST may hold the key to giving the board a more useful, comprehensive framework of the firm's utility and purpose to society. Practical implications – Organizations may be selected on their ethical performance by investors. Depending on whether ethical criteria are included in the definition of “firm's value”, decisions about which stakeholder theory to use become an issue of strategic importance to all organizations. Originality/value – The paper illustrates how the board of directors as the governing body of the organisation may find that continuous assessment of the company's stakeholders is valuable in reducing risks.
http://www.emeraldinsight.com/Insight/viewContainer.do;jsessionid=AFFFA9B264B7619EFFD296FC452108FB?containerType=Issue&containerId=6012734
Critiquing and contrasting “moral” stakeholder theory and “strategic” stakeholder: implications for the board of directors Rookmin Maharaj (pp. 115-127) Keywords: Boards of directors, Decision making, Market value, Stakeholder analysis
There are several references to the management/boards refusal to be fair to their stakeholders, for example,
1) “Senator Obama has made frequent reference to the spread between CEO compensation and average worker pay…..We have a [moral] deficit when CEOs are making more in ten minutes than some workers make in ten months."
2) According to David Rosenberg, “The U.S. economy has landed in recession, according to an economist at brokerage firm Merrill Lynch. David Rosenberg, Merrill Lynch's chief North American economist, said Friday’s employment report — which showed the U.S. jobless rate jumped to a two-year high of five per cent in December on weaker-than-expected job creation — "strongly suggests that an official recession has arrived." 'To say that the backdrop is "recession-like" is akin to an obstetrician telling a woman that she is "sort of pregnant."
References:
Dr. Rookmin Maharaj, 2008: http://www.emeraldinsight.com/10.1108/14720700810863751
http://www.cbc.ca/money/story/2008/01/08/merrilllynchrecession.html
http://www.americanthinker.com/2008/04/obama_ceo_pay_and_the_politics.html