The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘ABCP

The Magnetar Trade – otherwise known as ‘The Black Hole”


This is a complex article at ProPublica that in simple terms illuminates all that was wrong with CDO’s and synthetic CDO’s. These instruments allowed investment bankers like Magnetar to circumvent insider trading rules.  The story of Goldman Sachs being charged by the SEC for fraud is only the beginning.  Financial reform is the last thing many financiers and bankers will have to worry about as this story takes hold.

Magnetar involved all the big names and most are listed here.  You will see many recognisable names, eg. Citi, Wachovia, Deutsche, Lehmans, UBS, Mizuho, JP Morgan.  At this point it appears to be only guilt by association, however there is nothing good or right in this tale.  Propublica quote this participant.  “The deal was a disaster. He shook his head at being reminded of the details and said: “After looking at this, I deserved to lose my job.”

The Magnetar Trade

Magnetar’s approach had the opposite effect — by helping create investments it also bet against, the hedge fund was actually fueling the market. Magnetar wasn’t alone in that: A few other hedge funds also created CDOs they bet against. And, as the New York Times has reported, Goldman Sachs did too. But Magnetar industrialized the process, creating more and bigger CDOs.

Magentar founder Alec Litowitz speaks at a private equity conference held at Kellogg School of Management at Northwestern University in February 2007. (Nathan Mandell)

Magentar founder Alec Litowitz speaks at a private equity conference held at Kellogg School of Management at Northwestern University in February 2007. (Nathan Mandell)

What Magnetar were able to do was fund the housing bubble and bet against it bursting all at the same time.  They were able to do this using CDO’s and building them all the while knowing the bubble would burst.  The beauty of what they did was to create cash flow to fund their short selling of their own CDO.

Magnetar’s (Nearly) Perpetual Money Machine

By buying the risky bottom slices of CDOs, Magnetar didn’t just help create more CDOs it could bet against. Since it owned a small slice of the CDO, Magnetar also received regular payments as its investments threw off income.

Written by Colin Henderson

April 17, 2010 at 20:46

Arrangement shelters ABCP worth 27% of Canadian Bank equity base


The always clear thinking Fareed wrote this piece on the Canadian Banking system and how it is the envy of the world.  The facts outlined are indisputable and the distinctions between the US and Canadian systems that favour care and moderation in Canada are all true.

However there is one other event he does not mention, that has quietly gone on for the last 14 months and in fact just completed in January this year with the announcement noted below on the E&Y site dated Jan 21st, 2009.

The story here goes back to December 2007, when I first noted it here.  At that time the Canadian government strong armed the Banks in a prescient move to avert crisis in the Canadian component of the ABCP crisis. Recall that ABCP is lending by Canadian banks managed off balance sheet therefore not subject to capital requirements.

The arrangement in effect froze $25 Bn in Asset Backed Commercial Paper by transferring them into a series of trusts. [note this link is to a pdf on the E&Y site].  It explains ABCP, and explains the arrangement. In particular note this little gem on page 6 entitled “Alternative to the Plan”.  They have turned off copying so I saved the screen shot here, and typed the first few words …

The Investors Committee believes that failure of this plan would likely lead to the forced liquidation of billions of dollars in assets that back ABCP ….  the value of the affected ABCP in the context of a forced or voluntary sale is uncertain because there is currently no public market for the notes.

This financial trick was managed with the hesitant support of bank credit lines, and essentially (as I understand it) tooremoved the immediacy for settlement from the paper.  However that paper remains contingent off balance sheet debt of the Canadian Banks.

The reason I raise this now, is that the Fareed article suggests that Canadian Banks are perfect, but the Pan-Canadian Investors Committee manouvre hides part of that truth that ought to be factored into the picture for completeness.

Here are the equity bases of the Canadian Banks from Google Finance – how significant is the $32 Bn – you can judge for yourself.  In particular note that pre this arrangement, TD and I think one other were not engaged in ABCP as much, so the percentage would be much higher (worse) against those ABCP participating banks.

Royal    $ 31Bn

BMO     $ 19 Bn

Scotia   $ 22 Bn

TD         $ 32 Bn

CIBC    $ 14 Bn

$ 32 Bn as a percentage of $118 Bn = 27%

_________________________________________________________________________

Most recent update on the E&Y site relative to the euphemistically named Pan-Canadian Investors Committee.

Canadian Commercial Paper : Ernst & Young

Press Release
For Immediate Release
ABCP Restructuring Completed
Plan to Be Implemented on January 21, 2009
Toronto, January 16, 2009 – The Pan-Canadian Investors Committee for Third-Party Structured Asset-
Backed Commercial Paper is pleased to report that all of the principal legal documentation needed to
implement the restructuring plan affecting $32 billion of third-party ABCP has been finalized and is being
signed today by all of the necessary parties.
Final reconciliations and verifications are now being conducted and the Court-appointed Monitor is
expected to file the certificate required to implement the Plan and complete the closing on January 21,
2009.
– 30 –

For further information:
MEDIA
NATIONAL Public Relations
Toronto Montreal
David Weiner Roch Landriault
Tel. (416) 848-1633 Tel. (514) 843-2345
Cell: (416) 931-4633 Cell: (514) 249-4537
INVESTORS
Ernst & Young Inc.
Pierre Laporte
Tel. (514) 874-4383
GOODMANS\\5676758.1

Written by Colin Henderson

February 13, 2009 at 14:20

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