ABCP Mess Not Over Yet

HSBC Securities Canada is being sued for providing poor investment advice to a client. Aastra Technologies says HSBC advised it to buy almost $14M in third party asset backed commercial paper. Up until August, parking your cash in ABCPs was seen as a smart and more importantly safe bet. Now the market is in an actual freeze. Nobody wants to buy new paper. And holders of existing paper can’t cash out. And we’re not talking about an insignificant amount of cash. $35B is at stake here.

I spoke to Montreal lawyer Avram Fishman. He represents some of the holders of this dubious debt. He says investors who hold ABCPs are right to sue because it may be their only hope of getting their investment back. Also some holders of that debt can't afford to hang around for their notes to mature at a later, unspecified date. Investors bought the notes based on short maturity dates (as little as 30 days in some cases). Why should they have to wait longer for their money?
Fishman says more law suits are imminent.

Dubious debt

When Dominion Bond Rating Service rates a piece of debt, the issuer of that debt pays DBRS.
DBRS says it charged the issuers of Asset Backed Commercial Paper up to 125 thousand bucks per debt security. In addition DBRS charges a "maintenance fee" of about 40 thousand. It's been more than a week now that Coventry admitted it was having trouble rolling over new debt. Some of Coventry's ABCPs have pieces of subprime mortgages as their underlying asset. Two hundred thousand Americans defaulted on subprime mortgages last month. Two million subprime defaults are predicted by year-end. No wonder then that prospective buyers of this debt dried up. DBRS says it's now reviewing how it rates these securities and admits late last year it started to question the ratings on ABCPs. Yet the paper issued by Coventry which nobody apparently wants to buy still carries an "R-1" rating. Equivalent to the safety of a T-Bill which is backed by the government.