Finger pointing over the Yukon’s frozen investments may not be in the right direction.
“The banks stiffed us,” said independent financial analyst Diane Urquhart.
“The paper they sold was defective and there’s no question in my mind that it was sold in deceit.
The banks should fully repay the governments and corporate owners, she said.
The Yukon government invested $36.5 million in the short-term debt, which is known as asset-backed commercial paper.
The two trusts owned by the territory, Symphony and Opus, were created by a third-party sponsor called Newshore Capital Group.
The government is not revealing which bank handled the transaction.
But regardless of which bank it was, the government should have been told it was making a bad investment, said Urquhart.
On July 27, the Royal Bank of Canada wrote a 30-day notice to Coventry, another third-party firm that assembled such trusts, saying it wouldn’t sell its packages anymore.
The Yukon government bought Newshore’s trusts in July and August.
The investments were supposed to mature within 30 days, but the market froze on August 13 when vendors were unable to find buyers for the paper.
“In the final weeks before it froze, the banks were in possession of very material information regarding the prospects of damages,” said Urquhart.
“And not one notice went to a buyer.”
Auditor General Sheila Fraser has committed to investigate the Yukon’s investments to see if the government has violated it’s own investment laws.
Urquhart hopes this will not deflect attention from the fact the banks should be paying up.
“Why should the Yukon residents take a $12-million loss on something they were sold deceitfully?” she said.
“The buyer bought something that had toxic waste in it, that’s how I’d describe it.
“And the vendor knew it was in there and knew it was about to explode.”
Debt markets around the world have been reeling from the fallout caused by the American subprime mortgage crisis.
However, everywhere else the commercial paper was backed by internationally recognized liquidity agreements.
Without these agreements — that the banks would buy the paper if another buyer could not be found — the paper could not be sold.
Bond-rating services would not give the debt any sort of high rating without this guarantee.
That’s where Canada differed.
Canadian liquidity agreements were not internationally recognized.
They allowed banks to walk away in the event of a crisis, which they did.
They were able to get away with this because Dominion Bond Rating Service agreed to give the asset-backed commercial paper its highest rating.
No other rating agency would touch it.
In return, Dominion received a percentage share of all sales of the paper.
Banks knew that they were inflating their ratings and that the guarantee was weak, said Urquhart.
Buyers, like the Yukon government, trusted the banks and assumed that there was a guarantee based on the paper’s high rating.
Other Canadian governments are involved as well.
Alberta has $2 billion invested in the frozen debt market.
And the agency responsible for Quebec’s pension fund may have invested as much as $13 billion.
Despite the loophole, some banks have been honouring their liquidity agreements and fully repaying buyers.
National Bank has done the best job, said Urquhart.
The bank has bought the paper back from a number of investors, mostly in mutual funds.
Because of the buyback the National Bank is expecting to lose $575 million.
“However, they’ve only bought back paper that was under $2 million,” said Urquhart.
“Everyone that held more than that was left to deal with it on their own.”
The territory and other investors are currently waiting for December 14 when a consortium of banks, asset providers and investors will come to an agreement.
The Montreal Accord, as it is called, is intended to accommodate both sides.
“What they might do is, if say the market value of the paper turns out to be 60 cents on the dollar, they may offer 70 cents,” said Urquhart.
“That way they can say they’ve accommodated buyers.
“I’m taking the stance that they should be paying a dollar on the dollar.”
Purdy Crawford, a key member of the legal team hired to help fix the financial crisis, has said that everybody’s going to have to share the pain, said Urquhart.
“They’re trying to create the notion that you have to share the pain for the good of the country.”
But banks can afford to take the loss.
If Canadian banks paid everyone, they would only suffer a four to eight per cent reduction in their shareholder’s equity.
“This is not going to cause bank runs or a financial crisis,” said Urquhart.
“The Yukon public does not have to take a hit because a bunch of guys in Toronto and Montreal designed a faulty product for their own profit.”