Back from the Brink: Lessons from the Canadian Asset-Backed Commercial Paper Crisis

As global markets toppled during the 2008 financial crisis, the Canadian market for non-bank asset-backed commercial paper (ABCP) seemed on the verge of collapsing. Fueled by a top rating from DBRS, ABCP had found its way into the portfolios of some of Canada's most sophisticated investors as well as vulnerable retail investors who didn't know what they were holding.

The failure of the $32 billion market could have tipped Canadian and foreign credit default swap markets into chaos if it weren't for the swift actions of a few powerful asset holders. Collectively, through the Montreal Accord and led by veteran Canadian lawyer Purdy Crawford, they managed to hold the Canadian ABCP market back from the brink of collapse by crafting a complex and innovative solution.

Back from the Brink goes behind the scenes of the ABCP crisis to examine how a solution was reached and lessons learned that could prevent or mitigate future crises. The authors also examine the imaginative use of the Companies' Creditors Arrangement Act and describe the roles played by the banks, the major investors, rating agencies, and the financial regulators in the crisis's origins and conclusions. Back from the Brink holds important lessons for anyone interested in Canadian law, the future of complex investments, and Canada's capital markets.

Introduction

Part 1. The ABCs of a Crisis
Chapter 1: The Day Montreal Stood Still
Chapter 2: Not a Regional Problem
Chapter 3: Enter Purdy Crawford

Part 2. The Art of the Possible: Hammering Out a Deal
Chapter 4: A Proposal Is Born
Chapter 5: Putting It Back Together Again
Chapter 6: Selling the Deal
Chapter 7: The Plan Gets Approved
Chapter 8: It Almost Falls Apart

Part 3. ABCP Afterlife: How Has the Market Performed?
Chapter 9: Whither a Liquid Market
Chapter 10: Regulatory Fallout

Part 4. Conclusions
Chapter 11: Winners and Losers in the ABCP Fiasco
Chapter 12: Lessons Learned

Paul Halpern is a professor emeritus of finance at the Rotman School of Management at the University of Toronto.

Caroline Cakebread is the editor of Canadian Investment Review, writes widely on institutional and personal finance, and provides strategic and educational consulting services to institutional investors. She holds a PhD in English and writes and lectures on Shakespeare and contemporary women’s writing.

Christopher C. Nicholls is the W. Geoff Beattie Chair in Corporate Law at the Faculty of Law at Western University.

Poonam Puri is a professor at Osgoode Hall Law School at York University.

"In August of 2007 Canadian financial institutions faced a sudden crisis in the ABCP market that had to be confronted by those affected rapidly and effectively. Professor Halpern and his co-authors have written an outstanding book that outlines the successful restructuring that occurred, which preserved value for investors over time, thereby preventing more serious consequences for Canada on the eve of the worldwide financial crisis that began in 2008. The lessons to be learned by everyone involved are well described and will be of lasting benefit for future generations of decision-makers."

"I was in a Coventree board meeting the morning of Monday 13 August 2007 when we noticed the trading room was quiet, very quiet. The trading in ABCP had stopped. Back from the Brink is an engaging read that thoroughly explains what happened then and since and the implications for the future."

"Back from the Brink is a must read book for all who are interested in understanding how the Canadian financial system functions in a time of stress. It tells the story in colourful detail both of the origin of the ABCP crisis that emerged in August 2007, and of the uniquely Canadian process which culminated in a resolution of the crisis in January 2009. The authors have done an excellent job of describing and explaining in a coherent fashion the activities of individuals and institutions involved in managing the crisis and eventually arriving at a creative resolution. This story is fascinating for all of us who were engaged in some way in Canadian financial markets during this period. Perhaps even more importantly, this story provides important lessons for authorities who must craft rules which shape the future evolution of financial markets and for market participants who must manage risks involved in the issue and purchase of highly complex structured financial instruments in the years ahead."