Some of Canada’s largest banks have agreed to pay fines totaling close to $140 million relating to their involvement in the sale of Asset-Backed Commercial Paper (ABCP) in the summer of 2007. I wanted to look into this to see what was it exactly that the banks did and why was it wrong?
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Coventree, Canada’s largest ABCP administrator, warned dealers in July 2007 that the assets backing some of their debt were sub-prime mortgages from the US. These companies then continued to sell Coiventree’s ABCP into August of that year. When the US mortgage market fell apart, the asset-back commercial paper it was tied to was frozen. Commercial investors holding these ABCPs were stuck and unable to sell these worthless investments.
The issue here is that the banks and brokerages did not take proper measures to protect the interest of their clients, as they are required to do so by provincial regulators.
The fines imposed were not small, here is the current list of which Canadian banks and brokerages have been found at fault and how much they were fined:
- National Bank of Canada $75 million
- Scotia Capital Inc. $29 million
- CIBC $22 million
- HSBC Bank Canada $6 million
- Laurentian Bank Securities $3.2 million
- Canaccord Financial $3.1 million
- Credential Securities $200,000
Much like the Ponzi schemes that were all over the news, this should serve as another reminder that all investors should fully understand the products that they are investing in.
Related Websites:
- Liquidity Vs Solvency
- History of Top 10 Banks of the United States
- Commercial Real Estate Investment Tools: FREE Online Financial Calculators
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This is a good reminder Tom. From what I’ve read on the topic, it looks like some banks did tell customers that this stuff was 100% safe. I’m not sure whether or not the banks themselves viewed it as safe or were intentionally misleading clients.
In any case, it looks like they were either dishonest or less than competent. I’d like to think they just made an honest mistake. Either way, buyer beware.
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This was such a long process. A few financial penalties seems like a soft smack to the back of the head. These banks should have received a swift smack with a wooden spoon. I don’t condone physical abuse, but these guys got off easy.
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