Wednesday, October 24, 2007

Aastra Suing HSBC for Recommending ABCP

Aastra Technologies holds C$13.7 million of asset-backed commercial papers, out of which C$8.5 million is invested in Structured Investment Trust III and wasn't repaid when it became due on Oct. 10.
Aastra has commenced legal proceedings against its investment adviser, HSBC Securities and one of its employees, in the Ontario Superior Court of Justice seeking damages relating to "investment advice provided with respect to Aastra's purchase of the Structured Investment Trust III ABCP. "

This clears the way for other companies to sue their big bank advisors.

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Monday, October 15, 2007

Canadian Troubled ABCP Plan Gets 2 Months Extension

Globe and Mail has just reported that the $40B Canadian ABCP bailout plan (Montreal Accord) has just been given a 2 month extension beuase they could not agree on the terms.

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Banks to Make a a Profit on American ABCP Bailout Plan

The Canadian ABCP bailout plan will allow the banks to make a good profit out of the unlucky holders of ABCP. Would the american banks also be making a killing with this plan or are the just being nice and trying to save the market?

Marc Carpani, VP of Mulvihill Capital, stated today on BNN TV that, similarly, the US banks will likely indeed make a good profit out of this $100B plan. However, the Canadian plan is still in trouble (deadline was today October 15), perhaps because the banks are having trouble with their own greed. Will the american banks be better in sharing the profits?

The Wall Street Journal reports that the plan means that some banks will profit from the problems their industry helped create. They will be paid fees for providing the financial backstop to the fund. In addition, the broker-dealer arms of the banks would be paid to raise capital. Bank of America highlighted the opportunity to generate fees in discussions leading up to the final plans, people familiar with the matter said."

The other issue is that $100B is just a drop in the bucket versus the $485 trillion that are reported to exists in derivates out of these ABCP instruments.

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Saturday, October 13, 2007

An American ABCP Bailout Plan in The Works?

While the Canadian bailout plan is still in trouble with a deadline this weekend, the USA seems now to be planning its own bailout plan.

Citigroup and JPMorgan are leading a group of banks in talks with the U.S. Treasury about a plan to revive the ABCP market. Under one plan being considered by the banks, lenders would establish a fund of as much as $100 billion to buy assets from the SIVs (structured investment vehicles). Investors remain reluctant to acquire the paper. Setting up a fund would allow SIVs, which own $320 billion of assets, to avoid having to sell their holdings at deep discounts and further roil the credit markets.

The Canadian plan offers greatly benefits the banks, as opposed to the holders of the maligned paper, by swapping short term for long term paper. It remains to be seen who will be the real beneficiary of the American plan. Source: Bloomberg.

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Thursday, October 11, 2007

The Illusion of the DJIA - Updated

(Click on image to enlarge)

From January 2 2007 to today October 11 2007 the DJIA is nominally up 12% up. However this is only true for those investors inside the US. Investors in Europe who bought the DJIA have seen gains of only 5%. For investors in Canada and Brazil, the DJIA has dropped 5%. These investors have lost money. Similarly for investors using gold as currency, the DJIA has also dropped 5%.

The graph above shows the actual value of an investment in the DJIA in each currency, and gold.

Nominal DJIA (USD): 12.7%
For investors in Europe: +5.4%
For investors in Canada: -5.3%
For investors in Brazil: -5.4%
Using gold as currency: - 5.3%

The DJIA has nominally gone up only for investors in the US that are fully insulated from the rest of the world. To consider the actual real value, US investors should reduce this by the real rate of inflation (which should include items like food and energy).

Consider also the appreciation of gold in 2007. While the price of an ounce of gold has gone up by 18% in USD and by 11% in Euros in 2007, it has not appreciated at all for those investors in Canada and Brazil:

(Click on image to enlarge)

This can be attested by any investor in Canada who bought the GLD ETF, it has remained virtually unchanged in 2007 in Canadian dollars:

GLD in USD: +18.7%
GLD in Euros: +11.3%
GLD in CAD: 0.0%
GLD in Real: 0.0%

Adding a core rate of inflation of around 3% (and a real rate much higher) to this picture, investors with funds parked in the GLD ETF have actually lost money.

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