The take of SqueezePlay's Kevin O'Leary on the fate of retail investors of ABCP

"Maybe Granny will actually ask her broker next time (the person puts her into a piece of paper) what it is she's buying. Maybe you need these lessons occasionally to cleanse the markets....to scrape the plaque off the veins that make the financial system run."

So says Kevin O'Leary on April 22, 2008, as he makes the case for retail investors not getting back the par value of their asset-backed commercial paper (ABCP) suggesting instead that the value should be what the market dictates. I was complete shocked at the opinion put forth by the SqueezePlay anchor. The man, who shot to mainstream fame in Canada on CBC's the Dragons' Den, has the idea that retail investors should hold themselves responsible for not doing enough due diligence. I'd like to present is a Canaccord advisor's e-mail to his or her client suggesting ABCP:

We have been able to secure a block of AAA 1 year money market paper yielding 4.80 to our clients. This paper offers the following:
- Liquidity: You can sell the Planet Trust at anytime before maturity. GICs are non-redeemable.
- Protection of the capital: The rating of the Planet Trust is AAA credit. GICs are only ensured [yes, the broker misspelled it...it's "insured"] up to $100000.

This e-mail was taken from none other than SqueezePlay. Tell me, Kevin...Is it really possible for retail investors to do further due diligence being pitched of the merits of an investment in such a manner? Especially, when Canadians rely on their financial advisors as being their source to the happenings in the investment industry. Here they are being pitched an investment product as a substitute to a GIC. Until the offer to match par by Canaccord, which was recently matched by Credential Securities (the other party in this debacle), these investors were risking losing everything with no liquidity. Market pundits were putting the value of this paper at twenty cents to the dollar no more than a few months ago (now, it's looking more like sixty apparently). Imagine....close your eyes, Kevin....losing 80% or 40% or whatever '%' of your investment on something that was recommended to you as liquid (which it currently isn't) and as a substitute to a GIC? Uncanny.

It is absolutely shocking that the man seeing what he has seen would have such an opinion. You can't argue that he made this argument out of ignorance. You can't argue that he made this argument out of a lack of competence. What are we left with? This attitude will destroy the profession of finacial advice. Advisors should be trusted to make suggestions given their clients' needs. This is the reason full-service financial advisors are recruited in the first place. Having to second-guess constantly and to take out of this "don't trust anything that's being recommended to you," will seriously undermine the profession. This paper had a high credit rating and was exempt from prospectus disclosure, so even due diligence wouldn't have saved them. Wouldn't it be more powerful to give the players involved a sense of accountability over what has been done? Penalties? Fines? Lawsuits? Wait, lawsuits are looking very unlikely, as it is a condition for the retail clients to get their money back.

With the vote on the proposed plan of investors being bought out at 100 cents to the dollar being held this week, it is widely expected (indicated by proxies coming in) that retail investors will accept the offer. Of course, they should, but, as stated, they will give up their right to pursue legal action. Not exactly a great thing, as it won't help the players develop a sense of accountability. This is where the problem lies.

I do want to give credit to Mr. O'Leary...His imagery of paralleling "plaque" to retail investors being sandbagged is incredibly poetic. Rudyard Kipling couldn't have done a better job.



Sources: SqueezePlay [BNN], Globe and Mail "ABCP ruling to come Thursday"