The Black Box Article

Major problems:

1- The openness issues:

•Canadian investors held buying the business paper without the concerns, qualified only about the high earnings received. Therefore , on a " don't inquire, don't tell” basis, banking companies did not experience obligated to reveal further information regarding the risks and nature from the ABCP and also the assets root it

•Considering the fact that banks generate a transaction fee from selling securities, it may have been more rewarding for them to cover the risks by investors and increase sales

•The bank's failing to advise clients regarding the nature and risks of these investments is because the meaning hazard problem; this boosts questions about the visibility of these transactions and conflict of interest between the bank as the two a profit-seeker and dealer of ABCP

•This lack of openness eventually played out a large part in triggering a credit crisis for the ABCP trusts

•Without explicitly understanding, Canadian shareholders had been subjected to the subprime mortgage crisis in the U. S. through ABCPs; this caused a rapid loss of self-confidence and compression of the ABCP market as a result of decreased demand coupled with extreme supply

•With no traders buying the daily news, issuers had been left struggling to raise the necessary funds intended for the two-thirds of $33 billion ABCP currently maturing

•If the investors had known accurately about the underlying assets of the commercial paper, they might have been capable to weigh the hazards of the U. S. subprime crisis on Canadian markets appropriately (Exhibit 1)

two - The regulatory problems:

•The ABCPs had integrated a variety of insurance policies against disaster, including crisis liquidity support agreements pertaining to trusts by simply banks when it comes to liquidity problems

•However, the conditions of those agreements, drew up by OSFI, favour the creditors by the general phrasing of the conditions in which a bailout was important: a " general industry disruption”

•Two of the world's biggest rating agencies (Standard &...


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