Hamilton Sues Deutsche Bank over ABCP

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Hamilton sues over $10-million ABCP loss

John Greenwood, Financial Post Published: Wednesday, September 30, 2009

"The Hammer" wants its money back.

The City of Hamilton, Ont., is suing Deutsche Bank AG, the rating agency DBRS and others over a $10-million investment in non-bank sponsored, asset-baced commercial paper that turned out to be a dud.

In a statement of claim filed in Ontario Superior Court, Hamilton alleges it was misled by Deutsche Bank into believing the ABCP it bought was safe and that "misleading representations and/or omissions" by the investment dealer made it impossible to assess the true risk involved.

Hamilton is one of several hundred corporate and institutional investors hit by the failure of the $35-billion ABCP market two years ago.

Other government holders include Ontario, which bought more than $800-million, and the Yukon, with about $36-million.

The lion's share of the frozen ABCP was restructured earlier this year under a deal that took away investors' right to sue, but Hamilton's notes were not part of that arrangement.

The lawsuit, filed Wednesday, alleges that Deutsche Bank sold notes issued by Devonshire Trust even though it knew the investment was unsuitable for a municipal government.

According to the documents, Deutsche and DBRS were aware that the notes were more risky than they appeared.

"The defendants misrepresented that the Devonshire notes constituted a safe and secure investment" when in fact they "were a volatile, complex, unsecured investment with no real capital structure supporting them," the suit claims.

Canada's non-bank ABCP market collapsed in August 2007 after issuers were unable to roll their notes and liquidity providers declined to honour their agreements.

While ABCP trusts traditionally use the money they raise to buy car loans, credit card payments and other conventional assets, many of the players caught up in the market failure bought complex credit derivatives that ended up backfiring, triggering massive collateral calls that the trusts were unable to meet.

Deutsche Bank and DBRS both declined to comment.

As part of Ontario's manufacturing heartland, Hamilton has been badly hurt by the recession and cannot afford to take a $10-million hit on its ABCP investment.

Commercial paper markets around the world were among the first victims of the credit crunch, but only in Canada did investors end up shouldering most of the losses.

That was because the banks that were supposed to buy up the ABCP in the event of a market failure were able to take advantage of loose wording in their liquidity agreements to ignore their obligations.

Devonshire was triple-A rated by DBRS despite the weak liquidity agreement. Hamilton claims it relied on the rating and that had DBRS taken reasonable care in formulating its conclusions, it would not have given Devonshire an investment grade rating.

Devonshire was not part of the restructuring and it collapsed after failing to meet collateral calls. Note holders, including Hamilton, National Bank of Canada and the Caisse de dépôt et placement du Québec, suffered complete loss of their investment.