A sliver of democracy

Two of BC's largest retail players in the asset-backed commercial paper (ABCP) debacle, Credential Securities and Cannacord Capital, have agreed to bail out little-guy investors caught up in the worldwide financial shock that stemmed from the U.S. subprime-mortgage scandal.

So, for the first time in my memory the little guys aren't bearing the brunt of yet another financial industry manipulation.

To understand what's going on, remember that the financial industry operates on the old saying that “sh-t always flows downhill.” When everyone is making money, most of the results flow up – the people at the top gather all the nuts. When there's a problem, most of the losses flow down to those with the least power – ordinary investors.

We've seen it dozens of times before: some sector is hot, and financial intermediaries start shoveling out “investment opportunities” as fast as possible. Then, when it turns or collapses, the people who bought into those opportunities take the losses and the companies that sold them are protected.

Think of the technology investing boom, where hundreds of thousands of small investors lost their shirts. We'll probably see the same thing when the real estate market slumps and all those condos that were thrown up overnight start losing value.

Granted, the ABCP/subprime mortgage-market debacle was more complicated. But the principles were the same: Intermediaries packaged up the worst junk imaginable with some decent stuff to create a new investment opportunity – supposedly low-risk asset-backed commercial paper.

When it all collapsed, clients of Credential, the credit union system investment dealer, were on the hook for $48 million. Fourteen hundred clients of Canaccord, the other big retail dealer in BC, were holding $138 million of worthless investments.

In the financial world, these figures are a pittance – in Canada there is about $32 billion in ABCPs held mostly by large investors and institutions. So normally, small clients would be told, Tough luck, you invest and you take your chances. But these days, investors aren't quite so bovine; they're far more activist and have new tools and channels to fight noisy public relations battles.

Canaccord investors, for example, used the social networking site Facebook to organize and direct their troops in the battle for compensation. And damned if it didn't work. Both groups' investments are going to be honoured by the dealers, who, although they were caught in the scam as well, will eat the

Now a cynic might say, well what do you expect? They're retail investment dealers and it's not good for business when you stiff your customers. But that's certainly not been the case before, so I like to think that perhaps a tiny sliver of democracy is emerging in the normally autocratic investment industry.

Just maybe, from now on the industry won't fatten itself on the little guy's money quite so nonchalantly.

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