Have you ever met someone less willing to do their job than Canada's Reluctant Minister of Finance, Jim Flaherty?
Today we awaken to the news that “Flaherty sets stricter mortgage rules ”. It should come as no surprise that this news comes about ten days after we learned that “Banks urge Ottawa to tighten mortgage rules” in whihc top bankers pushed government to clamp down on market to avoid any chance of U.S.-style collapse. The bankers probably had to go public with that story because they were getting nowhere on the issue dealing with our reluctant Finance Minister in private. Reluctant in the sense that Jim Flaherty seems to be unwilling to properly perform the role of Canada’s Minister of Finance.
The Marshall Savings Plan will provide a good test case of that , as we will soon lean whether Jim Flaherty only dances to the tune of Bank CEOs as opposed to the will of the 79.6% of Canadians who support inclusion of the Marshall Savings Plan in Budget 2010 to avert the further foreign takeover of income trusts left vulnerable by his actions and protect the $6 billion in annual tax revenue that are presently collected by Ottawa, while at the same time restore a level playing field between the 75% of Canadians without pension funds who are double taxes on income trusts, while the 25% of Canadians with pensions are not.
More evidence of Jim Flaherty as our reluctant Finance Minister can be observed when it is understood that his reluctant clamping down on mortgages is necessary because borrowers were taking our mortgage with as little 5% down and many were borrowing by way of variable rate mortgage that made them susceptible to the risk of rising interest rates. Now that Canada’s reluctant Finance Minister had awoken to the reality of these types of risks as it relates to the mortgage lending market, when will he awaken to these risks in other parts of economy. For example, how is any more risky for a new home buyer to purchase a home with 5% down and the remaining 95% as debt, than it was for OTPP to buy BCE with 7% down and 93% debt. The leveraged buyout of BCE was nothing more that a massive sub prime mortgage exercise, that arose as a direct result of Canada’s reluctant Finance Minister breaking his promise to never tax income trusts and did so specifically to prevent BCE from becoming a tax maximizing, risk free income trust. The LBO of BCE was such a shaky proposition even from the start, that Goldman Sachs, lead advisor to BCE wrote to BCE’s directors at the very outset (June 27, 2007) warning that:
“We express no opinion as to the impact of the transaction on the solvency or viability of BCE or the ability of BCE to pay its obligations when they become due.”
How’s that for a vote of non-confidence in the very transaction that Goldman Sachs recommended to the Board? Just imagine what would have happened to Canada’s largest telecommunications company had it entered the Global Financial Meltdown straddled with $48 billion of debt and less than $4 billion of equity? It probably would be owned by either the federal government or some state owned sovereign wealth fund by now.
Meanwhile Canada's Reluctant Finance Minister was all for it and went out of his way to attempt to explain how the leverage buyout of BCE by OTPP wasn't just an income trust in disguise, except for the fact that as a income trust Ottawa would have collected $793 million more a year in taxes and BCE would not have been at risk of default, as there would have been $35 billion less in debt on which to default.
And how is it that Canada’s Reluctant Finance Minister can be so concerned about clamping down on variable rate mortgages issued by the banks and doesn’t care a hoot about variable rate annuities issued by the life insurance companies? We warned Ottawa about the risks of variable rate annuities in a press release of February 14, 2007, a full three years ago and warned Ottawa that Manulife Financial was probably not adequately funded. Variable rate annuities issued by Manulife Financial almost brought that company, Canada’s largest life insurance company crashing to the ground, for the simple fact that Manulife failed to hedge those risks. Instead it decided to “go naked” and take a complete punt on the major risks it had underwritten. What could be more reckless, and easier to understand for Canada’s Reluctant Finance Minister, than the absurd notion of insurance companies doing things that are uninsured? That’s like an oxymoron in action. A complete non-sequitor, the idea of insurance companies doing things that are completely uninsured. Manulife’s variable rate annuity business is still 75% uninsured as we speak.
Which do you suppose is riskier? One massive life insurance company involved in the risks of variable rate annuities that are uninsured or the risk of 100,000 separate individuals taking out variable rate mortgages and exposed to the risk of higher interest rates? The answer is obvious, since there is no expression known as “too many to fail”, but there clearly is an expression known as “too big to fail”.
Speaking of “too big to fail”, why is it that Canada’s finances continue to be left in the hands of someone who clearly is Canada’s Reluctant Minister of Finance?
Tuesday, February 16, 2010
Posted by Fillibluster at 7:32 AM