Thursday, December 27, 2007

Asleep at the switch

If nothing else, Jim Flaherty is a study in complete hypocrisy and profound fiscal mismanagement. His inability to discern good from bad, right from wrong is proving detrimental to all Canadians.

In the accompanying photo we see a beaming Jim Flaherty about to report on his school project entitled “How I taxed income trusts, after promising I never would”.

Jim Flaherty seems to think the loss of $35 billion in Canadians hard earned life savings is deserving of a grin from ear to ear. The main theme of Jim Flaherty’s school project was based on the false premise that income trusts cause tax leakage. Had Jim Flaherty been so confident in this central premise, he probably wouldn’t have issued 18 pages of blacked out documents as his sole source of proof. Eighteen pages that he subsequently demanded be returned, even though they had been issued under the Access to Information Act.

As with all snake oil salesman of his ilk, Jim Flaherty makes good use of the tactic known as fear mongering. What other possible purpose would the coloured slide haved serve, apart from invoking the fear that the announce conversions of BCE and Telus, meant the beginning of the end? This is where being able to discern good from bad is a very useful trait in a Finance Minister. The conversions of BCE and Telus to income trusts were actually the best possible outcomes for Canada, as the conversions of these two companies, which at the time were paying no corporate taxes whatsoever and who were forecasting that they would not be paying any corporate taxes for many years to come, would have meant that these two companies would have paid over $1 billion a year more in taxes as income trusts, beginning immediately.

Jim Flaherty is the first Canadian Finance Minister to bring into legislation a set of provisions that acting alone and acting together serve to promote the foreign takeover of Canadian businesses, and in so doing results in a loss of taxes to Ottawa. As such Jim Flaherty’s policies represent Government tax subsidies that encourage foreign takeovers. These policies are:

- The imposition of a 31.5% income trust tax that is paid by average Canadians, but not by foreigners who acquire these income trusts, that have been devalued by the trust tax. This creates what is called an arbitrage, with the economic advantage going to foreign owners is to the detriment of average Canadians, thereby creating an unlevel playing field. Foreigners acquire these trusts using debt in sufficient amounts to avoid paying any Canadian taxes on the earnings which previously were fully taxable in the hands of average Canadian investors resulting in a net loss of taxes to Ottawa. This was widely predicted to occur. When it did occur, Flaherty defended his actions by saying: “It’s not my fault”.

- The imposition of growth restrictions on these companies while in the hands of average Canadians, which are not imposed while in the hands of foreign owners. Again this creates and arbitrage that favours foreigners to the detriment of average Canadians

- The elimination of the 15% withholding tax on foreign investors of leveraged buyout loans used to acquire Canadian companies at reduced cost and at grander scale, such as was the case with BCE whose foreign funded buyout vastly benefited from this measure

So rather than bemoaning the growth of income trusts, on the basis that they were a bad thing, when in fact they were a good thing, and rather than have been fear mongering about BCE’s announced conversion to an income trust, when in fact all the policy served to do was to bring about the worst possible outcome, namely a highly debt levered private equity takeout that will cost Ottawa a mere $793 million a year in lost taxes, Flaherty should have been alert to the real crisis that was unfolding before his very eyes, namely the ABCP meltdown.

But then Jim Flaherty was asleep at the switch wasn’t he?

Jim Flaherty and the Department of Finance who are responsible for the regulation of the “exempt” market were completely oblivious to the crisis about to unfold in the Asset Backed Commercial Paper (ABCP) market. A house of cards if there ever were one, as it involved the purchase of a portfolio of long term fixed rate financial assets with short term floating rate paper. This market was growing at a pace that should have made the fear mongering Jim Flaherty blush, assuming he was even aware of its existence.

During the past three years the ABCP market has nearly doubled to its present level of more than $115 billion which mirrors the pace of growth in the US ABCP market. Of this amount, $35 billion forms the non bank ABCP market which is the segment that is in peril. How much of that $35 billion in ABCP market investment will be lost and how much will be recovered is anyone’s guess, as the whole value equation turns on the perception of risk.

So rather than attending to the crisis that was unfolding before his very eyes, Jim Flaherty manufactured one of his own, by taxing income trusts, which has resulted in the loss of $35 billion in the life savings of average Canadians, induced over $65 billion in trust tax related takeovers, which to date has caused the loss of $1.4 billion in annual taxes. This takeover activity will continue unabated and ultimately will see the loss of $7.5 billion in annual taxes to Ottawa. All to fix an alleged loss of $500 million in taxes that was was never proven to have even existed. Investors who were making long term investments in income generating instruments are now finding their investments turned into short term investments and are sustaining the $35 billion loss in the process.

Meanwhile the ABCP fiasco that was left unadressed has resulted in a group of short term investors finding themselves with a failed market instrument that will be replaced by long term paper. Unlike income trust investors, these ABCP investors were sophisticated institutional investors who should have known better. Furthermore their loss was the result of a systemic problem and not one brought about by the direct act of government, but rather from benign neglect. The good news is that they will have to recover zero cents on the dollar, before they sustain the $35 billion loss experienced by income trust investors, and nor will they be burdened with the fear of how they are going to make up the funding shortfall for their retirement brought upon them solely by the governments ill conceived actions.


Robert Gibbs said...

The Harper, Flaherty and CON Party philosophy is to insidiously plunder from the ordinary, average Canadian in order to perversely advance the rich, foreign collective.

Steal from the poor to give to the rich.

Treachery, treason and plot indeed!!!

Tootrusting said...

How much longer are the media going to sit on the most expensive financial scandal in Canadian history.

The Liberals and Green parties would like to call an enquiry, its about time one of the other parties got of the fence and forced an enquiry.

Dr Mike said...

This whole thing is probably the most blatant piece of fiscal mismanagement ever wrought upon a government since mark Carney decided to help out the Russians.

The thing that amazes me is that they don`t seem to give a flying flip about what has occurred.

They won`t talk about it , their MPs won`t talk about it , no one in the whole Conservative party will talk about it.

Are there no watch dogs left in this country.

The result of any full scale trust action was widely predicted back when the Liberals were mumbling about changing the trust policy in 2005.

Why was the original trust legislation almost unanimously voted in favor of , when it was first brought before parliament--it appears that all parties were remiss in coming to the proper conclusions.

Something that would eventually affect almost every Canadian should have been scrutinized more closely by all members of parliament--the Conservatives did not twist any arms when they first introduced this legislation.

There were a lot of people not doing their homework & this makes me mad as hell --we are the ones who elected these guys because we thought they were the best for the job.

Obviously , we are not very good at what we do either.

The trick is to learn from your mistakes--just because the Conservatives have not made any move to correct theirs , that does not mean that we cannot correct ours --the next election is not far off & that will be our chance.

As much as the Conservatives want everyone to believe they wear the white hats in this country , they are nothing but a bunch of wolves in sheep`s clothing.

Time to fleece the lot of them.

Dr mike.

Mary the Golfer said...

Michael Sabia`s personal take from the sale of BCE looks to be in excess of 30 million dollars.

Might this be why he disliked the trust structure so much & lobbied for their demise??


xenos said...

There's a curious things in the media coverage of the Harper Tories. They call his government “scandal-free”.

How is the deceitfulness of the Income Trust tax not a scandal?

How can it not be scandalous to pump up the market with a false promise, to be open to special pleading by some corporate elites, to misrepresent and cover-up and lie to a committee of Parliament; and generally to not give a damn about the harm and loss caused to many thousands of Canadian seniors and small investors. If all that is not scandalous, then Random House needs to be corrected. Except not.

Scandalous is "disgraceful; shameful or shocking; improper" as in 'scandalous behavior in public by a government official who has breached the trust granted to the office.'

nineofiveland said...

Great comments .. glad to see the discussion expanding.

lesterb said...

Never in the history of Canada have so few done so much to damage so many with so little proof.

lesterb said...

"And we have our own asset-backed commercial-paper issue in Canada, which we're still working on," he (Mr. Flaherty) added.

While the issue appears to have been resolved, Mr. Flaherty said there are already some lessons to be learned from the meltdown of the market for hundreds of billions of dollars in asset-backed commercial paper globally, including about $33-billion in Canada, that was tainted by holdings of U.S. subprime mortgages.

"One of the issues is transparency," Mr. Flaherty said, suggesting the credit rating agencies failed to reveal to investors the risks posed by the complex securities and that the investors, even those who were sophisticated, failed to do their own homework and relied too much of the credit rating agencies."
Eric Beauchesne, CanWest News Service
Published: Thursday, December 27, 2007

Can you believe that this man has the gall to say that one of the problems with Asset Backed Commercial Paper (ABCP) is transparency?! When the income trust loss in Canada is greater than the ABCP loss! And was created by a government using 18 pages of blacked-out documents as justification.

Flaherty suggests that the credit rating agencies failed to reveal the risks to investors. Harper told us income trust investors explicitly that he would not touch the income trusts!

What wonderful parallels, but then again Harper and Flaherty just seem to operate in their own little wonderland. The evil credit agencies screwing investors versus the transparent government with the "tax fairness plan" screwing investors.