Saturday, July 26, 2008

Mark Carney’s conflict of interest


Mark Carney is the Governor of the Bank of Canada. He was Jim Flaherty’s choice, not the Board’s.

Mark Carney’s pension is provided by the Public Sector Pension Plan.

The Public Sector Pension Plan is faced with a near $ 1 billion loss on Asset Backed Commercial Paper (ABCP).

Now we learn that the Bank of Canada, at Mark Carney’s request, has been granted greater freedoms by Jim Flaherty to assume riskier assets to back loans made by the Bank of Canada.

One of the reasons cited for this relaxation in the quality of collateral is to deal with credit market deterioration.

The article below cites that this will permit the Bank of Canada to extend loans against ABCP.

This creates a conflict insofar as the Public Sector Pension Plan is concerned. They should be required to sit on their ABCP and learn the errors of their ways. Lest they repeat them. The others as well.

The highly predictable and inevitable ABCP mess should not be subsidized in any way by Canadian taxpayers, either directly or indirectly. This change below, will lead to an indirect subsidy to holders of ABCP by Canadian taxpayers. It will lead to the assumption of risk by Canadian taxpayers. For what purpose and for whose purpose?

The Bank of Canada should not be made into a CONDUIT to bridge the gap between the short term nature of ABCP investors and the long term nature of the underlying assets that they acquired. This whole problem began with the formation of conduits. Why is the Bank of Canada now becoming a conduit itself?

To bail out Mark Carney’s pension plan? And that of 370,000 federal civil servants?


Central bank to take riskier assets as collateral


KEVIN CARMICHAEL
Saturday, July 26, 2008
OTTAWA — The Bank of Canada says it is prepared to accept some of the riskiest assets on the market, giving it more power to fight the credit crisis.

For the first time, the central bank will accept as collateral for emergency loans asset-backed securities of the type at the heart of the crisis of confidence that has seized financial markets for the past year.

Governor Mark Carney revealed yesterday in the Canada Gazette how he intends to use new powers granted him by Finance Minister Jim Flaherty in legislation that cleared Parliament in June. It was left up to Mr. Carney to decide which assets would be acceptable to the central bank.

The change aligns the Bank of Canada with other major central banks, including the U.S. Federal Reserve and the European Central Bank, and clears the way for Mr. Carney to more forcefully attack a problem that he says has subsided in Canada for now.

"This is a positive development as it brings the Bank of Canada's powers more in line with that of its peers, and it reduces the risk of further credit market problems in Canada," said Eric Lascalles, an economist at Toronto-Dominion Bank.

Mr. Carney indicated frustration during parliamentary testimony earlier this year as the Fed and others took extraordinary steps to inject liquidity into frozen credit markets, accepting a wide range of assets as collateral in return for billions of dollars worth of short-term loans. Canada's central bankers were left to fight the fire with what amounted to a garden hose by comparison.

That's because Canadian law forbade the central bank from accepting anything but the safest of assets in return for emergency loans. In his testimony to Parliamentary committees, Mr. Carney indicated the credit crisis was worse than it needed to be as a result of the limits on the central bank's discretion. The heads of Canada's biggest banks felt the same, and lobbied Ottawa to expand the Bank of Canada's powers.

At emergency auctions for short-term loans, the central bank said it will now accept collateral commercial paper, including asset-backed commercial paper, with a term of maturity of no more than 365 days, and other Canadian-dollar, asset-backed securities. The central bank also will accept securities issued or guaranteed by the federal government; provincial governments; the U.S. government; and any state in the Organization for Economic Co-operation and Development.

The list of assets also includes Canadian-dollar corporate and municipal bonds, Canadian-dollar bankers' acceptances with maturities of no more than 365 days and Canadian-dollar promissory notes with a term to maturity of no more than 365 days.

9 comments:

Anonymous said...

Mark Carney seems to have no problem with conflicts of interest and self dealing.

The same thing arose with the income trust tax.

In order to "buy off" the pension funds who were giving endless grief to Ralph Goodale when he attempted to change the income trust rules, Mark Carney and Jim Flaherty thought it would be best to buy them off......they did this by granting the pension funds an income trust tax "carve out"

Under this carve out arrangement, the pension funds could own trusts and not pay the tax that average Canadians were being forced to pay. The simple mechanism was that the trust tax would only applies to PUBLIC trusts and not PRIVATE trusts.

How very clever. How very corrupt.

As such, all these pension plans had to do was to buy the now grossly undervalued trusts and take them private. POOF...no tax.

So who was the first out of the gate to exploit this tax arbitrage?

You got it! The Public Sector Pension Plan, when they bought Thunder Energy Trust and took it private.

Advantage 370,000 civil workers, disadvantage 33 million Canadians.


Which begs a few questions"

(1) How is that a Tax Fairness Plan?
(2) How does that solve alleged tax leakage?
(3) How does that solve the other alleged problems with income trusts?
(4) Whose on first?
(5) Where did they find this (Carney) guy?


Brent Fullard

Anonymous said...

So the Public Sector Pension plan can buy income trusts and pay no tax.
But if the PSP investment managers screw up any of their investments then Carney can bail them out with taxpayer money?
What the hell is wrong with this picture? Why isn't the press screaming bloody blue murder?


LP

penlan said...

I don't understand how they can get away with this.

And I agree with anon. Why isn't the MSM on top of this & letting all Canadians know?

Dr Mike said...

This is very interesting.

The Bank Of Canada can use our money to bail out a group that got themselves into this mess---this was not our fault , yet our money will be used ---without our say-so.

Hmmmmmm!!

The income trust debacle was not our fault but that of our gov`t---the gov`t & the B of C will do nothing to bail us out---even if we want to use our money to do this--heck , who needs money , just a few policy changes would do the trick.

Hmmmmmm!!

We have lost control to a bunch of appointed big boys at the top of the food chain who are only interested in feathering their own nest with our feathers.

Personally , I want my feathers back.

Dr Mike Popovich.

Anonymous said...

Anyone thought of contacting one of the bigger known journalists - Paul Wells, Don Martin or someone like that and asking them about it?

Robert Gibbs said...

Present Value Of Taxes Ignored

So, Dim Jim Flaherty is the Canadian Finance Minister, supposedly responsible for the entire country's federal finances, but doesn't even understand basic finance concepts.

Now, a first year finance student can tell you that a "Sum" to be received in the future is still worth something now, by calculating the "Present" value, discounted by an appropriate "Interest" rate.


The simple formula for this calculation can be presented as follows:

P = S(1 + i)^-n

Where:

P = Present Value
S = Future Sum
i = Periodic Interest Rate
n = Number Of Periods
(Note: The symbol ^ is used here to denote exponent.)


For the purposes of this "real world" example, we shall use the following reasonable parameters:

1) A federal personal tax rate of 22% (the 2007 marginal rate for "middle income" earners of between approximately $37,000 and $74,000).
2) A provincial personal tax rate of 10% (the approximate 2007 marginal rate for "middle income" earners of between approximately $35,000 and $71,000).
3) Therefore, a combined personal tax rate of 32%.
4) A federal corporate tax rate of 15% (the announced rate by Dim Jim).
5) A provincial corporate tax rate of 10% (an approximate average and the desired rate by Dim Jim).
6) Therefore, a maximum combined corporate tax rate of 25%.
7) An annual discount or interest rate of 3.56% (the July 24, 2008 Government of Canada 7 year benchmark bond yield as published by the Bank Of Canada).
8) 7 years for the number of periods that trust distributions may likely be considered to accumulate within a senior's RRSP before conversion to a RRIF and annual taxable withdrawals begin (as a senior not considering an annuity would/must convert the RRSP to a RRIF before he/she turns 72 years of age [72-65=7]).


So, a $100 distribution taxable in 7 years has a present value of approximately $78, with a concomitant present value of personal taxes of approximately $25, being virtually identical to the maximum corporate taxes that would be exigible (which empirical evidence has shown to be actually much less).


Calculation:

Present Value Of Distribution = $100(1 + 0.0356)^-7 = $78
Present Value Of Personal Taxes = $78 x 32% = $25
Maximum Corporate Taxes = $100 x 25% = $25


Now, as we all know, combined personal tax rates can be a fair bit higher than 32% and effective combined corporate tax rates can be a fair bit lower than 25%, thus skewing the calculation and making Dim Jim's incompetence and hypocrisy even more apparent, but heh, you be the judge.

Dr Mike said...

Robert

Beauty!!!!!!!!!!!!

Dr Mike.

Anonymous said...

Robert:

It's actually worse than that. You are correct in saying that the calculation of a future payement is defined by the formula:

P = S(1 + i)^-n

Let's assume that P1 equals the pretax earnings that one contribute to his RRSP and invests in Income Trusts.

That means the government has foregone the following taxes:

P1 x Marginal tax rate of contributor = Foregone taxes at time zero

Meanwhile this income trust is generating a return in the RRSP derived from the distributions that are paid on the income trust and their capital appreciation over time.

That being the case, the question becomes:

Are the taxes paid in the future from the withdrawals from the RRSP (all of which are taxes as income) higher or lower in present value terms that the forgone taxes at time zero, when discounted at the government's cost of capital?

I'll give the readers a hint. As any finance 101 class or economic 101 class will teach you, the federal government's cost of capital (debt) is the lowest cost of capital in any economy. It has to be that way.

As such the return realized by all income trusts held in RRSPs over time HAS TO EXCEED the government's cost of capital.

Therefore if Flaherty had half a command of his presumed area of expertise, he would tell you that the dollar of deferred taxes on contributions made to RRSPs in well worth the wait, since that dollar is worth more than 100 cents in present value terms.

Meanwhile tax leakage on income trust is derived SOLELY from the false assumption that that dollar is worth ZERO. ZIP. NADA.

And for that we lose $35 billion ad an essential retirement investment vehicle?

Brent Fullard

Robert Gibbs said...

Brent:

I was just providing a relatively simple example of the present value of the taxes that Dim Jim fraudulently ignores on trust income distributions in isolation.

Many regards.