Tuesday, October 28, 2008

Mark Carney’s bucket shop mentality

Image: Raid on a bucket shop

Bucket shop is an old Wall Street term that was coined at the turn of the century and used to describe operations where speculators made blind bets on the market. The term is a defined term under the criminal law of many states in the United States which make it a crime to operate a bucket shop. Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a derivative interest in a security or commodity future, but there is no transaction made on any exchange. The transaction goes 'in the bucket' and is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market. Operating a bucket shop would also likely involve violations of several provisions of US federal securities or commodity futures laws.

Changes were made to US laws in 2000 that exempted credit default swaps from the definition of “bucket shop” trades, and thereafter credit default swaps flourished, and providers of credit default swaps like AIG were doing nothing to hedge themselves against these potential liabilities that they had exposed themselves to. This is what brought AIG to its knees and what required the US government (read:taxpayers) to bail AIG out.

We are now learning that a number of Canadian insurers made similar unhedged bets against fancy financial derivative products that they had sold over recent years. Manulife Financial was one of those who thought they could underwrite new liabilities and not hedge the risks that were being incurred. It was reported today that “Manulife's executives are paying the price for a decision they made nearly five years ago, when they chose to stop hedging the exposure to stocks that the company has as a part of its large variable annuity and segregated funds business.”

And now they want the government to bail them out, as the Financial Post reported yesterday that “The most radical proposal being advanced by executives is for a new form of government guarantee to backstop losses on high-return investment products known as variable annuities and segregated funds.Executives and industry lobbyists argue these types of private retirement plans have become vital to meet the needs of an ageing population at a time when companies and governments have curbed pension schemes.”

Well isn’t that choice?

The Canadian capital market HAD developed a product that had “become vital to meet the needs of an ageing population at a time when companies and governments have curbed pension schemes.” It was called income trusts. Income trusts were the market’s response to fulfilling this growing investment need for retirement income on the part of Canadians. Income Trusts were a direct investment in the real economy, in which investors received a share of a company’s earnings stream. A totally straight up deal. No derivatives, no hedges, no so-called “guarantees”. Nothing to fall apart. Nothing contrived. Just a straight investment, whose fortunes were dictated by the business itself and not some intermediary that might go bust, like an insolvent life insurance company.

So what becomes of income trusts as the preferred means to provide investors with retirement income? They are destroyed by Stephen Harper and Jim Flaherty in direct response to the lobbying efforts of Canada’s life insurance industry, so that Canada’s life insurance industry can sell more of what are now proving to be some bucket shop version of a retirement investment scheme. These life companies wanted the retirement savings market to themselves, so they successfully lobbied Ottawa to destroy the competition, known as income trusts.

No one had a greater role on the government side of the table in falling for this line of nonsense than today’s Bank of Canada Governor, Mark Carney. Mark Carney preferred a world where Canadians’ retirement futures were defined by the bucket shop mentality products of Canada’s life insurers, rather than through real investments in Canadians businesses and Canada’s economy. Mark Carney lamented that we didn’t want Canada to become “a nation of coupon clippers.” Better , in Mark’s conniving mind that we become a “nation of bucket shop investors”, buying the bucket shop products of Canada’s life insurers, or “a nation of stock speculators”, speculating wildly on the prevailing Price/Earnings multiple on which Canadian stocks may be trading on any given day,..an arbitrary and totally subjective measure of value, if ever there were one.

Below is testimony by Mark Carney before the Finance Committee of December 7, 2007, less than a year ago, in which Mark Carney is extolling the virtues of investing in Canada’s stock market whose yield is less than 2%, versus owning income trusts that typically yielded 8- 12% and whose investment returns were dependent on the real world and not the speculative nature of Canada’s TSX, whose value has declined precipitously since Mark Carney made these pandering comments, consistent with the Bucket Shop operator that he is.

By the way, the Stephen Harper government has never provided the proof for its policy, namely the allegation that income trusts cause tax leakage. That’s because that allegation is an outright lie. Meanwhile the loss of $35 billion in Canadians’ life savings is nothing short of a fraud. A fraud that Mark Carney is at the centre of and needs to be held to accountable to:

Hon. Garth Turner:
Mr. Carney, you've been called the architect of the Conservative government's income trust strategy and I'm wondering if that's a fair characterization.

Mr. Mark Carney:
I was a senior civil servant, as you know, in the Department of Finance. Quite frankly, I was a senior civil servant under the previous Liberal government, and under the current Conservative government. I ran the last five budgets and all tax decisions that were put forth by both governments I think it's safe to say I was involved in, yes.

Hon. Garth Turner
: In terms of income trusts you basically gave the same advice to Finance Minister Goodale as you gave to Finance Minister Flaherty.

Mr. Mark Carney:
I gave the best advice I could to both finance ministers.

Hon. Garth Turner:
Was it similar?

Mr. Mark Carney:
The advice of civil servants to their ministers is covered by Cabinet confidence. That's the way the system works and I gave the best advice that I could to those ministers.

Hon. Garth Turner:
A year after the decision more than $40 billion in Canadian trusts have basically been sold and it would appear that the better part of a billion dollars worth of tax revenue is not flowing into government treasury that was before.

Given that, I have two questions. One, did you anticipate the consequences of the advice that you gave the minister? Secondly, how can you consider to be anything other than a failure?

Mr. Mark Carney:
I'll refer to my previous answer, which is that I'm not going to go into the details of advice given to any minister of finance or any minister of the Crown that I gave as a civil servant. I will point out though, as a macro fact, that over the course of the last year-and-a-half, as I'm sure you're aware, the TSX, the largest market, is up substantially. We have a $1.6 trillion market cap on the TSX. It's important to keep context--

Hon. Garth Turner:
I know that and I'm not interested in the TSX--


Anonymous said...

smug bastard


Anonymous said...

Evasive smug bastard

CAITI said...

The risk fallacy
Wall Street thought it had risk all figured out. But the very system the banks created to protect themselves are at the heart of the financial meltdown.
By Nomi Prins

October 28, 2008: 5:52 AM ET
(Fortune Magazine)

-- If you visit Lehman Brothers' website today, more than a month after the investment bank's plunge into bankruptcy, you can still find the following words: "The effective management of risk is one of the core strengths that has made Lehman Brothers so successful."
That boast now reads like a bitterly ironic epitaph. But there was a time not so long ago when such a statement was widely believed to be true - not just for Lehman, but for Wall Street in general. News accounts in 2007, for example, routinely described Bear Stearns as being "known for its tough risk controls."
Now, of course, both Bear and Lehman have disappeared as independent entities, Wall Street has been brought to its knees, and American taxpayers are on the hook for outlandish sums to clean up the mess.
But all the drama and chaos of recent months obscures the most fundamental cause of the entire financial crisis: a basic misunderstanding of risk (abetted by heavy borrowing). The paradox is that Wall Street's strategy to avoid excessive risk - by dispersing it - ended up exacerbating precisely the problem it was designed to prevent.

Continued at:


Dr Mike said...

I will give them a bailout alright.

The same one the gov`t gave all of us income trust investors.

There`s the door Jack & don`t let it hit you in the ass on the way out.

We were impaled by a gov`t action designed to help the likes of Manulife.

Manulife failed miserably even with this gov`t hand-up.

Obviously the gov`t backed the wrong horse.

Dr Mike Popovich.

Anonymous said...

It's getting expensive for Canadians to listen to the advice of Deficit Jim, Mark Carney and lobbyists like Manulife.

Too bad Canada's media is so absolutely lame in reporting these facts but would rather sit on their collective asses and simply spout the Conservative message.

It gives me great satisfaction that the Insurers who help perpetrate the lie which killed Income Trusts are now caught in their own web.

Hey Deficit Jim, any word on the 2008 surplus?! Any Advice Mark?


CAITI said...

Below are excerpts from an article by Jonathan Chevreau of the Financial Post dated October 3, 2007 entitled “Manulife tweaks Income Plus”, where the author was trying to defend Manulife’s derivative product known as Income Plus against the legitimate criticisms of people like myself and Ron Forth, an income trust investor from Calgary.

Jonathan’s obvious intent was to dismiss the critics of Manulife’s derivative products as “snarky” and “enraged”. I wonder how snarky and enraged Manulife’s clients will be if the company defaults on its obligations under these phony fee-rich investment products or how snarky and enraged Canadian taxpayers will be if they have to bail out Manulife from its unhedged positions created by the issuance of their phony fee-rich investment products, or as Ron Forth aptly called them, “financial junk food”?

“A critic of Manulife is the Canadian Association of Income Trust Investors, which issued a snarky analysis that speculated Manulife "hates" income trusts because they "out-compete" life annuities.

Ron Forth of Primewest Energy issued a mass e-mail denouncing Income Plus and its ilk as "financial junk food -- Manulife couldn't make any money if people just went off and invested in trusts," Forth raged. "So, the public must be fed an unhealthy diet of processed, synthetic, financial 'product' instead of the natural healthy diet of pure cashflow from vibrant business."

Dr Mike said...

Chevreau is indicative of the mass failure of the media to actually understand the nature of the market products at our disposal.

What galls me is the fact that this gov`t has hampered my income to bolster idiots like Manulife & then want to shaft me a second time by taking my hard earned tax dollars & bail out the same crew that screwed me in the first place.

No way Jose or Jimmy or Mark or whoever the hell is really running this show.

Remember , You reap what you sow.

If that was my Dental practice , I would be on the street looking at the closed door to my business in very short order----I have my doubts if Jimmy , Mark or even Steve would even offer me the price of a cup of coffee.

Good ridance to bad rubbish---let em fail.

Dr Mike Popovich

Anonymous said...

Wow, now I remember why I hate anything involving insurance and have always considered all their products as a legalized form of gambling. Their investment products have consistently sucked (proven or they wouldn't be beggin for a handout) and so many health or life insurance policies require you to contract a terrible disease or drop dead in order to benefit.
The only way I can win with Insurance companies is as a shareholder who profits off others who buy their crap. As a shareholder I can also complain extra loudly. After this latest round it is clear that is the only way to recover those losses as a tax payer is to become a shareholder - obviously with room for risk in the portfolio. Hmmm, wouldn't it be nice if a disgruntled group of Canadians bought a ton of ManuLife and became key players to correct this injustice? This way the salaries of these middle & upper management can be cut. A good old fashion "re-organization" too. This way the savings on outrageous salaries and general dead weight can be paid back to the Canadian Taxpayers. We will also get less annoying phone calls or junk mail at home. At the same time the conditions for Canadians to get their money back would be fiscal responsibility in the form of NO CONSERVATIVE anything ever again in this country. And of course rescind all their damaging legislation.
Wow, dare to dream ...