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--