Sunday, February 22, 2009

Can bankers meet the financing needs of corporate Canada?

Can bankers meet the financing needs of corporate Canada? That’s the question being posed in an editorial piece in today’s Financial Post, to which the resoundingly obvious answer is: no

We have Canadian bankers themselves and Stephen Harper to thank for that, since it was Canadian bankers in cahoots with Stephen Harper, who killed the preferred means for investors to finance the needs of corporate Canada, namely through income trusts. Together they conspired to lessen choice in the Canadian capital marketplace. Removing the choices that went against their interests and preserving the choices that favour their interests. Such is the behaviour of entrenched oligopolies and compliant and inexperienced governments.

The trumped up and completely false argument that: "income trusts cause tax leakage" was the means by which this policy to kill income trusts was hoisted on to the unsuspecting Canadian public at the behest of the handful of people who truly benefited.

Income trusts were an elegant evolution in the capital markets and a profound competitive advantage for Canada that grew out of meeting the needs of corporations, as capital users, AND investors, as capital providers, at the same time. This contrasts with the traditional common share corporate model which is heavily skewed in favour of management, who have learned to successfully "game" that model to their advantage and to the detriment of their true owners, the investors. The examples of which are endless. Most recent of which is the backdating of stock options by RIM.

Having proven itself to be too successful, and therefore a threat to the established and entrenched status quo, income trusts, like the Avro Arrow, had to be eliminated by the self serving powers that be, lest the balance of power be compromised. In this case, as between the users of capital and the providers of capital reside where it truly belongs and, who under the income trust model are treated as the true owners of the business, in a way that they are not under the common share model.

Much as it would be have been impossible for Starbucks to be successful offering only one brew of coffee, so too it is the case with financing businesses. Killing income trusts was the Canadian banks’ equivalent of thinking they could run a successful Starbucks with one brew of coffee. John Manley became the spokesperson for the banks and this one-size-fits-all mentality, arguing that “we can’t have different types of businesses taxed differently.” This despite the fact that John Manley is a partner in a law firm that is taxed no differently than an income trust and therefore is employed by “a different kind of business that is taxed differently”. And to think, he’s a tax lawyer.......of the hypocritical sort.

This type of closed-minded thinking is the product of the oligopoly that Canadian banking is. Canadians banking thinks that it can dictate to Canadian investors, just what coffee brews they can and can not consume. God forbid that Canadian investors start showing a preference for that brew of coffee that goes against the interests of the banks themselves and some of the bank’s more influential clients like Manulife Financial and Power Corporation, who are intent on selling their synthetic junk food investments and curtailing Canadians from making investments in the real economy via vehicles like income trusts. The only justice is perhaps that these synthetic investments have come to haunt the troubled Manulife, whose unhedged book of synthetic product has caused its stock to lose 64% of its value over the last 12 months.

Taking choice away from investors and from Canadian business is the equivalent of creating a shallow gene pool. Diversity is a source of strength. Undue reliance on one alternative to the detriment of other alternatives, introduces unnecessary risk into any system and has cascading effects. Manulife provides a glorious example of that. Glorious only because it was the CEO of Manulife who spoke so passionately about reducing the gene pool of the Canadian capital markets and the elimination of income trusts.

Meanwhile, the silence of Canadian banks was truly deafening.

Having reaped over $4 billion in underwriting commissions over 10 years from the issuance of some $80 billion in newly raised income trusts investments in diverse Canadian businesses, the Canadian banks were conspicuously absent in their voices of protest over the government’s actions that caused their clients to lose $35 billion of their invested wealth. Are these Canadian banks fair weather friends or what? Some like TD, who clearly benefited from killing a retail investment product, given that TD has have virtually no retail distribution network to speak of, went so far as to argue to their ripped-off retail and institutional investing clients that Flaherty’s Halloween massacre flip flop, brought a welcomed measure of “certainty” to the market place? What kind of empty logic is that, if not totally self serving?

The bottom line is that the financing needs of corporate Canada will never be met so long as corporate Canada, in cahoots with compliant governments like the Harper government, think that they, and they alone can dictate the terms on which investors can deploy their money into the Canadian economy. This is the world in reverse. Capital is finite. Users are not. The necessary condition for financing corporate Canada is the availability of money and not the availability of corporations. Who are the users of capital to dictate the terms on which capital will be provided? Capital is a lot more transient and globally mobile than any corporation could ever hope to be, all of which is becoming painfully obvious as this global meltdown unfolds, and the absurdity of Harper’s income trust tax becomes obvious, now that Canadian businesses become starved for capital and investors become more risk adverse. An impasse that income trust are uniquely suited to overcome, had they not been destroyed by the hapless Stephen Harper.

As Warren Buffet recently stated: “You only find out who is swimming naked when the tide goes out”.

My only regret is that this global meltdown didn’t occur in the fall of 2006, rather than the fall of 2008, since there is zero chance that Flaherty would attack income trusts in a like environment to that of today. However, that may be giving the reckless lunatic more than his due?

1 comment:

Dr Mike said...

So what would have happened if the trust model had been allowed to continue to flourish??

Crocodile tears from the CEOs & members of the board as they would be held up to incredible scrutiny once contained within the trust model.

Big smiles all around from the owner/investors as the returns far outweighed the paltry numbers of Banks & Life-Cos.

The gov`t would be rolling in dough as high levels of tax would be paid from the distributed profits.

Unfortunately , the killing of the golden goose produced only rotten eggs & we will probably never know what could have been.

Jim (Reckless Lunatic) Flaherty---got to love it.

Dr Mike