How Flaherty helped D'Allessandro to help Income Plus sink Manulife

Today’s Financial Post has a good account of how the Manulife product known as Income Plus, together with management’s greed, helped sink Manulife. It pulls no punches. The only part that’s missing is the role that Jim Flaherty played, at the behest of Manulife in their own ultimate downfall, as Jim’s role was pivotal.

A key element to Manulife’s ability to sell excessive amounts of Income Plus was by removing competing products from the marketplace, that would have curtailed the sales of Income Plus. Income trusts were that very popular competing product, and were killed off by Jim Flaherty’s income trust tax, that was implemented on the totally false argument that income trusts cause tax leakage.

Dominic D’Allessandro gave vivid (albeit totally self serving) testimony before Parliament about why income trusts had to be killed, but omitted to mention how such an action played totally into the hands of Manulife and its launch of Income Plus.

Income Plus was launched the very week following Jim Flaherty’s Halloween massacre at a gala event at Roy Thomson Hall in Toronto, and these circumstances of Flaherty’s creation made for an enormously successful launch for this product that offered people the chance to own a product that provided market based returns, with a guaranteed return of their original investment. This meant that Manulife was taking on risks in making such assurances. To quote from today’s article: “ But what the CEO refrained from sharing with his audience was that management were so convinced of their own prowess they had just decided to gamble the company's fortunes on a one-way bet on financial markets”

And here’s where that gambling took place: “But Manulife decided to go one step further, finding a clever way to increase returns that would leave rivals scratching their heads. It dispensed with the industry practice of hedging bets to help cover guaranteed pay outs in the event markets crashed, judging this to be too costly and unnecessary.” The fateful decision would contribute to a dramatic destruction of the company's value.”

So let’s understand this in public policy terms and the pivotal role of Jim Flaherty in this multi-layered policy fiasco of his:

(1) The insurance industry lobbies Stephen Harper and Jim Flaherty to kill the life insurance company’s competition for peoples’ retirement savings, known as income trusts. Harper and Flaherty comply.

(2) Industry works government and the general public into a total frenzy based on the faux argument that income trusts cause tax leakage. Industry is not without its inside players, read Mark Carney formerly of Goldman Sachs, who is only too happy to concoct the fabricated analysis that supports such a false policy argument by leaving out the taxes paid on 38% of income trusts. An outcome that is without any intellectual or financial justification, hence the 18 pages of blacked out documents as “proof”.

(3) This policy is implemented with ZERO public consultation and with ZERO PROOF of the policy’s main allegation (i.e tax leakage). A process that goes against the country’s democratic interests.

(4) This policy destroys $35 billion of Canadians savings, severely restricts their suitable investment choices and takes away a form of low cost capital for business. An outcome that goes against the country’s interests.

(5) The resultant devaluation of income trusts results in over $108 billion of takeovers, mostly by foreigners and the loss of $1.2 billion a year in taxes. More takeovers and tax losses are only a matter of time. An outcome that goes against the country’s interests.

(6) The income trust tax policy achieves the main goal of Manulife, as it diverts peoples’ savings away from investments in the real economy to investments in structured synthetic products like Income Plus. An outcome that goes against the country’s interests.

(7) Having gamed Ottawa so successfully, the management of Manulife think they walk on water, and decide to arbitrarily boost their bottom line by not hedging the liabilities that this product represents to them. This is exactly like the greed that corrupted Wall Street with Sub Prime mortgages. Self regulation does not work. Manulife succumbed to greed.

(8) There was no disclosure of these risks to either Manulife shareholders or the purchasers of these synthetic products.

(9) Jim Flaherty was duped. Much like his reckless introduction of 0% down,40 year mortgages, he acted in a way that introduced systemic risk into our economy. Flaherty played a key role in creating the conditions that Manulife used to exploit to their advantage in the sales of Income Plus, and ultimately to their disadvantage.

(10) The income trust tax also spawned a whole plethora of junk bond leveraged buyouts of existing trusts or companies that sought to become trusts, such as BCE. His elimination of the 15% tax paid by foreigners on interest on corporate debt is another example of how the neophite Flaherty favoured policies that stripped Canada of tax revenues while at the same time favoured over reliance on debt, and the introduction of systemic risk to Canada’s economy.

(11) Some might argue that this litany of negative consequences are easy to point out in retrospect, except however many, including myself, had predicted ALL of these outcomes at the very OUTSET, and long before the law was passed.

(12) Flaherty is totally incompetent and reckless. His totally superficial understanding of finance prevents him from understanding the consequences of his actions. Meanwhile he defends himself by declaring “It’s not my fault”. That’s because he is nothing more than an instrument/tool of narrow self interests like Manulife and Goldman Sachs, who are intent on the commercial exploitation of Canada for their own narrow selfish ends.

Manulife, Sun Life left reelin' in the years
Eoin Callan, 
Financial Post 
March 6, 2009