Tuesday, April 28, 2009

Manulife and Power Corp.: Hoisted on their own petard

It is a well reported and documented fact that the “main movers” behind Harper’s income trust tax were the life insurance companies, Manulife and Power Financial (owner of Great West Life, and London Life).

So too was BCE, but that will be the subject of a separate analysis.

These life insurance firms had two distinct motives to kill trusts. What isn’t as well known is how their lobbying to kill income trusts served to hoist these two supposed "masters of the universe” (at least in politicians’ minds) on their own petard, but first let’s understand their motives:

(1) A given business formed as a Trust commands a higher value in the market for two reasons (and neither related to taxes proper):

(a) the requirement that it pay out 95% of its excess earnings to its owners, in order to preserves its trust status

(b) by convention, income trusts are not permitted by their owners to make non-accretive acquisitions, ie acquisitions that do not serve to increase distributions, by virtue of being uneconomic

(2) For these two reasons ALONE, there is a value “bump” to be had by converting to a trust. This creates pressure on management to effect such a conversion, which means a different lifestyle for management, one in which they have to work for a living and actually contribute incremental economic value added. Not a pretty picture for people who used to make “Hail Mary” acquisitions in the hopes they will work, or to accumulate excess earnings to fund large stock buybacks that trigger artificial stock price gains, into which stock options can be exercised and sold. For example, under a trust, Power Corporation would not have been permitted by its owners to have acquired Putnam in 2006, since it was a non-accretive acquisition.

Power hoisted on its own petard:
March 11, 2009: POWER CORP. WRITEOFFS “The main components of other items in 2008 were the write-down by Power Corporation of intangibles assets and goodwill relating to the acquisition of Putnam in 2007 ($983 million)”

(3) The LifeCos were having a tough time competing with the new kid on the block, namely the formidable income trust market, when it came to their own retirement investment products like life annuities and the like. Life annuities provide a modestly higher yield than a GIC, however when you die, there is no residual value to leave your children as an inheritance. Income trusts were higher yielding and their principal was not life dependent. Manulife wanted to get into the new area of variable annuities and did so, during the very week following Flaherty’s trust drive by shooting with a new product called Income Plus......that embodied market risk that Manulfe CEO Dominic D’Alessandro decided he was smarter than the market, and in order to drive higher earning (and higher stock option gains), he decided NOT TO HEDGE those risks. Throughout that whole time D’Alessandro was exercising his stock options.

Manulife hoisted on its own petard:
March 7, 2009: INSURERS PLUMMET TO EARTH, Financial Post: Kin Lo, a professor at the Sauder School of Business, said Canada's top insurance companies had strayed from responsible business practices."Insurance is about protecting people from risk and what we have seen is the insurance industry going out and seeking risk," he said . As a result Manulife stock dropped by 70%.

Here we have the two main proponents of the income trust tax., Paul Desmarais Jr. and Dominic D’Alessandro lobbying Ottawa to kill their competition, the effects of which are all negative including on themselves. This is a microcosm of the entire global financial meltdown, which can be explained by two things:

(1) People and organizations having the freedom to go “places” where they shouldn’t by virtue of lax regulations, and

(2) People and organizations being motivated to go “places” where they shouldn’t by virtue of their compensation arrangements

Power bought Putnam, a non-accretive acquisition because their shareholders had no say in the acquisition, and presumably the executives though they would be handsomely rewarded though stock options and the like. Two years later Putnam was written down by $1 billion. Manulife began selling life annuities that brought market risk to its balance sheet, but because it was never disclosed, then no one was the wiser when its CEO decided not to hedge these risks, for the sole purpose of inflating earnings. His stock options motivated this kind of gambling mentality and all throughout he was exercising them for gains. Two years later, Manulife’s value was tanked by this very act.

So why is Ottawa taking guidance from these people in the first place and not consulting with all Canadians and all market participants in a completely open and transparent way? This can not be permitted to occur again, since as Michael Ignatieff says:

"Successful countries knock down the barriers -- of red tape, regulation, and monopoly -- that divide citizens, confer unfair advantages or prevent people from working together"

Enough already with the unfair advantages being bestowed on the Power Corp’s and Manulife’s of this country

Ottawa has been completely GAMED by the managers of businesses that the capital providers own, in order to shut down a model that the owners prefer (ie income trusts) in order to permit the model that managers prefer (corporation), to persist and to be abused. What is wrong with this picture? Meanwhile the false tax leakage argument was the justification-at-large on which these narrow self interests were allowed to be achieved and falsely perpetrated on Canadians.

Is Ottawa up to the task to expose what is actually at play here namely a battle over who controls a company. The managers who lobby Ottawa, or the true owners who are being ignored and never consulted?

This is why tax Leakage MUST be exposed, otherwise Canadian democracy has been completely high acked by this crowd and owners are now taking instructions from the paid help, as was revealed in this Globe article of November 2, 2006:

“High-profile directors and CEOs, meanwhile, had approached Mr. Flaherty personally to express their concerns: Many felt they were being pressed into trusts because of their duty to maximize shareholder value, despite their misgivings about the structure. Paul Desmarais Jr., the well-connected chairman of Power Corp. of Canada, even railed against trusts in a conversation with Prime Minister Stephen Harper during a trip to Mexico, and told him he should act quickly to stop the raft of conversions, according to sources.”

1 comment:

Dr Mike said...

"the owners are now taking instruction from the paid help".

Now that about sums it up.

The owners of Canada , you & I , hire on a bunch of people to run our country & those are the MPS & bureaucrats.

We hire them , we pay them & then we lose control of the situation by allowing them to run rough-shod over our very lives.

More power is being concentrated into the hands of the few in the PM`s office & this has allowed them to do whatever they see fit & that can only mean one thing , we are screwed.

It`s time for a few good leaders to step forward & do the right thing.

Dr Mike