TD's power of persuasion

Today’s Globe has a headline article about TD Bank entitled ”TD's power of persuasion” about the influence wielded by TD Bank in Ottawa and governments across the country. I am intimate with this situation, as current TD Bank CEO Ed Clark and I worked very closely together for three years when we were both members of a 4 person team at Merrill Lynch Canada. I have insights into how Ed Clark thinks and operates. Enough said.

Not surprisingly what the article completely neglects to mention is TD Bank’s role in the introduction of Flaherty’s income trusts tax, so here is an explanation of that enormous journalistic oversight by the facile and vapid Globe and Mail, on all matters Harper’s income trust tax fraud:


Complicity on the part of the banks - Part 1 -TD Bank


I had it on good authority at the very outset in November, that Flaherty consulted with two specific banks in advance of making his Halloween (hollowing) announcement to reverse the Prime Minister’s solemn pledge to never tax income trusts. Flaherty perhaps naively thought that these banks would provide him with balanced and informed advice on the matter, rather than strictly economically self interested advice.

Flaherty shouldn’t be ceding that responsibility of his (to make informed and unbiased decisions) to others. That is what he was elected to do. More cynically, Flaherty was probably only looking to buy himself “cover” from these banks for his actions. Flaherty was looking for a form of moral justification for his actions. That’s probably giving him more credit than he is due, since moral justification could only have been had through a process of public consultation, which clearly he had no compunction to do, as further evidenced by his party’s strong opposition (along with the NDP) to holding public hearings to uncover the truth behind this policy.

Flaherty has since corroborated this consultation he had with certain banks by declaring:

“What I find troublesome, quite frankly, is that I have CEOs of banks, and leaders on Bay Street who have said to me, privately, absolutely it was the right thing to do. But they don't go out publicly and say the same thing.”

To understand the bias that may have existed in asking TD Bank to opine on this matter, one need only look at the “league tables” for the underwriting of income trust new issues over the ten year period preceding Hollowing 2006:

CIBC 28.8% $26.6 billion
RBC 20.5% $18.9 billion
Scotia 17.2% $15.9 billion
BMO 11.4% $10.5 billion
TD 7.6% $6.8 billion
National 4.3% $4.0 billion

Total 89.8% $82.7 billion


One has to understand that investment dealers and their bank owners, live and die by their league table rankings, as high rankings beget more new business and league table rankings are profit rankings as well. The $82.7 billion in income trust new issues underwritten by the six bank owned dealers above represents $4.1 billion in gross profit, which does not include all the secondary trading profits from income trusts.

Having a prosperous and profitable domestic new issue business is good for the country and good for investors and issuers alike. As simple as this observation is, I believe this fact is lost on the banks themselves, since their collective inaction in defending this market segment which they “owned” and which they created, will simply mean that their collective competitive position will have significantly eroded as the substitute market that will “in fill” the void left by the absence of the income trust market is one that they clearly do not “own”, but one that is increasingly becoming the preserve of US investment dealers, like Mark Carney’s old alma mater, Goldman Sachs.

Unfortunately the banks weren’t thinking of their collective good or even the collective good of their issuing and investing clients, they were thinking of their own individual competitive positions.

From the standpoint of TD Bank, it needs to be understood that TD does not have an active full service retail distribution network on a similar scale to any of the other banks. This is a competitive disadvantage in the income trust new issue business. This more than anything explains TD’s minor market share in income trust new issuance. TD Bank does however have a credible position in the corporate new issue common share business, since this is a market dominated by institutional investors and not retail investors as in the case of income trusts. Therefore, in the mind of TD’s CEO, the demise of the income trust market would have been viewed as a net positive development for his institution, if viewed in this most narrow minded of ways.

The CEO of TD Bank is Ed Clark, who as as a senior bureaucrat in Ottawa, was the architect of the NEP interventionist policy of 1981. The NEP was intended to enhance Canadian ownership of Canadian energy resources. You would have thought that this is something that ED Clark actually believed in as an important policy goal. And yet fast forward to 2006 and here we have the very same person extolling the virtues of killing the income trust market which has been responsible for the repatriation of a large number of Canadian energy assets from foreigners and was responsible for a reversal in the trend in the opposite direction. Furthermore, the obvious devaluation in the market price of trusts that was sure to ensue following the introduction of a 31.5%% tax and a limitation on growth would leave the entire royalty trust sector and infrastructure assets of Alberta held in trusts at the risk of foreign takeover by US based Master Limited Partnerships. The trust sector is responsible for 20% of Canada’s oil and gas production and trust own a large majority of the pipeline and storage infrastructure assets in Alberta.

These consequences were immediately obvious to anyone in the business . As the CEO of TD Bank, with a PhD in Economics from Harvard, I assume this would also have included Ed Clark. And yet here is the official policy statement of the TD Bank sent to its retail customers. Please note the legal use of the word “assertion” that is correctly used in the context of tax leakage. Also I believe the phrase “ greater measure of certainty” pertains subliminally to TD’s greater measure of certainty that they will now move up their league table rankings, freed from the shackles of the income trust market, and their meaningful absence of investment in the full service retail market. TD Bank......where banking can be this friendly:

Dear Mr. Marshall,

Thank you for your recent email addressed to Mr. Ed Clark regarding the
Federal Government’s income trusts proposal and the Tax Fairness Plan.
I understand your concern about the changes affecting income trust
investments, as this is an issue that has been raised by others as well.

As you already know, the Minister of Finance’s plan is based on the
assertion that the federal treasury has lost millions in tax revenue,
and the belief that the growing popularity of income trusts would likely
result in greater future losses of tax revenue to the federal treasury.
As I’m sure you are aware, the Government of Canada began a review of
the income trust sector in September, 2005, leading to a great deal of
uncertainty on this issue. TDBFG considers the fact that there is now a
greater measure of certainty in the marketplace on this issue as being
positive.

I would like to thank you for taking the time to share your perspective
with us.

Sincerely,

Sarah Kendall
Manager, Executive Response Team