Ottawa was an active contributor to this outcome: Investors may pay stiff price for Manulife's pride

An obvious and wholly intended purpose of Flaherty's income trust policy was to make Canadians saving for retirement become more captive to the wares of Canada's large LifeCos. Captive like sheep, to he herded and fleeced.

As such, Flaherty's idiot trust policy diverted investment AWAY from investment in Canada's real economy and INTO investments in synthetic products whose sole purpose is to generate fees for the life insurance industry. Look what happens when the imperative to drive earnings causes these life companies to take on unhedged risks, in the process.

A totally predictable outcome.....and completely lost on Canada's inept and incompetent Finance Minister and the Neanderthals working in the Department of Finance, including that Boy Wonder from Wall Street, Mark Carney. I wonder if AIG was ever a client of Mark's? Lehmann Brothers? Bear Stearns?

Investors may pay stiff price for Manulife's pride

Jun 23, 2009
James Daw
Toronto Star

The Book of Proverbs warns that "pride goes before destruction, a haughty spirit before a fall," but who knew what to expect from Manulife Financial?

Who recognized the trouble such a big, proud company could get its investors into by refusing to hedge or otherwise insure the capital and income guarantees it was providing to legions of stock and bond market investors in Canada, the United States and Japan.

The tentative conclusion reached by some leading class-action lawyers and investigators at the Ontario Securities Commission is that not enough of Manulife's stockholders knew ahead of time.

After coasting above the rest of the financial sector for much of last year, Manulife's stock price was slashed in half in the final quarter. It had to draw down a $3 billion loan.

Analysts started asking about its hedging practices and whether it needed to raise more capital.

Then came billion-dollar losses in its latest two financial quarters.

While the index of financial service stocks is now roughly back where it was a year ago, Manulife's stock is still down about 40 per cent.

Now the company has revealed the Ontario Securities Commission is questioning whether it provided investors with adequate disclosure but has yet to decide whether to take enforcement action.

Siskind, Cromarty, Ivey & Dowler LLP of London, Ont., has announced it is investigating a potential class-action lawsuit on behalf of investors who bought shares between Jan. 26, 2004 and March 26, 2009, when Manulife released its year-end results.

Manulife is not saying much at this point, except that it believes that its disclosure satisfied applicable requirements. Spokesman David Paterson declined yesterday to point to where and how the company warned of the potential risk for investors.

Clearly, various experts were well aware that Manulife was taking on considerable risk as its sales of so-called guaranteed living benefits or variable annuities soared over the past few years.

While consulting to Manulife, Moshe Milevsky, of York University's Schulich School of Business, began urging financial advisers, starting in 2007, to ask how companies were hedging those guarantees.

"I am simply arguing that the living benefits arms race is leading to promises and guarantees that might become difficult to keep," Milevsky wrote for Researchmag .com.

Brent Fullard, a lobbyist against changes in taxation of income trusts, raised such questions [in early 2007] as: "Whose credit risk are your investors exposed to? Yours or somebody else's? Where is this disclosed in your advertising? How do you provide your Income Plus investors with ongoing reporting of this shifting risk aspect of your product over time?"

But one of the earliest to warn insurers they should be properly hedging the risk of a stock market crash, or a 10-year period of low or negative returns, was Mary Hardy, a Waterloo professor of actuarial science.

The author of the 2003 instructional text for actuaries, Investment Guarantees, says her research pointed to the need for hedging but Manulife was openly opposed to the idea and argued publicly about why she and a fellow researcher were wrong.

"There is nothing you can throw at a hedging plan that makes it more risky than not hedging," Hardy insists.

Manulife relied instead on having enough of its own capital – or more properly, its investors' capital – to back its promises.

Hardy says that approach is not without cost, and waiting to put hedges in place while stock markets are falling, is even more expensive.

Siskind lawyer Dimitri Lascaris says it's not enough that experts knew the risk Manulife faced: "Disclosure of public corporations is not intended to be something only elite investors can understand."

jdaw@thestar.ca