Jack Layton’s role in bringing systemic financial risk to Canada

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When I last spoke with the NDP’s Finance Critic Thomas Mulcair on January 15, 2010, to acquaint him with the terms of the Marshall Savings Plan to deal with the income trust mess that his party and the Conservatives had created, I was literally bowled over how little this guy knew about finance and his inability to recognize a “brilliant” face saving win win solution for all Canadian taxpayers. Instead all I got was some dogmatic nonsense about how the trust structure was being used for things it was never intended and he used BFI Income Fund as some sort of poster child for a trust gone wild.

I then pointed out to him that his absurd logic and absurd policy only hold forth the argument that all would be right and just with the world if BFI were simply bought by a pension fund, as somehow that type of ownership in undeserving of the 31.5% tax, whereas ownership in an RRSP gets double taxed at rates as high as 62%. I also pointed out to him, where does he get off saying that just because something has evolved to a point different than where it started, doesn’t mean its bad, as I asked him how successful would mankind have been had it not been for the evolution of an opposing thumb and fingers?

Given that was a rhetorical question, I then pointed out to him that income trusts are a unique form of investments with attributes that are good for investors and for the issuers and the Canadians economy itself. I told him that income trusts are a form of profit sharing investment vehicle and the fractional ownership of a business profitability and represent an important democratization of the capital markets, a term I borrowed from Gordon Tait of BMO Capital Markets and his seminal research report entitled “The inconvenient truth about income trusts”.

I then pointed out to Thomas Mulcair that standing in the way of people saving for retirement and taking choices away from people was playing right into the hands of commercial interests like Manulife who are seeking to kill the competition for their grossly inferior investment products and specifically named Manulife’s Income Plus, a variable rate annuity product that Manulife failed to hedge. I asked him whether he was even aware that Manulife and almost gone bust during the global financial meltdown. Mulcair had no idea what I was talking about. I told him that killing income trusts was the goal of the life insurance industry and groups like Manulife, who specifically launched their product Income Plus in the first week after the Halloween massacre and that its popularity sky-rocketed in the absence of a viable income trust market....only for Manulife to expose itself to massive stock market risks that it didn’t bother to hedge that underlay this Income Plus product.

I then told Mulcair that Warren Buffet called any life insurance companies that issued this type of product to be “crazy”, and Warren Buffett was talking about those firms that attempted to hedge these products, whereas Manulife did not even bother to hedhes these riks. I wasn’t even sure whether Mulcair even knew who Warren Buffett is, but surely he did, although nothing else I said was met with any degree of knowledge on Mulcair’s part. He had no idea that Manulife almost went bust and even less idea what risks were associated with Manulife pumping out more variable rate annuity products now that the NDP had been duped into killing income trusts on Manulife’s behalf. Talking to Mulcair, I was reminded of babes in wonderland

I concluded by saying to Mulcair that this policy that was endorsed by his party has been an unmitigated disaster and that one of its greatest adverse policy outcomes is that it promotes the sale of synthetic derivative products like Income Plus, by insurance companies and they aren’t even insuring them against the risks that are embedded in these products. How's that for a contraduction in terms: an insurance company that doesn't insure itself? I told Mulcair that his party’s total ignorance of the capital markets is contributing to systemic financial risks and creating “too big to fail” outcomes like Manulife nearly became. I contrasted this with income trusts who pay out only what they earn. Nothing more, nothing less, No too big to fail, No bankruptcies. He didn’t have a clue what I was talking about.

Perhaps if Thomas were to read today’s Financial Post, he might get some idea of what the NDP have been aiding and abetting through their total ignorance of financial matters, a point we have been making since we ran an ad in the Hill Times back in early 2007 entitled “Strange bedfellows: The NDP and Manulfe Financial Corporation”. Strange bedfellows indeed. This is but a sampling of this expose article in today’s Financial Post:

Inside the fortress: Drama behind Manulife's doors

Theresa Tedesco, Chief Business Correspondent, Financial Post Published: Saturday, January 30, 2010

BLINDSIDED

Trouble began showing up on Manulife's radar in April 2006. ( my note: so they thought they would make things worse by launching more of the same in the immediate aftermath of Flaherty’s income trust bombshell of October 31, 2006 and supported by the NDP) But by 2006, according to the company's internal documents, the insurer was now dealing with growing risk exposure caused by the gap between the amount it promised to pay its variable annuity customers in the future, and the amount set aside to meet those guarantees.

Manulife's chief executive took his case to Ottawa, where he met with Bank of Canada Governor Mark Carney; Kevin Lynch, the Clerk of the Privy Council and Secretary to the Cabinet; and federal Finance Minister Jim Flaherty. He also requested time with Prime Minister Stephen Harper.( Would be interesting to know what meetings good old Dominic D'Alessandro had with these guys just prior to oct.31/2006.)

According to internal company documents reviewed by the Post, the insurer's chief risk officer made a presentation to the company's chief executive Mr. D'Alessandro, warning that the company's balance sheet at the time "could not absorb the growing equity risk."