Banks can’t be trusted: Fentie

Calling Canadian banks “untrustworthy,” Premier Dennis Fentie is standing behind his Department of Finance and its failed investments of last summer.

The Finance department, Fentie insisted in an interview Thursday, did not break any investment laws, as is stated by the Auditor

General of Canada in her report delivered yesterday.

Fentie, who doubles as the Finance minister, said his department followed normal procedures when it invested $36.5 million in asset-backed commercial paper, procedures which are grounded in 18 years of common practice.

The only difference now is that the Canadian banks promised to guarantee those types of investments if there was any disruption to the market have not honoured their word, he said.

“Of course it is a fairly powerful statement,” Fentie acknowledged, “the guarantee of liquidity, it was the banks that provided that.”

He said the government did not change its investment policy last month because of concern with the legality of its investment strategies, but rather it wanted to avoid any more broken promises by the banks.

Previous Yukon governments, Fentie said, have all made identical investments, going all the way back to the first such investment in 1990 under former NDP premier Tony Penikett.

The Yukon Party government, under the late John Ostashek, employed the same practice, as did the NDP government under former government leader Piers McDonald, as well as the short-lived Liberal government of former premier Pat Duncan, the premier pointed out.

It has become an issue now, Fentie said, because the “banks failed to meet their obligations to provide liquidity.”

The auditor general, he said, has her opinion and he and the Yukon government have theirs.

Rather than enter into a debate of who is right or wrong, the government is working through the ongoing nationwide process to see how $33 billion in affected investments can be restructured, he said.

The premier also pointed out that each and every year the auditor general reviews the territory’s books, and up until now, has not raised any red flags regarding its investment policies.

Auditor General Sheila Fraser, who was in Whitehorse to deliver her report Thursday, said there was never any cause to conduct a forensic audit of the investment policy, because there were never any problems.

Finance staff assured the auditor general’s staff that investment legislation was being adhered to, and with balanced books and no reason to suspect otherwise, there was no need to look any deeper, she said.

It was only after Liberal Opposition Leader Arthur Mitchell brought the matter to the attention of her office that Fraser agreed to conduct an audit. Normally, she said, her office would not involve itself in matters at the request of an Opposition party.

Fraser said since it was an urgent matter, since her office would be doing the audit in any case for year-end work, and since she and her staff were scheduled to be in Whitehorse this month to deliver their financial report, she decided to look at the failed investment and deliver both reports at the same time.

Fraser told reporters during a briefing Thursday the Yukon investments were made in good faith at the department level, without any involvement by Fentie or any other cabinet ministers.

Although made in good faith by personnel believing they were doing nothing wrong, in the end, the investments breached the territory’s Financial Administration Act because they were not guaranteed, her report states.

“We found that the government’s investment in summer 2007 in two asset-backed commercial paper trusts that were set up by non-banks (total value: $36.5 million) did not meet the requirements of the act,” reads Fraser’s report.

“When this report was written, the government had not yet received any payment of principal and interest from these two trusts, and

it has not determined the financial impact this may have.”

While Fentie and senior Finance officials insist last summer’s investments were indeed guaranteed, and disagree with the auditor general’s findings, staff with the auditor general’s office simply ask: then where’s the money?

The report by the auditor general also says, however, that the Yukon government is in a healthy financial position.

“It has reported an annual surplus for five consecutive years,” the report notes of the government’s financial position.
The auditor general told reporters it’s too early to say if the Yukon will recover all of its investments, and if not, what percentage of the $36.5 million it can expect to lose.

Some publicly-traded companies, which are legally required to make financial reports available every three months, have already written off 10 to 20 per cent of the money they have tied up in the asset-backed commercial paper investments, Fraser pointed out.

In light of Fraser’s report, the Liberal Opposition leader is renewing calls for Fentie’s resignation, maintaining the Minister of Finance is ultimately responsible for management of the Finance department.

“The Finance minister was asleep at the switch,” Mitchell said in an interview after the territory’s elected representatives received their own briefing from Fraser and her staff.

Fentie, with a sarcastic response to Mitchell’s call for his resignation, said he would not resign, for fear that someday the territory’s finances may be in Mitchell’s hands.

Mitchell, the premier said, can’t even sort out his own involvement in the decision to give elected officials a pay raise just a couple of months ago.

Both Mitchell and NDP Leader Todd Hardy have pushed for new policies on investment strategies in the wake of the ABCP fiasco that was first raised in the legislative assembly in early November.

Hardy said yesterday the decision to make the specific investments last summer was reckless and the premier must take responsibility, though he would only expect him to resign if the Yukon loses money.

While the Yukon has $36.5 million tied up in situation, there is a total of $33 billion in limbo across the country, including short-term investments made by other provinces and territories, federal Crown corporations and trade unions.

Investors and banks are currently trying to work out a restructuring deal to make up for losses.

David Hrycan, the Yukon’s deputy minister of Finance, told reporters Thursday the details of the restructuring agreement are expected later this month. It’s expected the money will be locked into some longer-term investment arrangement to maximize returns, but whether the Yukon will lose money or not, Hrycan was unable to say.

Hrycan said his department respects the findings of the auditor general’s office, but like the premier, noted his department has its own belief, backed by a legal opinion, suggesting the Yukon has a case to go after the banks, if need be.

Last summer’s investments, he said, were indeed covered by a liquidity agreement – a guarantee – from the bank.

Hrycan and assistant deputy minister Clarke LaPrairie held a briefing of their own, right after briefing hosted by Fraser and her staff.

Under territorial legislation, they acknowledged, the Yukon government can only invest under certain conditions, one of them being where there are liquidity agreements with banks that guarantee investments if the market goes sour.

Brokered by the Bank of Montreal, last summer’s two short-term, 30-day investments, which would have returned well under $100,000 each, were made with trust companies that held asset-backed commercial papers, like house mortgages and car loans, Hrycan pointed out.

Under federal law, LaPrairie emphasized, banks must provide guarantees – the liquidity agreements – on investment products they sell. While investors are not privileged to the specific details of the liquidity agreements between the banks and trust companies, both investments were backed by liquidity agreements, LaPrairie pointed out.

LaPrairie said the problem seems to lie with the definition whereby the banks must make good on their guarantees if there is a “disruption in the market.”

When the market went sour in August, and asset-backed commercial paper investments collapsed, the banks scooped up and protected their direct interests, arguing stability and subsequently dismissing any notion of a market disruption or need to fulfill liquidity agreements, LaPrairie suggested.

“We have been told we have legal grounds,” Hrycan said of the possibility of recouping Yukon losses through the courts.

The deputy minister said before they consider anything as involved as a lawsuit against Canadian banks, they’ll wait to see what comes of the restructuring process.

Since the Yukon government made its first investment into asset-backed commercial paper back in February 1990, it has made more than 200 individual investments involving $1.7 billion, Hrycan pointed out.

He said those investment have generated $19 million in returns for the territory.