Politics and hungry lawyers help abuse the system for gain

[urquhart]

Ontario Conservative Party, through its Official Opposition Critic for the Attorney General, held a press conference yesterday to put pressure on the Ontario Liberal Government to repeal its new two year limitation period that governs civil liability claims for breach of duty and breach of trust by financial advisors. The press conference was presented by Stan Buell of the Small Investor Protections Association (SIPA), Bill Gleberzon of 50 Plus Association (CARP) and Judi Muzzi of the United Senior Citizens of Ontario (USCO).

With SIPA, CARP & USCO presence at the press conference, there was representation of over half a million seniors. That has got to create an impression on the financial industry and securities regulators that the investing public will no longer tolerate eldery investor abuse.

That on top of a 500 turnout at the OSC Town Hall meeting on May 31, 2005.

Here is the Ontario Conservative Party Press Release.

LIMITATION PERIOD REDUCED TO TWO YEARS
Rights of investors being jeopardized

(July 14, 2005) Barrie – Bill 213, Justice Statute Law Amendment Act, 2002, enacted the Limitations Act, 2002, which provides for a reduction in the legal limitation period, from six years to two years.

MPP Joe Tascona, Opposition Critic to the Attorney General, is addressing this issue because of concerns that the two year limitation period in effect from January 1, 2004, is not long enough for investors seeking restitution after suffering serious financial damages due to the wrongdoing of the financial services industry. The Attorney General’s position is that plaintiff interests do not need further protection.

“The revised Limitations Act does not adequately provide for the rights of investors, particularly widows and seniors, who are endeavouring to seek justice through civil litigation”, said Tascona.

Tascona will be holding a press conference at Queen’s Park on Monday, July 18, 2005, to raise public awareness of this issue. With him will be representatives of CARP (Canadian Association of Retired Persons) and SIPA (Small Investor Protection Association).

“The problem of seniors losing their life savings due to investment industry wrongdoing is much greater than acknowledged”, said Stan Buell, President of SIPA. “Scandals such as mutual fund market timing, hedge fund collapses, corporate misdeeds, and governance failures are robbing Canadians of their life savings. Seniors seem to be targeted. Victims last recourse to obtain restitution is civil litigation, and now that right is being jeopardized by reduced limitation periods, from six years to two years.”

The press conference will be held at 10:30 Monday, July 18th, at the Media Room, Queen’s Park.


-30-

Contact: MPP Joe Tascona, Official Opposition Critic for the Attorney General, 705-715-6707

[Guest]

BY WOJTEK DABROWSKI
Financial Post

Thursday, July 21, 2005



The Small Investor Protection Association has obtained the backing of a Progressive Conservative politician in Ontario in its attempt to change the limit on how much time investors have to sue for restitution those who have wronged them.


Joe Tascona, the opposition critic to Attorney General Michael Bryant, launched a petition yesterday to strike down the two-year limit that applies to investors who lost money due to wrongdoing of the financial-services industry.


Ontario’s Limitations Act of 2002 cut the time during which such legal action can be launched to two years from six. the Act was proclaimed in January, 2004.


“There’s a lot of concern about this,” said Mr. Tascona, “and I think that once the public of all ages becomes aware of the situation, they’re going to look for some better representation and better response from the Attorney General.”


The limitations issue is the top concern facing small investors today, SIPA president Stan Buell said.


“This issue will affect victims today, will affect victims into the future,” he said. “Two years [to take civil action] is just not enough. We know that from talking to hundreds of people.”


Calling the loss of one’s savings a “lifealtering event,” Mr. Buell said that by the time an aggrieved investor gathers needed information, meets with regulators and files complaints, two years can pass.


“None of that activity stops the clock,” he said. “So people can spend a lot of time going through the complaint-handling process and find out that it’s too bad, it’s too late” to sue.


While the Limitations Act was brought in by the Conservatives, Mr. Tascona said he withheld his vote during its second and third readings and never spoke out in its support.


Mr. Buell said he turned to Mr. Tascona after not getting much response from the governing Liberals, including the Attorney General’s office.


Valerie Hopper, a spokeswoman for the Ministry of the Attorney General, said, “We’re looking at everything right now, just monitoring [the legislation], seeing what the effects are and seeing if it’s doing what it’s supposed to be doing.”


Ms. Hopper added that changing the limitation period has not been ruled out.

wdabrowski@nationalpost.com

[Guest]

I could be full of beans, in which case I would appreciate it if someone would set me straight. but I seem to recall changes to recent IDA rules which made the time under which an advisor remains under IDA jurisdiction increase from the previous two years to more like five years.

If true, it certainly goes against the premise of limiting or shortening clients recourse time to two years...................while the IDA needs more and more time to pursue departed brokers.

[Mike H.]

Alberta has had a two year limit on civil actions for several years. But this means that you have two years to file a statement of claim from the time you were aware of the cause of action; not the time of the tort.

So if your advisor stole money from your account 7 years ago, but you only became aware of it today, you would have two years FROM TODAY to file your statement of claim with the court.

Once the statement of calim is filed, there is no real time limit on the litigation.

[Guest]

The Investor Advocate
Ken Kivenko’s column is all about investor protection. Ken fights for investors’ rights and exposes violations and malpractices. He also runs an advisory business, FundBuster Analytics, assisting investors obtain restitution due to sales or broker abuses.



Hardly In The Public Interest


By Ken Kivenko | Friday, July 29, 2005


What the Limitation Act means for mutual fund investors Effective Jan 1, 2004 the Ontario Government (several other provinces have similar Acts) implemented legislation reducing limitation periods (the time within which plaintiffs must take action or lose their right to take civil action) from six years to two years. The basic limitation period under the Act is two years from the date on which the claim is discovered, or ought to have been discovered, by the person entitled to bring the claim.

An agreement (called a “tolling agreement”) to let an independent third party mediate or arbitrate the dispute will suspend advancement of the limitation period for the duration of the arbitration or mediation process, but if that process fails to resolve the dispute, the limitation period countdown resumes where it left off. A regulator such as a securities commission or the IDA would not be considered to be a mediator or arbitrator for this purpose, so complaints to them will not suspend the limitation period. Once the limitation period expires, it cannot be revived.

So, mutual fund investors now have to act much more quickly if they feel they’ve been a victim of financial assault. For unsophisticated investors, seniors, retirees, widows, non-English-speaking immigrants and others the new Act can spell economic disaster.

Consumer groups such as the Small Investors Protection Association (SIPA) and the United Senior Citizens of Ontario have been vocal in their concerns. The Canadian Association of Retired Persons has referred to the Act as a form of elder abuse. Media coverage has exposed the issue. Joe Tascona, the Conservative Party Critic for the Attorney General (Ontario) has drawn attention to the concerns and is attempting to have them rectified.

“…Yet, we all would also like to be able to live out our lives without fear that our past actions may become subject to a legal action so many years into the future that we would be discouraged from engaging in innovation and entrepreneurship…” — Ontario Attorney General Mike Bryant in a June 27 letter sent to SIPA justifying the Act

The government argues that two years is more than enough time to file a civil claim.

Here’s why it’s not:

Clients may not know the extent of their losses until late in the game.
Client statements rarely provide personal rates of return.
Book values obscure rather than illuminate portfolio performance.
Mutual fund terminology is often based on industry jargon, a foreign language to ordinary investors.
Suitable investments may temporarily mask the corrosive effects of unsuitable investments.
Some mutual fund and hedge fund managers report semi-annually.
For many reasons, a specific fund may be unsuitable for an investor. Advisers may not want to admit to responsibility for the error and therefore encourage ignoring the unsuitability, hoping a fund will recover. Principal-guaranteed investments (many segregated funds and investment trusts) encourage speculation to recover from early losses. Lucrative trailer commissions also encourage advisers to not recommend selling a losing fund. DSC- sold funds result in an early redemption penalty that further discourages selling a loser, with advisers rarely counseling no-fee switches within the fund family, or no-fee 10% annual withdrawals. These forces combine to encourage the investor to inappropriately hold on to unsuitable mutual funds. One year can easily be lost in this morass.
Behavioural finance scientists have studied retail investor behavior and concluded investors go through a multi-phase internal process before they decide to react to bad news (see Fig 1-4. below).


Investor Emotion Chart. Source: Index Funds: The 12-step Program, M.T. Hebner, 2004

Embarrassment, the fear of regret, outright psychological depression, anchoring and cognitive dissonance are all factors that may cause investors to delay facing the reality that significant losses have been incurred and to take mitigating action. This cycle of denial can and does extend to years

The stress of a life-altering event such as the loss of a hard earned retirement nest egg can be so debilitating that it can lead to depression and the inability to make a rational decision. In this mode, it’s unlikely an investor will have the emotional strength to file a claim or take civil action in a timely manner.
Once an investor concludes he can and should complain he must go through a long, extended and stressful process with the fund dealers and brokers. Some have referred to this complaint process as a quagmire as the investor struggles with how and to whom to address a complaint. Before it’s over an investor must deal with his advisor, a branch supervisor, a Vice President, a compliance officer and the firm’s ombudsman. During this complex process, documents are exchanged, there are many phone calls and meetings are held. Sometimes key documents are missing or the advisor has left the company. The brokerage firm encourages delays, with long response times and obtuse replies begging for explanations that are not forthcoming. This phase alone can take many months. Meanwhile, the Limitations Act clock keeps ticking away. Usually, the investor is told his claim is not valid, even in cases where the Courts later uphold the claim as valid.
Finally, investors who’ve encountered the firm’s convoluted dispute resolution process bring their case to the industry- sponsored Ombudsman for Banking Services and Investments (OBSI). OBSI won’t consider a case until all reasonable avenues have been pursued with the dealer/broker. The OBSI process alone can take more than a one year. An OBSI investigation is initiated unilaterally by a request from the investor and OBSI makes recommendations for settlement of the complaint. The recommendation does not have to be accepted by the firm (or the investor).A number of investors have gone on to win claims after rejecting the OBSI recommendation and engaging a lawyer It’s not yet been tested whether a complaint to OBSI would suspend advancement of the limitation period, but it appears unlikely. In any event, only 15% of cases are resolved in favor of investors (and for a fraction of actual losses), leaving civil action the last resort for investors who feel they’ve been abused.
So, by the end of this vicious cycle of events, three or four years can easily pass leaving the investor with no recourse with the oppressive Limitations Act in place. The fact that the investor complained at all suggests the investor was aware of the existence of the claim. The ability to seek compensation through the courts is lost forever. This hardly seems an Act in support of the public interest.

Perversely, the Act also has a tolling provision that bars the parties from mutually agreeing to an extended time by suspending a limitation period , in the absence of third party mediation or arbitration. On top of this, the Act could encourage some firms to deliberately stall on a settlement, hoping that the investor will run out of time.

Until such time as the Act is amended, mutual fund investors are encouraged to carefully examine their client statements, look at bottom-line account trends, ask questions, complain promptly whenever something doesn’t feel right and establish definitive timelines with firms on dispute resolution. If at any time you’re not sure of your rights or what to do, consider contacting a lawyer. This is certainly one area where professional advice can pay big dividends. Failure to do so in a timely manner could mean you get ZIP even if your restitution claim is rock solid.



Ken Kivenko P.Eng.

July, 2005

[admin]

POLITICS
The quiet unravelling of Canadian democracy

Muzzled MPs. A powerless cabinet. Politicized senior bureaucrats. Unaccountable parties. Canada's democracy is in trouble. To fix it we have to connect the dots
Apr 04, 2009 04:30 AM

JAMES TRAVERS
NATIONAL AFFAIRS COLUMNIST

OTTAWA–For a foreign correspondent reporting some of the world's grimmest stories, Canada in the '80s was more than a faraway home. Seen from the flattering distance of Africa, this country was a model democracy. Reflected in its distant mirror was everything wrong with what was then called the Third World. From Cape to Cairo, power was in the hands of Big Men. Police and army held control. Institutions were empty shells. Corruption was as accepted as the steeped-in-pessimism proposition that it's a duty to clan as well as to family to grab whatever has value before the state inevitably returns to dust.

By contrast and comparison, Canada was a cold but shimmering Camelot. Ballots, not bullets, changed governments. Men and women in uniform were discreet servants of the state. Institutions were structurally sound. Corruption, a part of politics everywhere, was firmly enough in check that scandals were aberrations demanding public scrutiny and sometimes even justice.

Canada today is not Africa then or now. Our wealth and health, and our communal respect for legal, civil and human rights position this favoured country on a higher plane. Still, 10 years of close observation and some 1,500 Star columns lead to an unsettling conclusion: Africa, despite popular perception, despite the Somalias and Zimbabwes, is moving in one direction, Canada in another. Read the headlines, examine the evidence, plot the trend line dots and find that as Africans – from turnaround Ghana to impoverished Malawi – struggle to strengthen their democracies, Canadians are letting theirs slip.

There, dictatorships are now more the exception than the rule and accountability is accepted as a precondition for stability. Here, power and control are increasingly concentrated and accountability honoured more in promise than practice. Canadian politicians flout the will of voters and parties. Once-solid institutions are being pulled apart by rising complexity and falling legitimacy. Scandals come and go without full public exposure or cleansing political punishment. If not yet lost, Camelot is under siege.

Laughter or disbelief would have been my '80s response to any gloomy prediction that within the next 20 odd years Canada's iconic police force would twist the outcome of a federal election. I would have rejected out of hand the suggestion that Parliament would become a largely ceremonial body incapable of performing its defining functions of safeguarding public spending and holding ministers to account. I would have treated as ridiculous any forecast that the senior bureaucracy would become politicized, that many of the powers of a monarch would flow from Parliament to the prime minister or that the authority of the Governor General, the de facto head of state, would be openly challenged.

Yet every one has happened and each has chipped away another brick of the democratic foundations underpinning Parliament. Incrementally and by stealth, Canada has become a situational democracy. What matters now is what works. Precedents, procedures and even laws have given way to the political doctrine of expediency.

No single party or prime minister is solely to blame. Since Pierre Trudeau first dismissed backbenchers as nobodies and began drawing power out of Parliament and into his office, all have contributed to the creep toward a more authoritarian, less accountable Canadian polity.

Some of the changes are understandable. Government evolves with its environment, and that environment has become more complex even as the controls have become wobblier, less connected. The terrible twins of globalization and subsidiarity – the sound theory that services are most efficiently delivered by the administrative level closest to the user – now sorely test the ability of national legislatures to respond to challenges at home and abroad. Think of it this way: Trade, the economy and the environment have all gone global while the things that matter most to most of us – health, education and the quality of city life – are the guarded responsibility of provinces and municipalities.

Politics and politicians being what they are, the reflex response is to grasp for all remaining power. Once secured, it can be used to exercise political will more easily by overruling rules and rewriting or simply ignoring laws. Power alone is effective in cross-cutting through the silo walls that isolate departments and frustrate co-ordinated policies. Important to all administrations, unfettered manoeuvring room is that much more important to minority governments desperate to maximize limited options and minimize opposition influence.

Good for prime ministers, that's not nearly good enough for the rest of us. It fuels an inexorable power drift to the opaque political centre, creating what Donald Savoie, Canada's eminent chronicler of Westminster parliaments, calls "court government." It's his clear and credible view that between elections, prime ministers now operate in the omnipotent manner of kings. Surrounded by subservient cabinet barons, fawning unelected courtiers and answerable to no one, they manage the affairs of state more or less as they please.

Prime ministers are freeing themselves from the chains that once bound them to voters, Parliament, cabinet and party. From bottom to top, from citizen to head of state, every link in those chains is stressed, fractured or broken.

One man's short political career helps explain how those connections fail. David Emerson, a respected former forestry executive and top B.C. bureaucrat, is recalled as one of Paul Martin's most competent ministers. Almost forgotten now is his corrosive effect on public trust.

In 2006, Emerson ran for re-election in Vancouver-Kingsway, winning easily as a Liberal. Weeks after promising to be Stephen Harper's "worst nightmare," Emerson was named to the Conservative cabinet in the trade portfolio he had long wanted and was well-suited for. His rationale was simple: There's no point in being in the capital if there's no real possibility of influencing the nation's course.

Emerson is an honest man and his motives genuine. But in severing the link between ballots and voter choice, he made nonsense of the electoral process.

Emerson was not alone in dripping acid on that rare winter election. But where he applied an eyedropper, then RCMP Commissioner Giuliano Zaccardelli emptied a bucket. With Liberals nursing an opinion-poll lead and Martin on track for a second minority, Zaccardelli dropped an unprecedented, still unexplained bombshell. In a private letter to the NDP, one the RCMP went to extraordinary lengths to ensure became public, the force confirmed its criminal investigation into rumoured leaks of the Liberal decision not to tax income trusts.

Conservative strategist Tom Flanagan candidly identifies that letter as the election's tipping point. Liberal scandals and ethics soared again to the top of voter minds, sending Martin tumbling and Liberals packing.

No political malfeasance was found – one bureaucrat was charged with gaining personal benefit. More remarkably, neither Zaccardelli nor the RCMP has been forced to fully deconstruct such an egregious intervention in the electoral process. To their lasting shame, all three federal parties, each to protect its interests and minimize embarrassment, chose to leave hanging the rotten odour of banana republic politics. Zaccardelli, defrocked for conflicting testimony in the Maher Arar affair, is in France, safe and quiet in an Interpol sinecure.

If Zaccardelli's intervention was wrong, Emerson's analysis was right: Being a bright, competent and energized backbencher in an increasingly ritualistic, theatrical and impotent House of Commons is an exercise in futility.

Parliament's problem is that it is patently dysfunctional. Its list of recent failures is long and instructive. It didn't notice the millions of Quebec sponsorship dollars shifting from the treasury to Prime Minister Jean Chrétien's office or the runaway costs of the Liberal long-gun registry. Starved of resources and already ineffectual, its committees became a standing joke when Conservatives secretly wrote a 200-page manual to discourage curiosity about, say, alleged attempts to buy dying Chuck Cadman's Commons vote, or the ruling party's suspect in-and-out campaign money-laundering scheme.

It's so essential for the ruling party to keep Parliament in the dark that its independent officers are now forced to struggle for the funds and freedom to do their jobs. Need proof? Liberals and Tories nurtured a cottage industry that taught how to hide public information vital to open democracy by, among other tricks, insisting on untraceable verbal reports and scribbling sensitive information on removable Post-it notes. Conservatives in opposition promised to create a budget officer to follow how Ottawa spends hundreds of billions. In power they are yanking the leash on Kevin Page, the newest watchdog.

Given those frustrations – and others ranging from voting as the party demands, not as their conscience dictates, to the growing irrelevance of the Commons as a forum for shaping public policy – it's hardly surprising that most MPs, like David Emerson, want to be where the action is – in cabinet. Except that it's not.

Strong cabinets are dusty relics. Long gone are the days when powerful regional ministers could flex their muscles with prime ministers who were merely first among equals. Under Chrétien, cabinets became little more than focus groups. Stephen Harper is going farther, making most ministers anonymous and keeping others silent when tough questions are asked.

Far more powerful than ministers are the political professionals who form a protective inner circle beholden only to the prime minister, not voters. Those appointed apparatchiks are now so entrenched that even senior ministers – Martin's deputy Prime Minister Anne McLellan was one – have trouble penetrating the barrier around "The Boss."

So who influences the prime minister, who moulds the putty of public policy? Well it's certainly not deputy ministers, those non-partisan civil servants who once took personal pride in speaking truth to power and kept resignations ready for the moment ministers crossed the line separating public interest from partisan advantage. For mandarins, Job One is no longer providing policy options, it's protecting ministers and the prime minister from political blowback. How much that's changed is measured by last year's report on the leak of a sensitive Canadian diplomatic memo suggesting Barack Obama was saying one thing publicly and another privately about renegotiating free trade.

In finding no culprit, an investigation led by the Clerk of the Privy Council, Ottawa's top public servant, pointed fingers at bureaucrats for circulating the memo too widely. But as the Star exposed at the time, civil servants didn't leak. It was political operatives in the Prime Minister's Office and in Canada's Washington embassy who recklessly jeopardized this country's interests to assist U.S. Republicans. Once again, the guilty went free.

If not Parliament, ministers or mandarins, who can hold the Prime Minister accountable? Apparently not political parties. On their way to their party's Winnipeg convention last year Conservatives, those grassroots activists who planted the seeds of the Reform movement and nurtured them until they grew into a government, were told they had become only one among many "stakeholders." Then, in a cameo convention appearance, the Prime Minister broke the news that hard times rendered the party's defining conservative framework at least temporarily null and void.

Liberals, facing a crisis of their own, responded with even more extreme pragmatism. Having reached the conclusion Stéphane Dion had to be replaced before Parliament reconvened for a critical January session, Liberals bent, folded and mutilated party rules to narrow the leadership contenders to one and anoint Michael Ignatieff interim chief. Whatever the urgency or justification, chattering-class Liberals effectively stripped the rank and file of the right and responsibility to choose a leader.

With parties pushed to the sidelines, only the Governor General remains as a political check on the prime minister. But even that control is suspect after last year's pre-Christmas coalition crisis. Here's how far outspoken minister John Baird said Conservatives were willing to go to hang on to power. "I think what we want to do is basically take a time out and go over the heads of the members of Parliament, go over the heads, frankly, of the Governor General, go right to the Canadian people."

Going over the head of the de facto head of state is a radical notion. But so, too, is the accelerating erosion of Parliament, cabinet, independent oversight and political parties. Extreme is now ho-hum in a country where the prime minister can override his own law to force an election, where accountability is little more than a campaign bumper sticker, where the police play politics and where there is no connection between scandal and punishment for those in privileged places.

Without meaningful engagement, participatory democracy is an oxymoron. Why vote if the winning candidate then switches sides? Why be a member of a powerless Parliament? Why be a minister in a cabinet without influence or a mandarin in a politically polluted bureaucracy? Why join a party to be spectator?

Responses can be found in the record low turnout of the last election. Or the dwindling number who consider federal politics relevant to real life or bother to join parties.

Fortunately, there are fixes. As Barack Obama proved in the U.S presidential campaign – and Premier Dalton McGuinty learned in Ontario when teenagers used Facebook to drive proposed drivers' licence restrictions into a dead end – the combination of motivated citizens and enabling technology is extraordinary.

If mad-as-hell voters can take back a riding, as they did in Vancouver by rejecting Emerson's adopted party, then surely MPs can recapture control of Parliament. It's possible, too, that ministers, bureaucrats and police officers can be forcefully reminded that their public duty is to the people, not to politicians. Even prime ministers can be told they are not monarchs.

Appealing as it sounds, advocacy requires effort. It's so much easier to go with the flow, to let situational democracy evolve with each reflex, stopgap, jerry-rigged response to every new policy demand and political threat. But that leads away from accountability and toward the Big Man culture that Africa is finally throwing off and has no place in Canada.

If war is too serious to leave to generals, then surely democracy is too important to delegate to politicians.

[admin]

I have learned that it takes more than white collar fraudsters to steal the economy of a country. Like a three legged stool, support comes from all legs of the triangle.

The first leg of course is the fraudsters, of which there is no shortage. The financial industry probably attracts the greatest quantity of financial sociopaths of any other industry.

The second leg is a willing, able and captured regulatory regime. Regulators either come from the financial industry, or are counting on their next job coming from the financial industry. In addition, they are paid by the financial industry.

The third leg of support needed to allow a financial industry and a regulatory regime to let crime succeed, is a willing, compliant, self serving political party in power. The political part is essential to let the regulators, let the financiers get away with their acts.

Politicans supposedly oversee financial regulators. The problem, and where they contribute to the perfect economic crime, and the perfect economic crime, is that the politicians refuse to allow bad practices to come to light under their watch. Bad politicians would prefer to protect their jobs, rather than protect the public. So they play the game of "see no evil", where they win, and the public loses.

This flogg topic will look at some examples where this has taken place, despite criminal codes against such negligence.

Send examples, comments, posts to investoradvocate@shaw.ca

[admin]

April foolS on us!

Financial failure, Hundreds of millions!

Alberta Taxpayer bailout

Alberta finance agency helps cause the failure

Alberta finance supports the joke

There is a unique connection between Government Ministers who condone sale of tainted products to our consumers, and the subsequent failures of those toxic products. This story has not yet been told. It is a multi billion dollar April fools joke on the public. I report it from Alberta, yet 13 provinces and territories allowed it.

The enclosed letter from Alberta Finance tells part of the story.

1. An admission that known tainted investment products were welcomed into our province, by letting investment firms and regulators bend the law secretly. There was no notice to the public of the toxic nature of the products being dressed up for sale.

2. Admission that this caused serious problems. (Alberta Treasury Branch alone put nearly 1/2 of all customer bank deposits into this toxic product, City of Lethbridge $32 mil, University of Calgary $18 mil)

3. No regulator nor Alberta Finance will tell, “what public interest” is served by letting investment firms bend our laws.

4. After letting friends in the investment industry bend laws to violate the public interest, they will now let them “review” themselves. Millions in fees earned by selling “exemptions” to our laws in each province.



From alberta auditor general report Oct 2008
http://www.oag.ab.ca/files/oag/Oct_2008_Report.pdf
Larry Elford
http://www.investoradvocates.ca
403 328-0391
http://www.youtube.com/watch?v=COPADl86Z0g 3 minute preview of soon to be complete doc film BREACH OF TRUST, an attempt to expose criminal violations of the public interest by an entire investment and regulatory industry.
Letter below also posted at blog page web.me.com/lelford

[admin]

I have just now, begun to understand the connection between government, the regulators, and the financial services industry. They seem to me like a three legged stool, where each is dependant upon the other to complete the conditions for a perfect storm.

The financial services industry owns and pays the self regulatory agencies that claim to "police" the securities industry. The self regulators have made assurances to the government regulators that they will do a proper job, although based on who pays their salaries, this seems nearly impossible to imagine, and has not yet come true.

The government of the day, has a political objective or remaining in power. To do this, they must avoid embarrassment.
They do this by failing to identify, recognize (and thus protect the public) and publicize failures inside the regulatory system for which they are responsible.

Thus the entire system fails due to a group of people, who while they are in positions of authority, fail to use this authority to protect the public interest. They instead use this authority to protect, serve, and further their own narrow interests.

It would be a criminal offense of negligence if it were allowed to be looked at.

[admin]

Iris Evans Alberta Finance and Enterprise deserves full credit for the economic situation we now find ourselves in.

After all, it was her Alberta Securities Commission that granted legal permission to "approximately 20 financial firms", to sell illegal, toxic investments to Albertans. It was her Alberta Treasury Branches that placed approximately 1/2 of all customer deposits into these same toxic investments. It was under her watch that the Treasury Branch lost 1/4 billion dollars on this investment. (to date)

It was under her supervision of the provinces securities commission that the City of Lethbridge went into this illegal product to the tune of $32 million. The University of Calgary just under $20 million. Hundreds of individual investors were nearly wiped out financially due to the investments that her department allowed into Alberta.

Alberta is a rat free province. It is unfortunate that under Alberta Finance, we lost the ability to keep financial rats out of this once prosperous province. Will Iris Evans call a public inquiry into these obvious failures, or will we shoot, shut up and shovel about the government's own contribution to the worst economic storm in a generation? Would Alberta taxpayers care if they knew that their own government is selling out their interests for political gain? The budget today will show us part of the damage.

Alberta taxpayers have had to bailout the Alberta Treasury Branch to keep it in business, providing additional funds and loans. Alberta taxpayers have had to bail out the individual investors who were facing financial ruin. Alberta taxpayers paid for the executive bonus's that ATB execs paid themselves for losing $1/4 bil. Alberta taxpayers also swallow the losses for the City of Lethbridge and University of Calgary. Now we have a new budget and Iris Evans has refused opening an inquiry to determine where we failed to protect Albertan's. She knows exactly where we failed. Unfortunately her choice to protect her job, is taking precedence over protecting Albertan taxpayers. Very enterprising of her to dodge this one. It is a breach of trust.

Larry Elford 403 328-0391
www.investoradvocates.ca

letter from Alberta Finance and Enterprise about legal exemptions to sell toxic investments posted at http://web.me.com/lelford/breachoftrust ... /Blog.html

Alberta Auditor General audit report on Alberta Treasury Branch bonus's at http://www.oag.ab.ca/files/oag/Oct_2008_Report.pdf

[admin]

ECONOMY MAY 2009
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
by Simon Johnson
The Quiet Coup

ONE THING YOU learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.

Becoming a Banana Republic
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.


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Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

The Wall Street–Washington Corridor
Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

America’s Oligarchs and the Financial Crisis
The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on. Instead, Fed Chairman Greenspan and President Bush insisted metronomically that the economy was fundamentally sound and that the tremendous growth in complex securities and credit-default swaps was evidence of a healthy economy where risk was distributed safely.

In the summer of 2007, signs of strain started appearing. The boom had produced so much debt that even a small economic stumble could cause major problems, and rising delinquencies in subprime mortgages proved the stumbling block. Ever since, the financial sector and the federal government have been behaving exactly the way one would expect them to, in light of past emerging-market crises.

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October, John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10 million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

The Way Out
Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100 years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Still, outright pay caps are clumsy, especially in the long run. And most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Regulation and taxation should be part of the solution. Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.

Two Paths
To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

The URL for this page is http://www.theatlantic.com/doc/200905/imf-advice

[admin]

I can't claim to know a damn thing about politics, and I am sure that I do not want to, but here is what it feels like from a layperson.

It feels like the country (every country) is crying out for leaders, and we keep ending up with liers. We hope and pray for people in office, who will do everything possible to protect the public, and instead we find politicians who will say and do everything possible to protect their own positions. Not healthy to any country.

I applaud the election of Obama in the USA, as it seems clear from the contrast between he and George Bush that they have finally started going in the right direction. It seems they have gotten an elected official who is willing to try and do the right thing. To try and speak the honest truth. I just do not see that here. Despite best intentions and perhaps best efforts of those who get elected, efforts to lead, serve, help the public interest. Despite these best efforts, it appears that once elected, they enter a different world. A world of gamesmanship, of political tricks. A musical chairs game where one must constantly play a game of deception to retain your chair. We are certainly starting to pay the price for such failed leadership.

Eventually, someone will figure it out. They will realize how temporary and how wrong it is to go into public service, and then to use this public position to serve yourself. A political hero will emerge. We hope sooner rather than later.

I think the world is a bit tired of middle aged white men, (and women) who will lie, cheat and steal to get whatever it is that they want. We saw it in finance, we are tired of it in our politicians.

[admin]

May 7, 2009

Dear Nova Scotia Voters

I write to you from Alberta, where we have learned a painful lesson on how our regulators and politicians have sold out our financial interests for their own political interests.

The recent economic crisis is something we all know about. What you may not know, however, is that the tainted or toxic investments, which migrated here from poor loans in the USA, were allowed into this country like a case of the swine flu, by the very protective agencies that are supposed to keep these out.

One must realize that it was known in advance, that the Asset Backed Commercial Paper (ABCP) toxic investments were infected with bad credit, which could cause a financial pandemic. How did officials know this in advance you ask? Because they did not meet your Nova Scotia Securities Act laws designed to protect your citizens from financial flu. The only way in which these toxic investment products were allowed into your province (as they were in my province of Alberta) was by means of an exchange of money, paid to the Commission, in return for what is called a “legal exemption”, a free pass, so to speak, for an investment firm to violate your laws.

This is done regularly without your knowledge. If you search the web site for the Nova Scotia Securities Commission ( http://www.gov.ns.ca/nssc/exemptionsCO.asp ) you will see how often your public protective crown corporation have traded a sum of money for allowing an investment firm to violate your laws. My Alberta Finance and Enterprise department says that provincial laws were exempted “about twenty times” to allow short term commercial paper to be sold, without meeting our laws. You will find roughly the same happened in your province. The damage here was in the billions, and caused our once strong province to be now running in the red.

Your securities commission states in the first line of their mandate, that “Our mission is to protect investors in Nova Scotia...........”, and this mission is overseen and backed up by your Justice Minister. A justice minister who I am not aware of, but who is probably campaigning for his or her job at this moment.

You might want to ask your justice minister, “ what possible public interest is served by selling out the protections of our laws, to financial firms”? I have tried with thirteen provincial and territorial securities commissions and ministers responsible, and so far, they are dodging and weaving. Perhaps one in your province might inform you.

Best regards from Alberta, and good luck with your election.

Larry Elford

www.investoradvocates.ca

[admin]

May 7, 2009 questions for a public meeting with Iris Evans, Alberta Finance Minister. (I will post her answers tomorrow after presenting her with these questions)

My name is Larry Elford and I have three questions for Mrs. Evans.

By way of preamble to those questions, I refer to Bank of Canada governor Mark Carney, who yesterday in our paper said that “the Central Bank had warned years in advance about the risks in the $32 billion dollar ABCP market......” It was ignored.
Those warnings could have saved us billions. Could have saved the City of Lethbridge $32 million, treasury branch would not have placed nearly half of all customer deposits into these products. University of Calgary might not have given away $18 million.

Fast forward, and we learn that the Alberta Securities Commission, which you are responsible for, gave away the public interest, the interest of protecting Albertans from these known toxic investments when it allowed them into our province. The Alberta Securities Commission went so far as to accept payment from about 20 investment companies to allow those investment companies to sell these bad investments which, without this payment to the ASC, would otherwise be illegal. A crown corporation accepting money to allow certain people to violate our laws???? I can only express shock and dismay at the thought of this.

Would we accept toxic products sold into our food system? Would we accept toxic infections entered into our health system? Here it appears that we knowingly, and in exchange for a payment of money, accepted infected investments into our financial system.

My questions are these:

What possible public interest is served by accepting money in exchange for allowing our laws to be violated?

Why are such transactions done outside of public view, with no ability to accept public input and no public notice when toxic products are sold to consumers with the aid of having purchased a legal pass?

Why does it appear, that despite numerous notice, and billions lost, that your ministry seems more intent on protecting the ASC, or suppressing investigation into this matter, than in protecting the public of Alberta.

[admin]

How to pay off a government agency, exempt yourself from the law in Alberta, (or any other province for that matter) and collect big $$ at public expense.
Third request for public interest answers from Alberta Finance Minister Iris Evans.

While I now know the difference between fraud and theft, learned in the last few years, after I left the investment industry, I am still in the dark about the differences between a commission, a fee, a kickback or a bribe.    Why might this be important?
 
It might be important to find out whether our current government is selling out the public interest for money. I have written before about the approximately 20 times (source Alberta Finance) that our crown corporation, the Alberta Securities Commission has given permission to sell toxic investments in Alberta.  I have asked both the ASC and the Alberta Finance department to provide a reason why these firms are allowed to skirt our laws.  They cannot seem to answer this question.  Not only did they sell permission to violate our laws for the recent Asset Backed Commercial Paper, as well as Concrete Equities Investments, which is now crumbling, but there are several thousand other examples of such legal tricks played upon the public on the ASC web site. Are you aware, as an investor that some of the investments you own did not have to follow our securities laws, and that your government allowed this for money?

How do we discover whether people running our finance department, or in the ASC, are simply inept at protecting the public interest, or corrupt and selling the public interest? 
 
The ASC earned $24 million in 2009 from fee revenue and this included fees for selling legal exemptions. (ASC 2009 Annual report) Selling permission slips to allow our laws to be violated by investment firms!
 
They can’t seem to find a public interest reason for doing this.  Is it all about money, and nothing about safety?  Is it a fee, a commission, a kickback, or a bribe by the investment industry?
 
This will be my third request to Iris Evans and Alberta Finance to see if they are willing to shed the disinfectant of sunlight on the practice. It now goes on behind closed doors.   I won’t go into negligence, breach of trust, and the other criminal aspects, but I notice them being involved in other cases.
 
For example, Allen Stanford was indicted and jailed recently for his ponzi scheme, and one of the bank regulators who should have stopped this, but looked the other way, was also charged.  In another case, an Austrian fund manager, Sonja Kohn, is now being investigated for receiving more than $40 million in kickbacks for helping funnel money to Bernie Maddoff’s ponzi scheme.  I am sure she would call these payments, “commissions”, and not bribes.
  
From the bottom of the economic food chain, where the salesman on the street is operating, to the top with Iris Evans in charge of Alberta Finance and the ASC, does it have to be a pathological pursuit for money?  Where are the professionals?  Where are the public servants?  Iris Evans, what public interest is being served by granting legal exemptions like this (with no notice to the public)? When will you own up to what is on the public record, recognize it and take responsibility?  Third request for an answer from Iris Evans.
 
Regards
 
Larry Elford, (former CFP, CIM, FCSI, Associate Portfolio Manager, retired)
www.investoradvocates.ca
www.breachoftrust.ca


(advocate comments, see below for what Iris Evans has been busy with as she "serves" the public, while we pay for her public service in more ways than one.
(from www.eyeswideopeninalberta.blogspot.com)

As Health Minister she globe-trotted on a pretty regular basis, yet Albertans have yet to see any benefit from the thousand upon thousands of public dollars she spent seeing New Zealand, Australia, France and the U.K. (at a cost of over $20,000 – and that’s just for France and the U.K.), Switzerland, Sweden, Washington (and don’t fool yourself that this would be an inexpensive trip – it came in at just under $12,000. – a relatively CHEAP outing for Minister Evans). As employment Minister Iris had some lovely adventures, spending your $32K plus to visit the Philippines, Japan and China October 5 – 19 2007, just shy of $36K to see Paris, France. London, England. Berlin, Germany. Amsterdam, Holland from April 19-29 in 2007, and a mere $14,419.72 in Dallas from March 21, 2007 to March 27, 2007.