When Yukon Finance officials bought Newshore’s Opus and Symphony funds, they breached the Yukon’s Financial Administration Act.
That legislation lays out the rules officials must follow when they invest government money.
It is straightforward and clean.
Government money can be invested if it is “not immediately required for payments.”
And then it lays out, clearly, where the money can be invested.
There are three categories.
“(a) securities that are obligations of, or guaranteed by Canada or a province.”
The Newshore Opus and Symphony funds do not fall into this category.
They don’t fall into the third category either.
It reads, “commercial paper issued by a company incorporated under the laws of Canada or a province, the securities of which are rated in the highest rating category by at least two recognized security rating institutions.”
While the funds do carry a AAA rating, they were rated solely by the Dominion Bond Rating Service.
Because they were rated solely by one rating service, the government investments did not qualify under the act either.
So the government needed a guarantee from an investment bank.
The act reads, the government can invest in, “(b) fixed deposits, notes, certificates, and other short-term paper of, or guaranteed by a bank, including swapped deposit transactions in currency of the United States of America.”
It is here that Finance officials crossed the line.
They bought the two, third-party funds through a bank.
“We viewed it as guaranteed” by the bank, said Clarke LaPrairie, the Yukon government’s director of financial systems.
But the funds clearly weren’t guaranteed.
Banks don’t guarantee third-party investments, like Newshore’s Symphony and Opus.
The officials should have checked. They should have ensured they were guaranteed.
But they didn’t.
Yukon government officials simply trusted the investment bank.
They assumed they were buying a solid investment.
They assumed a single AAA rating protected that investment.
Officials assumed the banks would make good on the investment if it failed.
They didn’t question the banks. They just bought the funds. That had, apparently, become common government practice.
Officials handed over the money without investigating what they were buying.
If they had, they would have found something profoundly sketchy.
Visit www.newshore.ca. Would you invest $36.5 million in this company?
Premier Dennis Fentie insists the investment carried no risk.
Clearly, that isn’t true — the Yukon government now has $36.5 million in limbo.
So there was risk.
Finance officials and Fentie are going to great lengths to purge any suggestion the investments are linked to the US subprime mortgage scandal. (Though initially Fentie himself mentioned the subprime link when discussing the reasons for the territories investment woes with reporters.)
In fact, the Opus and Symphony funds may be devoid of any connection to the failing US real-estate market.
But that doesn’t make it OK. The two funds still carried significant risk.
“For them to suggest that they do not own a piece of paper that does not have significant exposure to market-to-market losses is incorrect,” said Diane Urquhart, an independent financial analyst.
In fact, the two investments may be tied to a worse scheme than the subprime market.
The funds are linked to a lesser known, but far riskier play known as the credit-default swap market.
It was sold by the banks as safe cash deposit, but in fact it exposed the buyer to an obligation to pay for defaults on international loan portfolios up to 20 times more than the investment, said Urqhardt.
Which is probably why Canadian Pacific and other big investors are already writing off up to 20 per cent of their original investment.
Recognizing the risk as early as 2002, Standard and Poor’s refused to rate the funds at all.
In fact, given the risk, nobody but the Dominion Bond Rating Service, which took a cut of the investment, would look at these funds. That’s why the funds carried but a single rating.
Fentie’s reassurances the Yukon has not lost any money yet isn’t accurate either.
The territory has already realized a loss of interest on its money — it has had $36.5 million in limbo since August, money it could have been earning interest on. That lost interest represents a cost to the government.
On December 14, the Yukon government will find out how long it will take to recover its initial investment. And, in the event that it has lost some of that money, it might learn how much it can hope to recover.
It is a mess, though we don’t know precisely how large a mess it is.
And it happened because finance officials ignored the law.
They turned a blind eye to the fact the funds had been rated by a single agency.
And officials assumed they had a bank guarantee.
Fentie stands by his officials. He justifies their decision, saying the government made lots of money over the past couple of years.
He said his government will continue to invest public money.
And investing that money is alright — as long as officials follow the letter of the Yukon Financial Administration Act.
The law was written to protect public money.
By ignoring it, officials have breached the public trust.
Now, before future investments are made, they must pledge to follow the law. (RM)