When it comes to wayward government investments, there’s misinformation in the public domain.
Finance Minister Dennis Fentie is the source.
Governments dating back to Tony Penikett’s NDP (1986-‘92) invested in third-party asset-backed commercial paper, said Fentie.
The investment trusts that caused the loss (at least for the next seven years) of $36.5 million of the Yukon public’s money — and the immediate and unrecoverable loss of interest on that money — are relatively new.
They were a market “innovation” pioneered by a small Toronto-based firm named Coventree.
It was founded in 1998.
It was one of the first independent companies to create third-party trusts. That is, it assembled and sold ABCP investments and it wasn’t a bank.
And one of its innovations was extendable commercial paper.
In 2001, it had earned just $34,000 securitizing these “new” types of assets.
That is, they were little-used vehicles back then, but grew in popularity over the next five years, which provides clues as to when the first wayward Yukon investment could have been made. (We’ll pin it down soon.)
Coventree’s innovation was the creation of trusts backed by traditional assets — loans — and more complex financial assets.
That included US subprime mortgages.
These newfangled asset-backed commercial paper trusts grew to a $35-billion market in June 2006, from just $5 billion in 2003.
And here are their two big differences from earlier asset-backed paper investments allowed by the Yukon Financial Administration Act: The banks selling the investments did not issue them — the trust did. And the bank did not insure the investment, the trust did.
And that’s where the Yukon government broke the law. It can only buy such investments if they are guaranteed by a bank. These weren’t.
Fentie has noted other governments bought these investments.
And that’s true.
But that’s only part of the story.
The question is: were other government financial laws as strict as ours? The answer is, probably not.
And, really, that doesn’t matter.
The Yukon Financial Administration Act is crystal clear: the government was not allowed to buy these investments. And it did anyway.
And that’s a problem.
So, did Penikett’s government invest in these things? No. Did John Ostashek’s Yukon Party? No. Did Piers McDonald’s NDP? No. Did Pat Duncan’s Liberal government? No.
Yukon government investment in these trust-issued investments dated back “several years,” said auditor general Sheila Fraser.
She then says the Yukon bought $9.4 million of this illegal, trust-insured asset-backed commercial paper in fiscal year 2004-05.
That’s the first concrete date associated with such an investment.
Yukon Finance officials invested another $9.6 million in these things in 2005-’06, she added.
Now these investments might be a forgivable goof-up.
They were popular, and there was a “don’t ask, don’t tell” culture of disclosure in the asset-backed commercial paper market, according to a November 17th article in the Globe and Mail.
Here’s why Fentie’s Yukon Party government’s negligence might be less forgivable.
“The government did not obtain a legal opinion before these investments were made to ensure that they met requirements of the act,” wrote Fraser on page six of her report on the ABCP debacle.
This is significant.
These were “new” investments, and Fraser has stressed the government failed to take due care in protecting the Yukon public’s money.
Fentie has tried to diffuse responsibility by suggesting identical investments had been made for 18 years.
That’s simply not true.
One type of paper was issued and guaranteed by banks — a legitimate investment under Yukon law.
The new paper was assembled and issued by a trust, and insured by a trust. This was not allowed under Yukon law.
Fentie has tried to absolve his department of responsibility by blaming shifty banks.
Sure, bankers have a reputation for being shifty. But doesn’t that increase the obligation of the Yukon government to have their lawyers vet significant investment deals they sign with them?
Especially significant deals involving newfangled investments?
And that’s a problem for the Yukon government.
It suggests negligence.
And in the Financial Administration Act, negligence is serious business.
According to section 69 of the act, if public money is lost, the person responsible for the loss is liable for its recovery.
The key word being “lost.”
This week, government lawyers dismissed any claims of negligence.
In fact, they weaseled around the issue, suggesting the public investment has not been “lost”, that it is simply in limbo.
As a result, section 69 does not apply, they said.
“We have to work with the words that have been provided by the legislative assembly,” said lawyer Tom Ullyett.
All that may change once details of a financial settlement on the asset-backed commercial paper are released.
If the government were only to guarantee an 80 per cent recovery of its investment, then public money would clearly have been “lost,” and should provoke an investigation into government negligence.
Until then, we must rely on Fentie for concrete facts.
Such facts have been in short supply.
Fentie has dismissed Fraser’s finding the government broke the law as an opinion, but has failed to provide any evidence of an alternative opinion.
He asserted successive governments have invested in similar asset-backed commercial paper. They haven’t.
He suggested, in a taped interview, that Justice officials were investigating the matter. They weren’t.
And his MLAs have intentionally blocked a public investigation into the matter by the Yukon’s Public Accounts Committee.
That’s unfortunate, because such an investigation might have turned up some facts.
And, instead, we simply have a lot of misinformation in the public domain.
And Fentie is the source. (RM)