Two government-purchased securities worth $36.5 million did not comply with Yukon investment laws, according to Canada’s auditor general.
“We found that the asset-backed commercial paper, in which the government invested, was not one of the three types of investments permitted by the Financial Administration Act,” auditor general Sheila Fraser said yesterday.
Under the Yukon Financial Administration Act, the government is only permitted to invest in instruments that are guaranteed by a government, guaranteed by a bank, or given the highest rating by two or more bond-rating agencies.
The Yukon invested $36.5 million in two trusts. They did not meet the requirements set out in Yukon law, said Fraser.
A government didn’t guarantee the investments and only one rating agency, Dominion Bond Rating Service, gave them a rating.
The investments needed a guarantee from a bank.
Instead, the trusts had liquidity agreements, which Finance officials viewed as a guarantee.
However, these agreements were only redeemable after a large-scale market disruption.
The conditional guarantee did not meet the requirements of the Yukon act, said Fraser.
“The department’s view has been that there was a conditional guarantee, known as a liquidity agreement,” said assistant deputy Finance minister David Hrycan.
“It has been our position that that banks have not honoured their commitments.”
The commercial papers were purchased from the Bank of Montreal, but it did not provide the liquidity agreement.
The conditional guarantee came with the trusts, but the department of Finance doesn’t know which banks issued them.
“I think we have to recognize that officials made these investments in good faith,” said Fraser.
“They truly believed that it was guaranteed by the bank.
“Unfortunately it was not.”
Now, the $36.5 million is stuck in financial limbo and the Yukon government is still not sure whether it will recover all of the money.
Asset-backed commercial paper is a short-term investment backed by a variety of assets, like mortgage loans, car loans and credit card balances.
In July and August 2007, the Yukon government invested in two trusts, Symphony and Opus, which were created by a third-party company called Newshore Capital Group.
The investments were due to mature at the end of August.
However, the $33-billion market froze on August 13 when buyers could not be found for the investments.
In December, a consortium of banks and lenders reached a deal to restructure the paper into long-term debt.
The government will not know how much money it stands to lose until details of the agreement are released in late February.
“There will be a loss, the question now is how much,” said Fraser.
“And we will, of course, be looking at this very closely when we do our audit of the financial statements as of March 31.”
The Yukon has been investing in commercial paper for a number of years, said Fraser.
“The government of Yukon has been investing in this asset-backed commercial paper for a very long time — since February 1990,” said Hrycan.
“At no time during these 18 years did it ever occur to anyone that there may be a problem with these investments.”
Last week, prior to release of Fraser’s audit, Finance minister Dennis Fentie announced the government would change its investment policy.
The Yukon will no longer invest in asset-backed commercial paper.
Who should be held responsible for the bad investments?
“Under the Westminster system, ministers are, of course, responsible for everything that goes on in their departments,” said Fraser.
“Though I think it has to be recognized that this was an action done by officials and it will be up to government to determine what consequences those officials have to assume.”
“Either the minister was incompetent in his job, or else they were lying and misleading us in the house,” said NDP leader Todd Hardy.
“I would really like to know what happened.”
While Hardy initially called for Fentie’s resignation, he now says that would be too easy.
Hardy wants to face Fentie in the legislature this spring to get him to account for his role in the investment debacle, he said.
“They need to issue a apology to the legislative assembly and the people of the Yukon and explain why they took this position.”
“The auditor general’s report is very damning of this government and the actions of Dennis Fentie — they broke the law,” said Opposition Leader Arthur Mitchell.
“I believe that the Finance minister should be tendering his resignation.”
“In any other jurisdiction the Finance minister would be fired by the premier or resign,” he continued.
“And in this case, I think Mr. Fentie should go.”
After Fraser’s announcement, Fentie dismissed her report in radio interviews as being just another “opinion.”
“Apparently there’s only one opinion that matters to Dennis Fentie and that’s his,” said Mitchell.
Both Fentie and deputy Finance minister Elaine Taylor were absent during the auditor general’s briefing to the legislature.
Fentie could not be reached for comment before press time.