The Story of AIG and the Canadian Government

The Canadian Press has awarded Jim Flaherty the Business Newsmaker of the Year honours for his handling of the economy. "With Flaherty at the helm, Canada's economy outperformed most others last year."

But in a case of what you don't know won't hurt you, I would say that if Canadians really knew what was behind the appearance of a strong recovery in Canada, they might want to make Flaherty the most high-profile Canadian prisoner of the year, because his actions since taking over in 2006, have been criminal.

He's been lauded for keeping a cool head, but there is a big difference between a cool head and not giving a damn. Flaherty falls into the last category. I think when he's finally out of office it will be worse than when he left the Ontario cabinet, and an enormous deficit was found under his desk.

Because what Flaherty has been doing, even when our economy was strong and his government inherited a 13 billion dollar surplus, was to gamble away our future. We've had incompetent governments before, but this is the first to systematically tear down decades of financial infrastructure, put in place to protect our ability to take care of our citizens.

I've already mentioned the sub-prime mortgage mess that he's gotten us into. You can read about it here, here, here and here. But what he's done is actually worse, if that's possible. But first a bit of history.

The Story of AIG

The American International Group, Inc., or AIG, has been in business for almost nine decades, and rose to the top under the leadership of Maurice R. "Hank" Greenberg, "who shifted its focus from personal insurance to high-margin corporate coverage. [Greenberg also] focused on "selling insurance through independent brokers, rather than agents, to eliminate agent salaries." (1)

And the company prospered by following government regulations and maintaining a cautious approach to investing. But while deregulation of the industry began before George W. Bush, his administration virtually turned Wall Street into the Las Vegas strip and AIG took the bait.

Deregulation mania raged .... liberating every corner of the American financial industry from what were patently sensible regulations aimed at protecting the public from reckless bankers, speculators, hucksters, and just the blind stupid greed of the herd on a rampage. Deregulation can't simply be chalked up to the alleged imperatives of globalization or the existence of freer financial markets offshore.

There were international efforts to rein in the financial anarchy, but instead of joining them—even taking a leadership role—the U.S. government actively resisted attempts to bring order and caution to the markets. When the European Union tried to bring the foreign operations of Americas five big investment banks under stricter European regulations in 2004, the Bush administration helped ward off such interference, siding with the banks' request to be left alone to decide how best to regulate their own risky behaviour. (2)

And that risky behaviour resulted in the worst economic crisis since the Great Depression. Some gamblers made a lot of money betting on the crash, but AIG self-destructed.

The American Taxpayer to the Rescue

After telling the government that AIG was too big to fail, the federal reserve began bleeding money to beleaguered corporation. A total of 170 billion dollars. The largest bailout in American history.

You might think that given the generosity of the American taxpayer, that AIG would be grateful and try to show their appreciation by doing a better job of managing their company. Not on your life. They continued to operate as if nothing had happened. They were "victims" who needed rewards.

- The week following the September bailout, AIG employees and distributors participated in a California retreat which cost $444,000 and featured spa treatments, banquets, and golf outings.

- A month after the first bailout, AIG executives spent $86,000 on an English hunting trip. The company responded by saying, "We regret that this event was not canceled."

- And yet on November 10, 2008, just a few days before renegotiating another bailout with the US Government for $40 billion, ABC News reported that AIG spent $343,000 on a trip to a lavish resort in Phoenix, Arizona.

The American taxpayer is suffering, in part because they had to clean up AIG's mess, and the company is flaunting a lavish lifestyle, financed by the suffering American taxpayer. But it doesn't end there.

In March 2009, AIG announced that they were paying out $165 million in executive bonuses. Total bonuses for the financial unit could reach $450 million and bonuses for the entire company could reach $1.2 billion. President Barack Obama, who voted for the AIG bailout as a Senator responded to the planned payments by saying "It's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat?" (1)

Good question. And yet they do. This new culture of greed and entitlement, while a nation suffers as the result of their "risky behaviour" is frightening. What have we created?

Jim Flaherty and AIG

When Jim Flaherty threw the doors open to high-risk mortgages in Canada, with his first budget in 2006, he allowed the American high-risk industry to get a foot hold.

“In the U.S., they are still responding to the fallout of the subprime mortgage mess. In Canada, we acted early over the past year,” Mr. Harper said in a speech to the Empire Club in Toronto. He didn't say that, not only did his own government open the sheltered Canadian mortgage market to U.S. insurers, but it also doubled to $200-billion the pool of federal money it would commit to guarantee their business. The foreigners unleashed what one U.S. insurance executive described as a fierce “dogfight for market share” that prompted rivals, including the giant federal agency Canada Mortgage and Housing Corporation, to aggressively push such risky U.S.-style lending. (3)

And one of those companies that Flaherty and Harper aggressively wooed, was AIG.

On May 2, 2006, in his first budget, Mr. Flaherty announced that not only would Ottawa guarantee the business of U.S. insurers, it was doubling the guarantee to $200-billion. Twenty-four hours before Mr. Flaherty's announcement, AIG's mortgage subsidiary first registered with Canada's lobbyist commissioner, according to a federal registry. At the time, companies who spent more than 20 per cent of their time lobbying the government for changes in policy were required, by law, to register. It is not known how much time AIG spent promoting its cause to the government.

... Banking and insurance officials were so concerned about the alarming rush to 40-year mortgages at the beginning of 2008 that one bank executive warned the Bank of Canada's chief financial stability officer, Mark Zelmer, in a meeting that “the government has got to put an end to this.” (3).

And just so we're clear. AIG and other American firms, can insure questionable mortgages in Canada with absolutely NO risk to themselves. The only ones assuming the risks are the Canadian taxpayers.

And when news of the crisis first hit, Flaherty simply transferred all of the high-risk mortgages from the banks' books, to ours. We now own them and if they default, guess who's left holding the bag? The Canadian taxpayer. Now comrades of the American taxpayers, who have transferred enormous amounts of money to AIG, but got only a bunch of rotten paper in exchange.

And make no mistake. Forclosures in this country, while harder to track, are on the rise. And there are vultures circling hoping to cash in.

AIG and the Bank of Montreal

Another controversy arising in the U.S. over the AIG bailout, is that they paid off their bankers first, before compensating shareholders or the American public. And one of those bankers who had given AIG money to help create the sub-prime tsunami, was the Bank of Montreal, who received 200 million dollars of American taxpayer money.

And guess who recently purchased a portion of AIG in Canada? You guessed it. The Bank of Montreal. We got their garbage and AIG got our money. Good job Mr. Flaherty.

$200 billion to feed our finance minister's gambling habit. And what does our media do? Give him an award. It's much easier than doing their homework, I suppose.

Some might wonder why the opposition is not having more to say about this impending disaster. But when a Globe and Mail reporter asked then Liberal finance critic, John McCallum about it, he said that no one wanted to be responsible for the crash of the housing market.

So, instead, everyone has to go along with the charade. Absolutely frightening.

Sources:

1. Wikipedia

2. The Trouble With Billionaires, By Linda McQuaig and Neil Brooks, Viking Canada, 2010, ISBN: 978-670-06419-9, Pg. 64

3. Special investigation: How high-risk mortgages crept north, By Jacquie McNish and Greg MacArthur, Globe and Mail, December 12, 2008

Getting Tied to the Railroad Tracks by Wall Street Villains

Random House Unabridged Dictionary defines a villain as "a cruelly malicious person who is involved in or devoted to wickedness or crime; a scoundrel ....

In the aftermath of the 2008 financial crisis, we were introduced to many new villains we didn't know existed. These were Wall Street folks, who created the crisis, and then cashed in on their misdeeds, by taking money from taxpayers.

But there were others who went above and beyond to feed off the misfortunes of others. One of those was John Paulson. According to The Trouble With Billionaires:

Of the world's 1,011 billionaires, it seems fitting to begin with John Paulson, who made a fortune betting against the subprime mortgage market....

Paulson always knew he wanted a large fortune, and he systematically went about laying the groundwork for acquiring one, applying himself sufficiently at New York University to graduate first in his finance class and then winning top honours in the Harvard MBA program. From there he soon gravitated, as water down an incline, to the money-making palaces of Wall Street, opening his own hedge fund in 1994 in order to best make use of his unusual talent for spotting the biggest money-making opportunity going.

The ultimate one came his way in April 2005, when he developed a hunch that the ultra-hot subprime mortgage market was headed for spectacular collapse. Keeping that particular insight to himself, he turned his research staff loose on the problem and figured out how to make money betting that the millions of people signing up for mortgages they could only dream of actually affording would soon start defaulting. When they did, Paulson was there, watching money flood into his hedge fund with the torrential force of a great deal of water travelling down a very steep incline. In 2007 he personally pocketed $3.7 billion, giving him the record—perhaps of all time—for financially profiting from the misery of others. (1)

This would certainly be bad enough, betting on people losing their homes, but what was really happening was that these sub-prime mortgages were actively being sold to unsuspecting and vulnerable clients, who were used as pawns to make a great deal of money for a handful of people. And yet these fraudsters believe that they did nothing wrong.

A scapegoat is emerging for the U.S. housing market meltdown -- and as a reason for more Wall Street regulation -- and his name is John Paulson. As the very smart manager of a hedge fund bearing his name, Paulson and Co., he created a controversial investment vehicle called the Abacus Fund for Goldman Sachs. The Abacus Fund bought risky mortgage loans and literally bet that they (and the homeowners who held them) would default to the detriment of investors and consumers ... ... As it gets easier for the general public to wrap their heads around this picture of Paulson and Co. (and others) creating designed-to-fail mortgages for unwitting consumers, those who partook are going to be painted as pariahs, whether they acted legally, unethically or otherwise . (2)

What these players did, may not have been illegal, though it should be, and the attitude of the financial industry, is that Paulson was simply a smart man, who is being ostracized because he made a bit of money.

These people have no sense of common decency. They believe they are above everyone else and owe nothing to society. This was a con. A fraud, and someone should be in prison as a result. But instead they are being high-fived and continue to almost print money.

Another example of enormous greed, involved Larry Ellison, CEO of Oracle, who has a net worth of $27 billion.

Assuming a 10 percent rate of return, Ellison could spend $51 million a week—or $303,000 an hour, every hour of the day, seven days a week—and still not dig into his principal at all. Moreover, at that same 10 percent return, the taxes on Ellison's sprawling twenty-three-acre California estate could be entirely paid from his interest payments in just six hours, during one night's sleep. Nevertheless, in 2008, Ellison contested the tax bill for the estate and won a $3 million refund, which had to be repaid by local school boards and municipalities. The Portola Valley School District in northern California was ordered to repay the billionaire some $250,000, roughly the cost of hiring several new teachers. For Ellison, the tax refund was yet more pocket money—enough, for instance, to increase that week's hourly spending from $303,000 to $321,000. (2)

$250,000.00 was pocket change to Ellison, and yet he took the money knowing that the community would suffer as a result.

How did we get to this point?





Sources:

1. The Trouble With Billionaires, By Linda McQuaig and Neil Brooks, Viking Canada, 2010, ISBN: 978-670-06419-9, Pg. 4-5

2. McQuaig/Brooks, 2010, Pg. 10-11