Home Capital Group

Canadians need to be paying close attention to how their government addresses what just happened with Home Capital Group. The way this unfolds will tell us whether we have an honest and reliable cop on the beat, or if the thieves are now running the store.

Back in 2014, HCG announced that it was letting go of some mortgage brokers due to concerns of fraud. A couple of weeks ago, the Ontario Securities Commission moved ahead with allegations that the company delayed disclosure, made misleading statements and falsely certified an annual report in the wake of those frauds. This move by the OSC caused the company’s stock price to tank and prompted a run on deposits. (Here’s the Financial Post blaming the OSC for doing its job.)

To cover its obligations, HCG has turned to the Healthcare of Ontario Pension Plan (HOPP) which is furnishing a $2 billion line of financing. This deal comes with a $100 million non-refundable fee, and has 200% collateral in the form of mortgages held by HCG. In other words, HOPP may gain $4 billion worth of mortgages for a $2 billion outlay. Meanwhile this financial stopgap bears an interest rate of at least 15% on funds drawn, plus additional interest on funds not yet used. This spells doom for HCG, while allowing HOPP to strip assets from the company at basically no risk to itself, leaving nothing for HCG’s creditors come the eventual bankruptcy.

Here’s the fun part: The CEO of HOPP, Jim Keohane, is an HCG board member and Kevin Smith, HCG’s chairman, is on the HOPP board as well. For these men to use HCG’s distress to serve HOPP is a glaring conflict of interest and may constitute fraudulent conveyance, or hiding of assets from creditors. (For more, read this article from John Hempton.)

There’s a lot of talk that the downfall of HCG is the beginning of the end for Canada’s real estate bubble, and that may be the case. But bubbles are one thing, while honest governance is another. People entrust their livelihoods and futures to financial institutions. When insiders serve themselves by playing fast and loose with other people’s money, that trust is abused. We’ve seen a lot of financial chicanery go unpunished in the last few years. I’m going to consider this case a test of whether our country is capable of keeping its financial industry in hand and not the other way around. Let’s see if our regulators have it in them to do what needs to be done.

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