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.
Looks like you dont blog much anymore but I thought your bitcoin answer was interesting as you clearly know a lot about it. What are your thoughts short/mid term on it? I realize long term it will be a really bad idea people will laugh at but for now seems like a lot of money to be had.
Yes, I could be blogging more… Bitcoin is technically and politically interesting. From a financial point of view I think it’ll never be more than an unsustainable bubble. It doesn’t create any value, it’s just a manifestation of “something for nothing”. I say it’s politically interesting because of the ideology built into its design. The ‘space’ of Bitcoin maxes out at 21 million, so the supply is permanently limited, i.e. it’s inherently deflationary — the more widespread its use, the more scarce and valuable each Bitcoin becomes. This inherently favours the Bitcoin-wealthy, making them even wealthier by default — rent extraction is built into the thing. As William Jennings Bryan might have said, Bitcoin crucifies its users on a cross of bits.
What do you mean rent extraction?
Rent extraction means using money to make money, without actually producing anything. It means a free ride: owning things for a living.
On Sat, Aug 26, 2017 at 11:49 AM Lorne Beaton's Blog wrote:
What do you think of this crypto currency?
1. They want to launch satellites around the earth to maintain the network – and have some big names behind them.
2. They have a conference soon, with some interesting people like ron paul and doug casey.
Hopeful without any basis in reality?
Zero-trust schemes have their uses, but they’re technocratic and serve technocratic ends. I prefer democratic schemes that serve democratic ends. Instead of trying to do without trust, democracy uses accountability instead. That’s what I’d prefer.
That’s a really good point actually, in a way it plays to the lowest in us instead of higher aspirations.