General Electric Co. tumbled the most in six years after the manufacturer’s deteriorating outlook stoked fears it will cut its dividend for only the second time since the Great Depression.
Banks from RBC Capital Markets to UBS Group AG lowered their predictions for GE’s stock price, days after Chief Executive Officer John Flannery reduced the company’s 2017 profit forecast. Morgan Stanley recommended selling the shares, citing “a higher probability of a dividend cut that we do not view as priced in” and hurdles in GE’s power-equipment unit.
“The weakness in the power business is one item that people are getting more bearish on,” Jeff Windau, an analyst at Edward Jones, said in an interview. “The dividend is another one of those items in which people are getting a stronger feeling that it’s going to be cut.”
Flannery, who took over Jeffrey Immelt’s longtime post less than three months ago, called the company’s latest results “completely unacceptable” last week and vowed to consider all options as he seeks to reverse one of the deepest slides in GE’s 125-year history. Already, he has targeted US$20 billion in asset sales, announced major management changes and welcomed a representative of activist investor Trian Fund Management to GE’s board.
GE plunged 6.3 per cent to US$22.32 at the close in New York, the biggest decline since August 2011. The shares have fallen 29 per cent this year, by far the largest drop on the Dow Jones Industrial Average.
Flannery, who will detail his plans to reshape the Boston-based company at an investor meeting Nov. 13, is grappling with challenges from poor cash flows to slumping power-generation markets.
The maker of jet engines and ultrasound machines on Oct. 20 cut its forecast for adjusted earnings this year to $1.05 to $1.10 a share, down from a previous range of $1.60 to $1.70 a share. Analysts had anticipated $1.54 a share, according to the average of estimates compiled by Bloomberg.
“We believe investors need to take action to protect against the possibility of near term underperformance in the event of a dividend cut in November and this is clearly an additional factor in our rating change,” Nigel Coe, an analyst at Morgan Stanley, said in his report.
Former HSBC Holdings PLC currency trader Mark Johnson was found guilty of fraud for front-running a US$3.5 billion client order, a victory for U.S. prosecutors as they seek to root out misconduct in global financial markets.
He was convicted on Monday of almost all fraud and conspiracy counts after a month-long trial in Brooklyn, N.Y.
“They’ve convicted an innocent man,” defence lawyer John Wing said as he left courtroom.
Johnson, 51, was the first person to be tried since the global currency-rigging scandal that resulted in global banks paying more the US$10 billion in penalties. The charges stemmed from HSBC’s execution of a trading order from Cairn Energy PLC in 2011 to convert the proceeds of a unit sale from dollars into pounds.
Johnson looked down as the first guilty count was announced by the jury foreman. Prosecutor Carol Sipperly asked the court to order Johnson to surrender his passport and remain in New York. The judge ordered that he not seek a new passport from the British consulate. He will be sentenced at a later date.
“This sends a signal to traders and banks that this type of behaviour is absolutely inappropriate and will be pursued by the government,” Michael Weinstein, a former Justice Department trial attorney, said. “That’s a big hammer over the banks — it may force them to monitor and self-regulate their people.”
HSBC wasn’t accused of wrongdoing, but the bank has been under investigation over currency trading and is in active settlement talks with the Justice Department and U.S. regulators, according to a July 31 regulatory filing.
The verdict comes as prosecutors prepare for other trials targeting manipulation in markets including currencies, commodities and mortgage-backed securities.
In one, three former employees of JPMorgan Chase & Co., Barclays PLC, and Citigroup Inc. are awaiting trial in Manhattan after being accused of using an online chat room they dubbed “the Cartel” to share information and fix currencies. In another, a former trader at UBS Group AG is accused of rigging the price of precious metals.
The Johnson trial offered the Justice Department a chance to regain momentum after an appeals court in July tossed out convictions of two ex-Rabobank Groep traders for manipulating the Libor benchmark rate. The court said prosecutors had improperly used testimony they were forced to provide to a U.K. financial regulator to build the U.S. case.
Johnson was arrested by federal agents at New York’s Kennedy Airport in July 2016, just as he was about to board a flight to the U.K. Stuart Scott, the bank’s former head of currency trading in Europe, was also charged in the case. He is awaiting a ruling on his bid to avoid extradition to the U.S.
According to prosecutors, Johnson and Scott were among 11 currency traders feverishly buying pounds just before the Cairn transaction. The traders in New York and London jumped ahead, driving up the price of the pound to its highest in two days on Dec. 7, 2011, minutes before the 3 p.m. deal, according to a government witness. Prosecutors said they were tipped by Johnson.
HSBC’s traders dominated 75 per cent of the currency’s trading on a major platform in the five minutes before the fix, according to a prosecution witness. They collectively made the bank US$8 million in profit, just after Johnson used what prosecutors said were code words — “my watch is off” — according to chat transcripts and recorded telephone calls.
The U.S. called officials from Cairn to testify about their talks with Johnson and Scott, who advised them to do the trade at 3 p.m. instead of 4 p.m. Prosecutors said both men knew the earlier time was easier to manipulate.
The government also played numerous recorded phone calls including one in which Johnson said, “I think we got away with it.”
A key government witness was Frank Cahill, the former HSBC trader who conducted the Cairn transaction. He said he was part of a separate scheme in which he and traders at other banks used instant-chat groups to communicate with each other to influence benchmarks and maximize profits.
Cahill said Scott directed him to begin purchasing pounds about an hour before the 3 p.m. transaction. He testified that he employed an “aggressive” manner of buying that caused the pound’s price to go up, just after Scott directed him to “ramp” up the price. During his trades, Cahill also said he realized other HSBC colleagues were also purchasing pounds and competing with him, resulting in an “aggressive jerking move higher” in price.
Johnson took the witness stand in his own defence, testifying that he was in New York when the trades took place and left Scott “in charge” of the Cairn transaction in London. He said HSBC provided high-quality execution and gave Cairn a “fair” price. Purchasing of pounds before the transaction was an accepted practice called “pre-hedging,” he said.
If the pound’s price rose during the transaction, Johnson attributed it to the massive size of the trade and not manipulation. He insisted neither he nor those he supervised were prohibited from buying pounds.
Johnson’s lawyers called Kevin Rodgers, Deutsche Bank AG’s former global foreign-exchange trader, who worked with Johnson at the Frankfurt-based bank. Rogers said the rise in the pound was instead caused by the size of the trade and that the transaction was conducted in a manner that was common in the US$5.1 trillion-per-day currency market.
Cisco Systems Inc. agreed to buy BroadSoft Inc. for about US$1.9 billion to expand further into software and cloud services.
The US$55-a-share cash offer announced Monday is a 28 per cent premium over BroadSoft’s closing price on Aug. 29, a day before Reuters reported that the Gaithersburg, Maryland-based company was working with bankers to pursue a possible sale. The acquisition is expected to close during the first quarter of 2018, Cisco said.
Cisco has had an acquisitive year as Chief Executive Officer Chuck Robbins adapts to a shift in the networking industry toward less-expensive software-based services and away from traditional hardware, which provides Cisco with most of its revenue. The San Jose, California-based company had announced eight acquisitions in 2017 before today’s deal, according to data compiled by Bloomberg.
BroadSoft, which had a market value of about US$1.7 billion based on Friday’s close, earlier attracted interest from buyout firms Searchlight Capital Partners and Siris Capital Group, people familiar with the matter said Oct. 4.
BroadSoft was advised on the transaction by Jefferies Group and Qatalyst Partners, with legal advice from Cooley LLP.
The deal gives Cisco a major new presence in cloud-based communications products and services, a segment of the market it has been lacking in until now, said Jason Noah Ader, an analyst at William Blair & Co. Cisco already is a leading provider of communications for companies, but BroadSoft’s business is focused on providing those services through the internet and hosting them in the cloud.
“Cisco has been a little bit behind the curve there,” Ader said. Buying BroadSoft “allows them to be a leader in the cloud instead of a challenger.”
BroadSoft operates in about 80 countries, according to its website. Founded in 1998 by former Alcatel USA vice president Michael Tessler and Celcore executive Scott Hoffpauir, the company went public in 2010. Tessler serves as chief executive officer.
Cisco paid US$3.7 billion to acquire AppDynamics Inc. in March and in May, it agreed to buy software-based networking startup Viptela Inc. for US$610 million.
OTTAWA — It’s not often the Finance Department and the Bank of Canada come so close to bumping heads on major policy announcements — but they will this week.
Both government institutions — linked at the hip, but still staunchly guarding policy independence — are set to reveal their latest economic assessments and forecasts, one day after the other.
And it’s not that current conditions are threatening to go south any time soon. Most forecasters are calling for only mildly lower adjustments in growth patterns over the coming months and into 2018, after fiery — many would say unsustainable — gains in the first half of this year. Interest rates, meanwhile, will likely continue to rise gradually as economic output nears full capacity.
Nor is the federal government’s finances anything to be unduly worried about — notwithstanding major NAFTA rejigging, general discomfort over the direction of the Trump administration and lingering concerns over the impact of tougher mortgage rules on the domestic economy.
In fact, the next annual Liberal budget — date yet to be determined, but probably two or three months into 2018 — is expected to show much less red ink on the fiscal books than previously predicted, thanks in large margin to better-than-anticipated revenues and over-the-top economic growth so far this year.
We’ll get a better taste of what is to come on Tuesday. That’s when Finance Minister Bill Morneau delivers his government’s fall fiscal update, which could include new measures to close more loopholes for some of Canada’s wealthiest taxpayers.
“We’re not expecting any big shifts in fiscal policy at this point, but we will — at least — get some direction,” said Douglas Porter, chief economist at BMO Capital Markets.
“I think the big news there will be just how much the picture has changed, thanks to the much-better-than-expected growth rate this year, giving Ottawa more flexibility,” he said.
“Our advice would be to use most of that flexibility to bring down the deficit and/or improve the medium-term outlook for growth — in other words, focus on tax relief or infrastructure spending.”
Even so, the economy is starting to come back down to Earth — or, at least, back to sustainable-but-slower growth. Instead of quarterly highs as much of 4.5 per cent that we saw in the first half of 2017, Canada’s growth spurt could ease to around two per cent in the second half of this year.
Meanwhile, on Wednesday, the Bank of Canada will lay out its latest economic forecasts in its quarterly Monetary Policy Report, along with an interest rate decision and followed by a news conference in Ottawa.
While many analysts are not anticipating a change in the current one-per-cent lending level, following two increases of a quarter-point — in July and September — the markets will be focused on the central bank’s revised GDP numbers.
Estimates from the previous MPR, published in July, put growth at 2.8 per cent for 2017, followed by two per cent next year and 1.6 per cent in 2019.
Those forecasts were released at the same time as a quarter-point rise to 0.75 per cent in the central bank’s trendsetting lending rate — the first upward move in seven years. That was followed by a hike of equal measure in September, taking the base borrowing cost to one per cent.
Bank Governor Stephen Poloz has since acknowledged there is “no pre-determined path for interest rates from here.”
Indeed, “if the bank needs to ‘monitor’ how the economy is doing with higher rates and other changes in the landscape, we won’t see the next rate hike until the Spring of 2018,” said Avery Shenfeld, chief economist at CIBC Capital Markets.
“But other uncertainties are ones that can’t be assessed by pushing a few buttons on the Bank of Canada’s forecast model. There’s no variable in the model for ‘NAFTA ends.’ There’s no button on the computer for ‘new mortgage rules’.”
This week’s back-to-back economic estimates could serve to highlight the debate over who is actually running the show — the Finance Minister or the Bank of Canada governor. It’s an issue that has fired up sporadically for decades.
Most recently, the issue was vocalized by Poloz himself after a prominent private-sector economist claimed late last year that the central bank “had” to raise its 2016 growth forecast, “since the governor’s boss, Minister Morneau, is out touting the benefits of fiscal stimulus.”
When asked to clarify the fiscal-monetary relationship, Poloz told reporters at the time: “The Finance Minister, sorry, is not my boss.… The Bank of Canada is a fully independent policymaker.”
The federal government would argue otherwise.
Regardless of who is supposed to be running what, Poloz and his monetary team are arguably at the policy forefront, given the overriding impact of interest rates on the economy — from food and housing costs, to the level of the Canadian currency and its influence on cross-border trade.
“I think of monetary policy as being more able to affect the economy in the short to medium term,” said Porter at BMO.
“Fiscal policy definitely takes a backseat in trying to steer the economy over the short term. I think the best thing fiscal policy can do is create a healthy background for the economy to flourish — or it can absolutely frustrate that,” he said.
“Generally speaking, it falls on monetary policy to try to fine-tune the economy as much as possible.”
President Donald Trump’s shortlist for the next Federal Reserve chair includes the most qualified person for the job who’s been on the right side of every economic argument the last 10 years, and also Kevin Warsh.
The first one, of course, is current Fed chair Janet L. Yellen. Now, the case for Yellen is as straightforward as it gets. She has the best resumé for the job, and has done about the best job she could at it the last four years. Indeed, she has a PhD in economics from Yale, she’s been a Fed governor, a regional Fed president, the Fed vice-chair, and now the Fed chair itself at a time when unemployment is at a 16-year low and inflation is below the Fed’s 2 per cent target. The only possible quibble is that inflation actually might be a little too low right now. In any case, though, it’s impossible to invent a better C.V. for a central banker.
But as easy as it is to tell a story about why Yellen should be Fed chair, it’s hard to tell one about Warsh. The Harvard Law-trained Warsh, whose father-in-law is a major Republican donor and the heir to the Estée Lauder fortune, got his start on Wall Street before taking a job in the Bush White House. From there, he was nominated to be a Fed governor despite lacking the kind of high-level academic or financial credentials that others have had. “Kevin Warsh is a bad idea,” former Fed vice-chair and Reagan appointee Preston Martin said at the time, and “if I were on the Senate Banking Committee, I would vote against him.”
They didn’t. Instead, at 35 years old, Warsh became the youngest governor in the Fed’s history.
(Keep in mind that a few years later, Senate Republicans would block Nobel Prize-winning economist Peter Diamond from taking the same position three separate times, despite the fact that he had also taught then-Fed chair Ben Bernanke, on the grounds that he did “not possess the appropriate background, experience, or policy preferences to serve”).
It’s true that some of our best central bankers haven’t had PhDs in economics, but that wasn’t Warsh. His specialty was seeing inflation problems that didn’t exist. He warned about inflation in 2006 when, excluding volatile food and energy prices, it was just 2.1 per cent. Then he did in 2007 when it was 2 per cent by the same measure. And again in 2008 when core prices were rising a relatively nonthreatening 2.3 per cent, going so far as to say that he was “still not ready to relinquish my concerns on the inflation front” the day after Lehman Brothers failed.
What Warsh wasn’t worried about, though, were all the risks banks had been taking that would ultimately require them to be bailed out. A few months before the credit crunch began in 2007, Warsh even said that “an important source of strength has been financial innovation,” highlighting the purported benefits of credit default swaps and other derivatives that Warren Buffett would go on to call “financial weapons of mass destruction.” This was supposed to be Warsh’s area of expertise.
Donald Trump’s rumoured shortlist for chair of the Federal Reserve includes: left, Kevin Warsh, former Fed governor, right, Jerome Powell, current Fed board member, and centre from top, Gary Cohn, U.S. economic council director, Janet Yellen, current Fed chair whose term ends in February, and Stanford economist John Taylor.
Now, to be fair, everybody makes mistakes. Warsh, after all, was far from the only member of the Fed to be so blinded by inflation that they missed the ticking time bombs on bank balance sheets. Most of them were. And, as Bernanke put it in his memoir, Warsh’s “many contacts on Wall Street” and “particularly good connections among Republican lawmakers” did “prove invaluable” when they were desperately trying to keep the entire financial system from melting down.
The bigger question, though, is whether you learn from your mistakes. Warsh didn’t. He kept tilting at these inflationary windmills even as the prospect of a second Great Depression loomed as a real possibility. In April 2009, when the economy had just lost 539,000 jobs, the unemployment rate had ballooned to 8.9 per cent, and core inflation was a mere 1.2 per cent, Warsh told his colleagues at the Fed that “I continue to be more worried about upside risks to inflation than downside risks,” according to the transcripts the central bank has released of its meetings. He sang the same tune five months later when he said that the Fed should start removing its support for the economy even before it had “substantially returned to normal,” lest they let the inflationary genie out of the bottle. Core prices were only rising 1 per cent at that time. And they were increasing even less than that when Warsh once again sounded the alarm about the dangers of trying to do too much to put people back to work in a speech a year later. Unemployment was 9.8 per cent then.
Warsh has never admitted that he was so wrong to lose so much sleep over an imaginary inflation problem when the economy was faced by a very real unemployment one. Instead, as Bloomberg View’s Ramesh Ponnuru points out, Warsh has spent his time inventing new, incorrect rationales for his old, incorrect policies. After he left the Fed, he argued that it shouldn’t be doing as much not because it was risking inflation, but rather because it was allegedly fueling inequality and allowing Congress to get away with not cutting Social Security.
Warsh was unavailable for comment, but two of his supporters, Heritage Foundation economist Stephen Moore and CNBC senior contributor Larry Kudlow, told me why they think he’d be a strong choice despite all of this. (For the record, they say the same about Stanford economist John Taylor. And Taylor, if Trump’s comments Friday on Fox Business are any indication, has remained in the top tier of candidates, while Warsh seems to have slipped.)
“A lot of people were wrong about inflation after the crisis when we had a massive run-up in the money supply,” Moore said. The more important thing, in Kudlow’s opinion, is that Warsh “doesn’t believe that faster growth and higher wages cause inflation.” This, he explained, means that “if Trump gets his tax cuts, and the economy responds with higher growth” then “Warsh will let that run.” This is what Moore hopes for as well, since, he believes, “the role of the Fed chair is not just to be the key person on monetary policy, but also to be a spokesperson for economic policy in general.” He thinks that “Trump needs someone who will speak out in favour of his tax cuts,” and that Warsh would fit that bill.
To be clear, this is not what Fed chairs are supposed to do. They’re supposed to stay out of politics entirely. They haven’t always — Alan Greenspan, for one, seemed to endorse the Bush tax cuts in his typically Delphic way back in 2001 — but that’s the ideal. Warsh, though, has a different view of things. During his time as a governor, he actually argued that the Fed should have done less despite still-high unemployment — in effect, ignoring its statutory mandate to keep joblessness as low as possible while also keeping inflation low — so as to “put the burden” on Congress to do the kind of things he thinks would be good for growth, like cutting entitlements and striking new free trade deals. It’s a dangerously undemocratic idea that would be dangerous for the economy as well. That’s true even in the opposite case where, say, the Fed “rewarded” the government for cutting taxes by keeping interest rates inappropriately low. We’ve already seen what happens when the Fed focuses on what is best for the president over what is best for the economy. It was called the Nixon administration, and it helped set the stage for a decade of stagflation.
In a rational world, Warsh’s long and distinguished career of being wrong about just about everything would keep him from becoming Fed chair. But, as you may have noticed, this isn’t exactly a rational world. It’s one where Trump has reportedly all but ruled out appointing his National Economic Council Director Gary Cohn to lead the Fed after Cohn criticized Trump’s statements about neo-Nazis and anti-Nazi protesters both being to blame for the violence in Charlottesville, Va. Being easy on fascists isn’t usually a criterion for central bankers, but being hard on them is apparently a disqualification for Trump. Which is to say that Trump might have other priorities than whether his most important economic policymaker is the best economic policymaker he can find — an opening if there ever was one for Warsh.
Trump seems to want a Fed chair who will never disagree with him, which is just about the worst requirement you could come up with for the job. Well, that and picking someone who thought that 2 percent inflation was a bigger threat than 10 percent unemployment.
Toronto-Dominion Bank’s new U.S. head isn’t being critical when he describes the lender as “sub-scale” in small business and corporate lending, and “underweight” in wealth management. He just thinks there’s market share to be had.
“We’ve got loads of room to grow,” said Greg Braca, chief executive officer of TD Bank, the U.S. retail unit of Canada’s largest lender.
Braca, 53, who took over the top job in June following Mike Pedersen’s departure, outlined his plan for the bank’s “next evolution” during an interview last week at Bloomberg’s New York headquarters, including ambitions for its Maine-to-Florida branch network to be a “market share taker.” He said he’s not looking to reinvent the lender, but expand its “foundations and underpinnings” to become a more significant competitor to bigger rivals like Citigroup Inc. and Bank of America Corp.
The Canadian-owned lender has expanded through acquisitions to become the eighth-biggest U.S. retail bank by assets. Toronto-Dominion spent about $17 billion building its U.S. branch network from 2005 to 2010, buying Portland, Maine-based Banknorth Group Inc. and New Jersey’s Commerce Bancorp Inc., as well as lenders in the Carolinas and Florida. TD also has added on credit-card portfolios, an auto financing company and a U.S. money manager.
Braca, who joined Commerce Bancorp in 2002 and stayed through the transition, described his strategy as “basic, old-fashioned sort of stuff, overlaid onto digital capabilities.” It includes investments in technology, opening more branches in New York, Philadelphia, Washington and throughout Florida, and building on what he calls a “nascent” wealth-management business seeded by the 2013 takeover of New York-based Epoch Holding Corp.
“We have a fantastic opportunity around wealth,” Braca said. “We’ve brought in a lot of people, we’ve rebuilt platforms and we’ve built product capabilities. We are finally now dressed to play.”
The firm has established wealth-management offices in major markets including New York, Philadelphia, Washington and Boston to help with retirement planning, asset management and estate planning, Braca said. He also sees opportunity to leverage Toronto-Dominion’s minority stake in the TD Ameritrade brokerage.
“We very much want to be a focus for our customers and that includes lending to high-net-worth or mass-affluent individuals,” he said. “We think there’s a compelling way we can go to market there.”
Given the relatively small size of its wealth-management business, the lender is open to new technology without the fear of it “disrupting the existing capabilities or revenue streams,” Braca said. He sees a place for robo-advising, the low-fee automated investing platform already being adopted by big banks including Morgan Stanley and Bank of America.
“We would view it as a tool rather than some overarching strategy about how you face off against the market,” he said. “As we think through this, we don’t have this inherent large book of business that we’re disrupting.”
Braca said he expects future growth will be fueled internally, though he didn’t rule out more acquisitions.
“Never say never,” Braca said. “You want to look and be aware of what’s going on in the market, you want to be opportunistic. But clearly, we now have the size and scale in the U.S. where we don’t have to do a deal.”
His comments echo those of Toronto-Dominion Bank’s CEO Bharat Masrani, who said he’d rely on internal growth over acquisitions to expand in the U.S. when he took over as head of the parent company about three years ago. Still, Toronto-Dominion has continued with some deals, including working with TD Ameritrade on this year’s $4 billion takeover of Scottrade Financial Services Inc., and earlier buying credit-card portfolios of Target Corp. and Nordstrom Inc.
The Toronto-based parent company gets about a third of its annual profit from U.S. retail banking, and has more branches in the country (1,260) than it does in Canada (1,138).
As it shifts toward digital banking, TD Bank plans to differentiate itself by highlighting the same “convenience” theme its brick-and-mortar locations are known for, Braca said. In its early days, TD Bank relied on a “retail-tainment” strategy revolving around coin-counting machines, piggy banks for kids and treats for customers’ pets.
“We used to, 15 years ago, talk about dog biscuits in stores, and that was a convenience point and people loved it,” Braca said. “What’s the digital version of that biscuit?”
Amazon.com Inc has received 238 proposals from cities and regions across North America vying to host the company’s second headquarters, it said on Monday.
The number of applicants underscores the interest in the contest, which Seattle-based Amazon announced last month. The world’s largest online retailer said it would invest more than US$5 billion and create up to 50,000 jobs for “Amazon HQ2”. The deadline for submitting proposals was Thursday.
Amazon said 54 states, provinces, districts and territories in the United States, Canada and Mexico were represented in the bids.
Some said this month they could offer Amazon billions of dollars in tax breaks if they were chosen. New Jersey proposed US$7 billion in potential credits against state and city taxes if Amazon locates in Newark and sticks to hiring commitments, for instance.
Amazon did not disclose the range of incentives it was offered in the proposals.
Others took different tactics. The mayor of the Atlanta suburb of Stonecrest, Jason Lary, said his city would use 345 acres of industrial land to create a new city called Amazon. Amazon Chief Executive Jeff Bezos would be its mayor for life, Lary said.
Amazon is expected to choose a city that will help it recruit top talent to stay competitive with rivals such as Alphabet Inc’s Google.
The company has said it will make a decision next year.
OTTAWA — A Conservative MP joked last week that Finance Minister Bill Morneau would be a “shoo-in” for an award honouring the “most creative use of loopholes.”
These loopholes — the ones that allowed Morneau to keep substantial shares in Morneau Shepell, his family’s pension and benefits firm, by using numbered companies instead of divesting himself of his assets, and which failed to prevent him from tabling legislation that furthered his own family’s interests — were first flagged four years ago.
Back in 2013, when the Tories were in office, Conflict of Interest and Ethics Commissioner Mary Dawson pointed out a number of gaping holes with the Conflict of Interest Act.
The Conservatives chose to ignore her.
Instead of addressing the loopholes, the Tories, who were embroiled in their own conflicts of interest with the Mike Duffy-Nigel Wright affair, sought to protect individuals subject to Dawson’s examinations by keeping news of investigations secret until a final report, while also swamping her office by including some 215,000 federal public servants under the scope of the act.
The Conservatives’ committee recommendations led the lone Liberal involved in reviewing the act to comment that the report “is a complete farce” and “ignores all of the very credible testimony” heard, including Dawson’s nearly 100 recommendations.
Many politicians and political staffers find Dawson’s interpretation of the Conflict of Interest Act overly restrictive. So it’s no surprise that there is a lot of head-scratching going on.
“When I met her, she was pretty darn tough,” Winnipeg MP Robert-Falcon Ouellette told HuffPost Canada last week. “I can’t even go to my kids’ school, according to her, and sell raffle tickets, because I might be influencing people for private interests because I am the MP…. It sounds kind of crazy; I said it was ‘crazy,’ that it was ‘off the wall,’ but it’s not her, it’s [the] law.”
Last week on Facebook, a number of former Conservative staffers shared their bewilderment at Dawson’s decision to allow Morneau to hold millions of dollars of shares in Morneau Shepell in an “indirect” fashion because the loophole had never been closed.
Former Tory staffers vent
“In 2006, I was told by the Ethics Commissioner’s office that I had to put my $40,000 of exchange traded index funds into a blind trust. Nobody said anything about putting them into a numbered company being another option,” former Conservative staffer Dan Mader posted.
Others chimed in, sharing stories of how Dawson had prevented a colleague from continuing a $10-an-hour side-job as a yoga instructor, and a summer intern at Veterans Affairs Canada who was refused permission to work as a part-time dishwasher at Blue Cactus, a nearby Mexican restaurant.
In the House of Commons on Friday, Conservative finance critic Pierre Poilievre pointed out important issues around how the finance minister had failed to recuse himself on legislation — C-27 — that creates targeted-benefit pension plans that his company sells, as well as tax proposals for small businesses that would encourage the purchase of individualized pension plans, which his company also sells.
Watch Morneau take heat in the House of Commons:
When asked if the law should be changed to close some of the loopholes Morneau used, Poilievre declined to comment. He said he hadn’t examined the issue.
“I don’t have a specific response to your policy question,” he told HuffPost.
“I think we can all examine the law, but if a well-lawyered minister with enough money comes along and seeks out every possible loophole to get around the rules, then the problem isn’t the law. The problem is the minister.”
Conservative Leader Andrew Scheer’s spokesman, Jake Enwright, said he had “nothing to add” to Poilievre’s answer.
There is no question the minister’s behaviour bears scrutiny but the law also needs fixing.
Here are a few ways the Conflict of Interest Act could be amended to increase transparency and avoid conflict of interests:
1) Consider indirectly held assets to be “controlled assets” that require divestment
This is the most obvious and pressing amendment. The NDP may call for this as early as Monday. Public office holders — and certainly the finance minister — should not be allowed to use numbered companies to shield their assets from conflict of interest provisions.
Dawson first flagged this change on page 32 of her 2013 report, writing: “There have been instances where a reporting public office holder does not controlled [sic] assets directly, but holds them indirectly through a holding company or other similar mechanisms. Those instances should be included as well.”
Dawson never elaborated on which other office holder was holding controlled assets indirectly and whether that placed him or her in a conflict. In her numerous appearances before MPs, she never raised this loophole as a priority, so it’s perhaps no surprise that neither the Tories, nor the NDP, nor the Liberals suggested addressing the obvious gap.
A review of Commons debate and committee discussions from 2006 onwards also finds no MP ever mentioned the loophole, suggesting the problem was not by design.
The watchdog group, Democracy Watch, places blame for the loophole on Dawson herself. Writing in a 2013 brief for the bill’s statutory five-year review, the group noted that legislative change is needed only because “the ethics commissioner is too narrowly — and legally incorrectly — interpreting the definition of ‘controlled assets.'”
What Dawson calls “indirectly” held assets are not included in the act’s exhaustive list of “exempt assets,” such as cars, paintings and antiques, and Canada Savings Bonds.
As it stands, the law states that public office holders who wield significant decision-making power and have access to privileged information must divest themselves of their “controlled assets” within 120 days of their appointment or place them in a blind trust to be divested through an arms-length process.
So crucial is this to the application of the law, Dawson stated in 2013, that Canadian taxpayers pay the cost of administering these trusts, which can be very expensive as they are generally based on a percentage of a person’s holdings.
Currently, public office holders are not in a conflict of interest if they take part in a decision or a matter that is “of general application” or affects them as “one of a broad class of persons.”
Morneau has not recused himself from discussions around the C-27, the pension bill, because of this “general application” clause, even though Morneau Shepell is one of only a handful of companies heavily involved in the sector which will be affected by the bill.
In February 2016, Morneau declared that Dawson had set up a conflict of interest screen to prevent him from participating in “any discussions or decision-making processes and any communication with government officials” on “any matters or decisions, other than those of general application, relating to Morneau Shepell Inc. or its subsidiaries, affiliates and associates.” If a topic came up he wasn’t supposed to be in the room to discuss, it would be up to his chief of staff, Richard Maksymetz, to ensure he was removed.
(Interestingly, the screen did not include any restrictions on participating in discussions affecting the vast family assets of his wife, Nancy McCain.)
By “general application,” as Dawson previously explained, a conflict arises only if a matter discussed is “narrowly focused and affects the interests of [a particular company or person] as one of a small group, or if [that company/person] has a dominant interest in the matter.”
NDP ethics critic Nathan Cullen told HuffPost this is an “easily exploited” loophole.
Democracy Watch’s Duff Conacher called it “too vague.”
“Almost all decisions made by ministers, their staff, and appointed senior government officials … apply generally – so, in fact, they likely don’t have to abstain from participating in very many decision-making processes even when they have a direct conflict of interest,” he stated in a press release Friday.
3) Force all recusals to be publicly declared
Morneau told reporters Thursday that he wasn’t sure how many times he had been pulled out of meetings because of a potential conflict of interest, “but I can remember at least two times.”
He said he doesn’t know “what happened at those meetings” because his conflict of interest screen prevented him from knowing what was discussed.
Morneau is legally obliged to recuse himself from “any discussion, decision, debate or vote on any matter in respect of which he … would be in a conflict of interest.” He must publicly declare, within 60 days of the recusal, every time he removes himself in such circumstances.
But Morneau, like all similar office holders, is obliged to declare only instances when he went to a meeting or took part in a discussion or debate and then removed himself. If, for example, he chose not to attend a cabinet discussion because he suspected he would be in a conflict of interest, he doesn’t have to publicly declare that he missed the meeting or why.
Cullen, the NDP MP, thinks this suggestion could help the public understand what a cabinet minister feels is a conflict and what is not.
“When you choose to stay out of a meeting or you choose not to, it helps in real terms to define what you think is ethical behaviour and what is not,” he told HuffPost.
4) Conflict of interest screens can’t be allowed to replace blind trusts
Morneau said Dawson told him a blind trust would not prevent his knowing what was in the blind trust and suggested instead that “a conflict of interest screen would be a superior way” for him to ensure he had no conflicts.
Conflicts of interest screens are not defined in the legislation, but Dawson has the flexibility in the act to set them up. She has said she uses them if a public office holder is in a position “where there is a significant possibility that they will be involved in discussions or decision-making that could affect their own private interests or those of a relative or a friend or an organization with which they have been connected.”
Morneau said he took her advice because she is the expert.
Rotman School of Management professor Andrew Stark told HuffPost that Dawson should not have given Morneau that advice, because screens can’t be effective when you are dealing with someone with “great power and great wealth.
Watch Morneau get testy with reporter:
“When they come together, the screen is inadequate — and that is the experience of the U.S. treasuries who realized soon in that they would have to be screened from everything they did in office or almost everything they did in office…. The blind trust was the only remedy for them. And it is this particular situation that we are talking about.”
Stark also notes Morneau’s position that his “indirect assets” posed no conflict of interest — “and that’s a position nobody will accept.
“But if that’s his position, why the screen?”
5) Oblige spouses to put their holdings in blind trusts
Morneau acknowledged last week that his spouse holds a great deal of shares in Morneau Shepell. The finance minister said she and their children will now divest themselves of all their assets in the family company. But the law doesn’t force Morneau, or anyone else in his position, to do so.
Stark calls this “a huge loophole.”
“It is not the way it is done in the States…. That is something that needs to be addressed as well…. The law does not adequately prevent conflicts of interest when it comes to spouses in this country,” the University of Toronto professor said.
Although there are numerous other changes that could strengthen the Conflict of Interest Act, the few loopholes that the Morneau affair has highlighted are some that should have been discussed earlier.
“Whether by seeking election or by accepting an appointment or employment, each public office holder freely chooses this responsibility. Public office holders voluntarily accept the public trust knowing they must maintain that trust and knowing they must be seen to maintain it.”