Thank you.
My name is Steve Furino and I am the treasurer of Beaver Creek Housing Co-operative in Waterloo, Ontario. I would like to tell our story in two parts. First is how the situation came to pass for us and consequently our need to be made whole for our ABCP investments. With Canaccord's announcement yesterday, it seems that this will be accomplished for us, though large losses will still be borne by others. Second, and more importantly, I want to emphasize how the credibility of both the financial sector and the government has been damaged.
Beaver Creek is a mixed-income community of 50 families. As with other cooperatives, Beaver Creek is owned by its members. The members contribute to the operation of the complex. Specifically, members democratically decide the policies, budgets, and values that influence the community in which we live. We administer a rent-geared-to-income subsidy provided by the federal government to low-income families under section 95 of the National Housing Act. Roughly one-third of the co-op's families are subsidized.
We have managed ourselves very well. Our housing charges are below market and hence we provide access to affordable housing beyond the subsidy program. We have very low arrears, minimal vacancy loss, no deferred maintenance, and a long-term plan for capital expenditures that is, or rather was, fully funded. Our replacement reserve is a fund to pay for capital expenses, such as new roofs or floors. We have made annual contributions to the reserves since our first occupancy in 1984, and the balance is currently about $180,000.
In 2008 we had budgeted to begin the replacement of 25-year-old furnaces at an estimated cost of $88,000. The fund is held at Canaccord Capital. The agreement with our investment adviser requires explicit instructions from us for the purchase of bonds and equities, but allows his discretion for cash and cash equivalents. This agreement has been in place for more than 10 years. The money market portion of our account needs to be safe and liquid because it is intended for near-term activity, like the replacement of furnaces. Our adviser is certainly aware of this.
In the summer of 2007, $93,000 in this fund was frozen as part of the ABCP crisis. The paper was purchased as part of our money market funds. We were not informed of its purchase specifically nor of the risks of this type of entity. Our investment adviser and I have engaged in repeated conversations about the risks in the American housing market and in the derivatives market. Under no circumstances would I have allowed the purchase of such an instrument had I known it contained American mortgages or any derivatives. Our investment adviser has confirmed over the phone that he was unaware of the contents of the paper and relied on its AAA rating and implicitly the good judgment of his firm.
Clearly the freezing of 50% of our financial assets and the loss of a large fraction of that 50% is a serious impediment. To our members, many of whom earn less than $30,000 a year, it's a colossal loss.
Let me emphasize what the situation looks like to a typical family. Mom and Dad, with two kids, earn $40,000 a year. They have lived in the co-op 10 years. They always pay their housing charge on time, volunteer on the landscape committee, and attend general meetings. Through no fault of their own or the co-op's, $93,000 is frozen and a large fraction of that may be lost. They do not get a new furnace as planned. Why? Essentially because a much wealthier and more powerful group--choose from the list: banks, rating agencies, conduits, brokerage houses--claiming to act in their best interests, perpetrated what the family can only interpret as fraud. AAA-rated paper, bank guaranteed, which was declared to be safe and liquid, was neither safe nor liquid.
The Crawford committee is seen by the family as belonging to that same class of financial agents who now completely lack credibility. Without being made whole, why would such a family vote in favour of a proposal that would legitimize the loss of capital, the loss of liquidity, and deny recourse under the law? The obvious answer is to get some of the money back rather than none. However, prior to yesterday, the co-op did not know how much money it would get back or when it would get the money back.
Moreover, beyond a certain point, the issue is no longer one of financial loss. To our families it's an issue of justice.
That brings me to the second part of the story. In meetings at Beaver Creek where this situation was discussed, members made repeated references to failures in the corporate and financial sector over the last 10 years and to the Canadian government's apparent lack of desire to provide a regulatory and compliance framework that protected Canadians from predatory behaviour. I've taken the following examples straight from discussions within the co-op.
When the tech bubble was crashing, popular analysts like Henry Blodget were saying to buy in public and sell in private. Off-book accounting and fraud at Enron and other corporations caused the collapse of large firms and the loss of employment and pensions to many tens of thousands. In the American mortgage business, predatory lending practices, biased real estate assessments, and opaque securitization have plunged the American credit market into crisis. Unfortunately it seems that similar practices may have occurred in Spain and the U.K. as well. CEO salaries, Bay and Wall Street bonuses, and hedge fund managers' pay have all hit records, despite dismal performance in many cases.
No one in the co-op has any recollection of the Ontario Securities Commission or the RCMP successfully prosecuting a Canadian for a criminal act in the financial sector, though everyone was aware that Conrad Black and the CEO of Enron were convicted. This may be because Canada had no high-profile cases or because Canadians are more honest or, more cynically, because Canada's enforcement in these areas is at best pathetic and at worst acts to protect law-breakers.
If the problems in the financial sector had made very, very rich people only rich people, that would be one thing. If those problems had spread to Main Street and harmed ordinary citizens who had no part in the decision-making, risk assessment, or profits, I think that's another thing.
With respect to the ABCP crisis, that such a product has been sold as a cash equivalent clearly demonstrates a failure in disclosure or regulation. My hope is that this committee would ensure that appropriate regulation is brought into force to prevent future mishap. I have also concerns about the integrity of the agencies and individuals involved. It has already been asserted that Coventry informed the Bank of Nova Scotia in early July 2007 that there were imminent problems. Neither Coventry nor the bank made those concerns public. Instead, it has been asserted that the bank sold hundreds of millions of dollars of the suspect paper, some to Canaccord, which in turn used it as routine money market tools for its clients. Even when sufficient regulation exists, there is a need for compliance enforcement.
The public continues to perceive that leaders in both politics and business lack credibility and integrity. The ABCP debacle adds more evidence to an already burgeoning file. Younger citizens do not vote much anymore. In the most recent election in Ontario, I reminded my students, every class, of the date of the election and of the importance of their participation. Roughly 10% voted. When I asked why, the typical answers were “All politicians are corrupt” or “It makes no difference”.
As someone who has personally lived under a dictatorship, I find the prospect of a disengaged citizenry frightening. Unfortunately, behaviour exhibited by the corporate and political leaders in the last 10 years provides abundant evidence to the cynical. It is imperative that elected members act to ensure the integrity of the financial system and the credibility of its participants. In the end, our society runs on institutional trust, and that trust is being eroded.
Thank you.