Special Committee on Cooperatives Committee on July 25th, 2012

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

Let's say they have a $2-million or $3-million locked mortgage at a rate of 2.3% or 4%. Given the rates today, they could possibly replace that money fairly easily. But unless they're told to do so, they figure they're locked in and they can't.

My question is, if CMHC were given the green light to allow for the closed mortgages to be bought off at a lesser penalty, equivalent to the others, say a three-month penalty, could they relocate that money productively and not lose on it?

[The Chair, Conservative, Blake Richards]

Before you start, we're about 35 seconds over time. I know it was a clarification of the question you had asked earlier, so I allowed that.

I will ask that your response be as brief as it can be.

[John Lahey]

It's really hard for me to answer that question because CMHC's powers have been significantly changed in recent times.

The reality is that the arrangements between the housing co-ops and CMHC are commercial arrangements and have commercial requirements. I do believe there would be some benefits to everyone, if we were able to find a way to meet in the middle somewhere.

It's pretty hard for me to answer that question.

[The Chair, Conservative, Blake Richards]

Thank you.

We'll move into our second round of questioning now. First up is Mr. Boughen.

You have five minutes.

[Ray Boughen, Conservative, Palliser, SK]

Thanks, Mr. Chair.

Thanks to the gentlemen for sharing their time with us this afternoon.

Alan, when I listened to your presentation, I thought it was a good business move that allowed you to buy six, seven, or eight industries at one time—and as my colleague Dan said, the economy of scale enters into that equation. But what happens to any profits that the company accrues? Is there a share dividend, or is it banked for future use?

[Alan Diggins]

It goes back to the members. The cooperatives are facilitated by a third party. Actually this one is facilitated by people who came out of the Home Hardware cooperative—a very sophisticated group.

A lot of the money in the early stages is going to be to insure the receivables, if you will. If you can guarantee the receivables for vendors, they're going to get better prices in the end. Probably in the initial five years, some of the profits will be turned back into self-insurance. It will go back to the members. As well, the objective of this whole thing is volume rebates. That's where the real money is for the purchaser of the steel, and that kind of stuff.

But it's a true model cooperative. The people running it, the third party, work for a percentage of the profits. It's a pretty clean model.

[Ray Boughen, Conservative, Palliser, SK]

So around the board table is it the co-op model, one member one vote?

[Alan Diggins]

That's correct.

[Ray Boughen, Conservative, Palliser, SK]

Is has nothing to do with how many shares the member may have in the corporation.

[Alan Diggins]

No.

In EMC, our organization, we've licensed our name to give it the strength, so we've got two shares, if you will. That's just to keep the spirit and ensure that it follows the model we've established over the last 15 years, in terms of how the relationships work between the manufacturers. But every company that joins only gets one share.

[Ray Boughen, Conservative, Palliser, SK]

Good. Thank you.

Mr. Lahey, I was interested in your analogy of the money moving to the west, or the opportunity for involvement of credit unions and co-ops headed west. What about the west coming east? What do you see happening there? Is that a possibility, a probability, or not going to happen?

[John Lahey]

I meant to imply that it was far more likely that the credit unions in the west would come east than that the ones in the east would go west.

I think the western credit unions are very strong. They have a long-standing successful history. I don't believe some of them would be interested in going outside their province. I think they are quite competitive, but others have different views. I think Ontario represents a big opportunity for them. It's the biggest consumer market in the country and it's where credit unions have the lowest market share. For sophisticated western credit unions, I think they'll take a long hard look at it.

[Ray Boughen, Conservative, Palliser, SK]

What do you attribute the small market share to? Obviously there's lots of opportunity for financial operations here, there, and everywhere.

[John Lahey]

I think it's a function of things that have happened over a long period of time.

I spent most of my life in banking, so when I came into the credit union I spent a lot of time trying to figure out exactly that question.

I think many of the western provinces, in particular, see having their own financial institution sector as very important to their local economies. In their minds—and I think there's a lot of truth to it—eastern Canada hasn't always been a consistent and reliable supporter to them, so they see themselves as needing to be self-sufficient, and a financial sector is important to that.

That's not the case in Ontario. Ontario has been the home of the banks. I think the Ontario government likes credit unions and is committed to credit unions, but it doesn't see them as strategically important as perhaps some of the western provinces do. The powers that have been provided to credit unions partly reflect that, I think, but credit unions in western Canada have broader business powers. They also have unlimited deposit insurance.

I think they've had kind of a friendly environment. I think their history is different with consumers as well, because consumers share a lot of that willingness or wish to be independent of eastern Canada.

Again, that's not true in Ontario. In Ontario you can hardly go very far before you find someone who is either employed by a bank or is married to someone who is employed by a bank. Banks have a very strong history in Ontario, and credits unions were hurt by that, having really developed in the industrial sector, which has shrunk in Ontario.

[The Chair, Conservative, Blake Richards]

Thank you very much. The time has expired on that round.

We'll move now to Mr. Allen.

You have five minutes.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Chair.

Thank you both for coming.

As Mr. Boughen was asking the question and Mr. Lahey was explaining—we were conversing earlier—I thought I would point out that Mr. Lahey used to be the CEO of FirstOntario, where I've been a member for a long time. But it goes back to the auto workers actually, and specifically to General Motors and not auto workers in St. Catharines or in Niagara, but actually to one plant. We had what we used to call CU-men—because they were men at the time, not women—who would come around and sign you up, as a new employee when you entered the work force, to join the credit union. That's how they drove their membership base.

I think of my late brother, who worked at Ferranti-Packard and also belonged to a credit union at Ferranti-Packard, which John would remember, of course. It made electrical equipment. When that plant and other plants closed, the credit unions closed as well. So the history of Ontario credit unions is driven by small manufacturers and large manufacturers. At one point in time they couldn't merge in Ontario, so when they died, they died.

One of our branches, while you were CEO, Mr. Lahey, was Holy Rosary in Thorold, which was actually a credit union to the parish. It wasn't attached to an industry or a company; it was Holy Rosary parish of Thorold. The credit union was for the parishioners, and you had to be a member of the parish to belong to the credit union. So it was a different dynamic, I think.

I want to actually get to both of you, and time will run short.

Can you compare the first 55% of your career, Mr. Lahey, with the second part of your career, which is now ongoing, and the banking aspects of where you were? You were there for a substantial period of time. Your CV correctly points out—and I already knew this—that you were a senior executive there for a long time. Can you compare what you saw coming into the credit union movement and what you've seen subsequently? Can you give us a sense of the importance of why credit unions are truly needed, not only in this province but across the country?

[John Lahey]

For about two years I ran CIBC's retail network across Canada when they were in the midst of the TD-CIBC merger, which didn't happen. If I had 10 priorities for the year, they were all about money. It was all about growth, it was about income, and it was about profit. That's the nature of the beast. That's why they're so strong.

I went to the credit union and it was all I could do to get profit even on the agenda. I think that's one of those examples where neither extreme, in my view, is the right place to be.

I think what you see is that the profit preoccupation of the banks causes them to abandon things or to not pursue things that they probably could afford to pursue but which don't represent the next incremental best investment for them.

I think credit unions play to a different agenda. I think we have to be a lot more focused on profit because the reality is that we need capital to support our business. It's true at Alterna and it was true at FirstOntario that profit isn't the first, last, and most important ingredient in my day. That's why we can do micro-lending. There is no way we could get micro-lending done at the bank because you don't make any money at it on your income statement. People would laugh at me. If they did do it, they would do it in the charitable division, and it's not about charity; this is business. This is helping people create viable businesses and create viable lives.

I think credit unions and cooperatives, because they don't have the drop-dead profit motive, are much better positioned to support social innovation and community economic development.

[Alan Diggins]

Can I throw a bit of a curve at you? I grew up in the bank and the last thing I did in the bank system was create the first commercial banking centre for any chartered bank in Canada. That centre was made up of lenders who understood manufacturing. They had dirt underneath their fingernails and understood it. I call them old fashioned bankers.

I've spent the last five years watching the old fashioned bankers either die or retire, and there is not much opportunity for manufacturers in Canada, period, to enjoy old fashioned bankers. I may have a conversation after this, and there may be an opportunity here.

I've been at his level at two chartered banks, and they're just not listening. There are so many manufacturers in this world that need old fashioned bankers who understand people. A good example is our chairman who bought out a part of General Electric, spent $400,000 of his own money trying for a management buyout with 30 of his people who put $7 million in and they could not find financing in Toronto. This was up in Owen Sound.

I listened to him for a whole winter and there was one old fashioned banker left and I said, “Jim, enough of this. Can I call a banker I know?” I did that on Monday, they saw them on Tuesday, and they had their money on Friday.

There might be an opportunity to look at forming cooperatives on the financial side for manufacturers, which are run by guys with dirt under their fingernails. That's a bit of a curve for you.

[The Chair, Conservative, Blake Richards]

Thank you very much. The time has expired on that round.

We'll now move back to the government side.

Mr. Butt, the floor is yours for the next five minutes.

[Brad Butt, Conservative, Mississauga—Streetsville, ON]

Thank you very much, Mr. Chair.

Thank you very much, gentlemen, for being here. In particular, Mr. Lahey, it's good to see you again. Alterna has a wonderful retail location right in the heart of the village of Streetsville, right across from my constituency office. I walk by it all the time, and I see that it's a busy hub. So congratulations on a very successful location there in my home riding.

Congratulations, by the way, on the 2012 MicroSkills Corporate Spirit Award you recently received. Obviously, you're clearly a leader in that. You've indicated that you're not doing it because it's a money-maker. It's not making everybody millionaires. You're doing it because of the cause, or the mandate, of the credit union. I think that's wonderful.

You gave one example, I know, in your opening remarks, of how the micro-skills program works. Did you want to maybe expand on that a little bit more and talk about how it's an important part of your mandate and generally about what it's designed to accomplish for the clients who are approved under that program?

[John Lahey]

Yes. We have established inside Alterna a community economic development group, if you will, as a line of business, and microfinance is part of that. Microfinance was developed by the old Metro Credit Union over a decade ago, and it was focused on helping people get off social assistance. It very specifically focused on people who are underserved and disadvantaged in the community.

We do two or three things that I think differentiate our approach from other people's. First is that we require them to get education on how to run a business. Many of the micro-lending programs you see across the country do not require that, and as a result, they have much higher failure rates. We require them to go through that. Most of that is actually training sponsored by the federal government. So thanks for that.

The second thing we require them to do is to do a business case. Many of these people have never done that. We help them through that. We mentor them through that. But they have to put a business case, because at some point in time, if they're successful, they're going to grow out of the micro-lending side of things, and they're going to have to sit with one of the old-fashioned bankers, or maybe one of the new-fashioned bankers. They're going to have to convince them that their business is viable. So they need to know how to manage the business.

The third thing we do is mentor them. We actually, in many ways, hold their hands through much of it. I think that's probably what differentiates us most.

The other thing for Alterna is that Ontario is one of the few provinces where there isn't any government subsidy for microfinance, so any losses we have on the program we eat.

It's a relatively small program, but it's effective. It's an important piece of our overall community economic development, but it's not the only piece. Overall, the overall piece is profitable. This particular piece, in terms of our income statement, we try to keep breaking even.

[Brad Butt, Conservative, Mississauga—Streetsville, ON]

Second, in my short time for questioning, I want to get back to the housing cooperatives. Both Mr. Harris and M. Bélanger have raised it. There might be some confusion among the general public that may be watching about how these original mortgages, these 35-year agreements with CMHC and housing cooperatives, were entered into. CMHC had to go out and borrow that money at that time when there were high interest rates. They were able to borrow from long-term bondholders, get a lower rate, and actually pass on that mortgage rate at no markup to those housing co-ops. Now it's great to say that interest rates have dropped and everybody should break their mortgages and all that, but everybody has to understand that it's a domino effect, right? CMHC has to pay penalties if they want to break those long-term funding agreements with the bondholders.

I assume that credit unions would be very interested in having mortgages or in providing project financing or retrofit financing to housing co-ops, given the rates today and so on, once those first mortgages have been paid off. Or perhaps in a second mortgage position, where you could negotiate with CMHC, some projects have been allowed. They've been given exemptions by Canada Mortgage and Housing Corporation to go out and get a second mortgage or project financing, because they have a capital need or they have something else they need to do. I'm assuming that credit unions would be quite interested in lending to cooperatives. They have asset value there. There are real estate holdings there that are worth something. It sounds like a sound investment to me. I'm assuming that credit unions would jump at the chance to lend to housing co-ops.

[John Lahey]

I believe that to be true. Certainly, Alterna is very interested, and that's why we're participating. I agree with you. These are commercial loan arrangements. People come to us all the time. We're on the other side sometimes, and sometimes we negotiate, and sometimes we can't. I think there are ways to get this done, but it may require a little bit of flexibility on everybody's part. That's the negotiation and discussion under way right now.

[The Chair, Conservative, Blake Richards]

Thank you.

Sorry, your time has expired, Mr. Butt. I appreciate that line.

We'll move next to Madam LeBlanc.

The floor is yours for the next five minutes.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Thank you very much.

Again, I want to thank the witnesses for the great information they are providing.

I just wanted to go back to the micro-lending programs that you have. They're just great. I think they're very interesting. You were mentioning that sometimes you have to eat a loss that's ongoing, but because I think you probably would be interested in expanding these programs, because of the need, do you see a role for government, perhaps through a provincial-federal government partnership, in helping? Would you see a way that could help expand these programs, which have such great benefits?