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Waiting for Flaherty: CPP IB Questions for the Minister of Finance

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Created on Tuesday, 12 June 2012 16:28
Written by Erik Andersen
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Global Credit Deterioration
by Erik Andersen
Dear Minister; a short while ago I asked you to act in your capacity as trustee for the Canada Pension Plan beneficiaries, to commission a “value at risk” analysis of the investments at the CPP Investment Fund. Hopefully such an analysis would become a regular event and be posted publicly, much like done by the Chief Actuary.
 
My reasons for this request are two fold: First off I saw little value in self-auditing by the CPP IB; secondly, I have yet to read evidence that Members of Parliament fully grasp what are the persisting investment risks weighing on the CPP Fund value and today’s discernible financial vectors.
 
I am going to cite two examples, of the thousands available, which disclose the credit deterioration that has occurred since 2008, height of the credit bubble. Many folks failed to anticipate or learn from this event.
 
 
The Honourable James M. Flaherty
Minister of Finance
House of Commons
Ottawa, Ontario
K1A 0A6
 

BC Hydro is my first metaphor, illustrating a segment of the economy that should not be in financial distress as it operates as a “natural monopoly”. Using the record of gross revenues as a percentage of total assets and total liabilities one can observe just how thin the financial ice has become for what amounts to governments and their crown corporations.

Starting in 2006, gross revenues were 34.5% of total assets. This percentage ratio declined in every year thereafter to 20.6% by fiscal 2011. This ratio pattern was a little more dramatic when using gross revenues as a percent of total liabilities. The ratio started at 40% in 2006 and by 2011 it had almost decreased by half to 24.2%.
 
What is captured by these ratios is a serious deterioration of credit which you know is of considerable interest to investors. What is not properly disclosed is the “Enron” type accounting carried on by the provincial government and BC Hydro. BC Hydro has been booking revenues and profits that are in fact still accounts receivables which means the gross revenues do not represent cash flow. At the end of fiscal 2011 BC Hydro carried, as an asset, a total of $2.2 billion of yet to be collected money, a condition our provincial Auditor General says will not only persist but will double in the near term.

So when you and your team are off scolding the Europeans please remember we need some scolding done in Canada as well. What is more important to me is that I see no comprehension of this credit deterioration by the actions of the CPP IB.

My second example and metaphor for the private sector is Lockheed-Martin, the one and same you folks want to do business with. From page 29 of their 2011 Annual report these are some eye popping numbers. In 2009 the corporation showed its net equity to be $3.966 billion, its total assets at $35.1 billion and total liabilities at $31.2 billion. By 2011 total liabilities had increased to $36.9 billion, total assets to $37.9 billion and net equity down to $1.0 billion.

It is not worth the effort to work out the debt to equity ratio because if one removes the soft asset of “goodwill”, $10.1 billion, it seems like the corporation is no longer on thin ice but under it.

The global economy is in a compression phase which is the hang-over from the past credit binge. A lot of now valueless paper must come to a sticky end before economic symmetry is reached. The trick now is for the government to navigate this unpleasantness with as little harm to citizens who had little to do with perpetrating the credit exaggerations in the first place. Also, while this period of financial retribution is underway it would be great to see the hard earned money of 16 million Canadians placed in safe harbours.
 
Is that too much to ask?
 
Sincerely,
Erik Andersen
 
Cc Jean Crowder, MP
Standing Committee on Finance