:LPE:

The analysis of the UAW-GM VEBA is starting to ramp up, with today’s Globe suggesting that this is the beginning of the long hollowing out of the auto sector in Canada. Depends what you mean by hollowing out: if you mean losing jobs, then that has been going on for some time, but yes, this could add a new “competitive pressure”.

No doubt the call will be for lower taxes and lower Canadian wages to help stem the tide. What might be a better fix is a Canadian version of the VEBA - the introduction of the pre-funded health and welfare plan. Right now, we have health and welfare plans, but they are run largely on a pay-go basis. We don’t have the legislative structure to (cost-effectively) run a pre-funded health and welfare system, something akin to the pre-funded employer pension system.

As a policy fix, it has its advantages and disadvantages (witness the difficulties of pre-funded pension schemes). However, post-employment non-pension benefits (called OPEBs) are becoming more costly and more litigious in Canada, and these might make a nice fix to a growing problem. More on this soon.

According to reports they’re before Congress or the SEC or some other body fending off potential regulation after, gasp, failing to rate asset backed securities very well last year, or anytime. They are being sued. Better than lawsuits would be strict regulation, but we take what we can get.

I haven’t canvassed their arguments, but I think there must be some pretty strong evidence about the problems in the ratings system we now have. For example:

+ have you ever heard of an “over rating” (e.g., they were too conservative) of a structured product? I haven’t, but if rating were merely difficult, we’d expect there were as many over-ratings as under-rating of these products (all else being equal). We only hear about underestimates, of course, but it seems to speak of permanent bias to over-rate creditworthiness of products. Why would that be?

Because sellers of those products ask for the ratings and pay for them. They act in the *sellers* interests, which are to get more buyers to buy. Further, rating agencies offer paid technical advice on how to design products that will get better ratings. Then they provide other financial services to sellers on the strength of the rating business - a potential loss-leader.

To be sure, last summer was also the result of computer models that don’t cope well with significant secular changes, the fallacies associated with equating “value” with “mark to market”. Not least, last summer was caused by financial institutions (banks, pension funds) holding hard-to-value bundles of contingent claims. How they got the idea to hold them, and how they failed to be regulated to prudence in their holdings is explained, in part, by the ratings agencies.

One of the parts of the GM-UAW deal in the US is the Voluntary Employee Benefits Association. VEBA is pre-funded arms-length trusteed fund to pay for health and welfare benefits. I believe it will be trusteed by the UAW. The concept is not new, but it is a major change from employer-sponsored health benefits.

The details of the VEBA and its relationship to GM are still not clear — and the SEC will review it, and a court will approve the arrangement. Depending on how GM is related to the VEBA - for example, if it has capped costs payable to the VEBA, and the VEBA is responsible for setting benefit levels. If these are the kinds of terms, GM could still have health care expenses in an expensive system, but one of the advantages to GM is getting the liability off the balance sheet. The accounting rules require these liabilities be included at their projected values. Instead, GM could have a line-item expense on the income statement, not a massive volatile liability on the balance sheet. This permits them to borromw more cheaply, because the liabilities side will have less on it. They also ditch the heachache of accounting for and managing a 30-50$bn liability, and depending on the structure, it could shift the responsibility for managing part of benefit restructuring to the UAW.

UPDATE: Terms are still not available (the union goes to memebership today according to the WSJ), but one apparently includes funding part of the $36 bn to be paid into the VEBA out of the pension fund actuarial surplus. Over 80 years, that $36bn with income and interest is expected to meet approximately $55bn of health care liabilities. All to be confirmed.

Not law or business, but important none-the-less. After a couple of weeks of the provincial election campaign, you could be forgiven for not knowing there is a referendum being held on the electoral system itself. Do we switch to a mixed member proportional system or keep the first-past-the-post system? I don’t know, and some of the easily available online explanations don’t make it all that clear what the implications would be.

I wish we’d get some better press on the situtation.

Link.

You probably heard about it in the news yesterday, but Stats Can released a study of the high-income earners in Canada, the top 5% of incomes as revealed in tax filings. Link.

An interesting group. The bottom line is that high income earners (”rich”) got richer over the past 20 years. Not exactly Man Bites Dog, but still worth making a case in numbers. It appears from the T1 filings and survey data that the very high income earners are men, age 55-65, live in cities, increased their income anywhere from 25% to 100% over the past dozen years, got paid more in employment income and capital gains, and pay anywhere from 10% to 40% effective tax rates.

Here, if anywhere, is a basic reply to supply side predictions of “trickle down” effects to lower taxes, which sadly still make echoes in certain quarters of the Legislature and Parliament. That response is: after 20 years of cutting taxes the benefits “trickled up”, not down. No doubt there is a theory that it all would have trickled down if we’d cut taxes further, or that the Laffer Curve peaks at 10%, not 25% or 40%.

A couple of enterprising lawyers here have convinced, I believe, the federal NDP to submit proposed legislation when the house next sits (which I believe is October 16).

A copy of the proposed legislation can be found here: Link is apparently still to be kept confidential to some degree, so for people interested in the draft legislation, please contact one of the authors.

The title of the legislation is the “International Promotion and Protection of Human Rights Act”. Nick Milanovic and Mark Rowlinson have been drafting this bill. I believe that it has been approved by the House of Commons legislative draft-person and will be introduced as a Private Members’ Bill by MP Peter Julian.

The genesis of this project was a presentation by the authors before the Parliamentary Trade Committee last year to speak about the CA4FTA and labour rights. This led to an idea to replicate some of the Alient Tort Claim Act, US legislation from 1700s which permitted civil lawsuits against pirates. In the past 20 years, there have been attempts to use it to hold actors accountable inside the US for wrongs committed outside the US.

The proposed Bill would amend the Canadian Federal Courts Act to grant the Federal Court an international jurisdiction to hear civil claims based on violations of international law. These violations would have to occur outside Canada. The amendments specifically refers to violations of recognized internationals human rights including: genocide, slave trading, extrajudicial killing or disappearance, torture, arbitrary detention, war crimes, systemic discrimination, child prostitution, conscription. The amendments would also provide a cause of action for violations of recognized environmental rights and transboundary pollution. Further, a cause of action would be created for violations of international labour rights as defined in the ILO core labour standards.

In essence, the amendments would allow non-Canadian citizens to sue Canadian corporations, the Canadian government, or potentially foreign governments or corporations for violations of a wide list of international human rights, labour rights and environmental rights.

The amendments raise several issues, including:

a) The question of Federal/Provincial jurisdiction. There is an argument that this legislation infringes on Provincial jurisdiction. However, we believe that the legislation falls under Federal power over naturalization and aliens. By restricting access to this statute to non-Canadian citizens (or aliens,) and by restricting it to extraterritorial acts, the authors think it falls within the federal jurisdiction.

b) The question of the appropriate forum. One reason why Canadian courts have often rejected these kinds of claims in the past has been the “forum non conveniens” test which essentially states that a court will dismiss the action if there is a court in another country that is better placed to hear the case. The amendments would modify the existing test and place the onus on the defendant to clearly establish that the matter could be fairly and effectively heard in another forum that will issue a final and binding decision in a timely manner. Only then could the court dismiss the matter on the basis that the Federal Court is not an apprpriate forum.

I am part of a group of the Law Union of Ontario drafting a commentary on this proposed legislation and placing it in a broader context, including other methods of holding Canadian actors accountable for wrongs committed against third parties outside Canada.

If you have any comments or resources you think the authors or we at the Law Union should have, please contact me.

As you may know a group of like-minded folk have formed the Ontario working group for Avocats sans frontiers (abogados sin frontierras, lawyers without borders). I have a static page on this website with some basic information and links.

In one of our projects we partner with a couple of NGOs in Colombia. One is called “Colectivo de abogados José Alverear Restrepo” (CAJAR). It is an association of HR lawyers. Our work is to provide funds, support (moral, logistical, informational) and do our best to figure out ways to help lawyers doing HR, labour or similar work organize themselves and stay alive.

We’ve just found out that the President of CAJAR, Alirio Uribe, is likely visiting Canada (Toronto, Ottawa, Montreal and Quebec City) during October 6-20, 2007. Alirio is planning a trip here to do some fundraising and friend-raising.

Alirio’s won some pretty decent awards. Link. He’s not always been popular with the local authorities and lack of authorities, such as they are. Link.

If you know of some groups or people he should meet, please let me know. We’re trying to put together a schedule for him to meet groups like lawyers’ associations, funders, unions and like-minded civil society groups.

The arguments in favour of a single securities regulator in Canada are legion, but predicting and avoiding the credit crunch is not among them. Minister Flaherty and RBC head Stymiest have used the volatility in the credit markets (sub-prime, asset-backed paper and their broader effects, logical or not, into equities) as an opportunity, if not a reason, to have a single national securities regulator. The argument is hard to follow clearly, but it seems to be that if there was a larger single regulator, we would not have had the bad bets on ABCPs this summer, and the volatility of people fleeing risk (or, as one commentator said, fleeing to risk, as money left ABCP (money market) for equities (bluechips)).

The securities market regulators don’t have the job of influencing which particular risks people take and bets people make — they only set standards for sale to investors, especially retail investors, and enforce those standards. A single national securities regulator would likely have had zero effect on the events this summer. The existing regulators had zero effect, and it seems hardly likely that the fact that there are 10 or 12 of them was the efficient or proximate cause of a flight from or to risk. Maybe, but it does seem to be a stretch.

The real location of the control over the supply and quality of credit — in broader measure, the money supply — is the Bank of Canada, and this is where warnings should have come from as well as any recommendations about how to maintain liquidity in the markets. Second in line should be the regulation of the banks generally, who were buying and selling a lot of this ABCP. As in the U.S., the primary guardian of the money supply is the central bank, and it is there we should be looking for answers. First by way of answer might be the pros and cons of reducing their independence, or increasing their “co-ordination” with government: in effect, re-nationalizing them. They allocate profound resources in the public interest (including a massive bailout last summer) with relatively little accountability to elected officials. There are also arguments for central bank independence, and most are independent.

But if these speeches amount to the right thing for the wrong reasons, so we ought not to complain too hard, but it is hardly likely to buff the tarnished imagine of Canadian capital markets when the Minister of Finance and senior bankers make spurious associations in an attempt to intimidate the protocols of co-ordinate federalism. Equally as effective at boosting the appearance of capital markets with integrity would be to finance a more robust compliance and prosecution division at the OSC.

UPDATE: some mainstream resources on central bank independence. Link. Link.

The upshot: there are lots of reasons why central banks either do not or can not act independently. This is an interesting conclusion, because it suggests a second way in which credit market turmoil could be effectively addressed: issuing government debt. Since the late 1990s, governments have retired debt, and there are occasionally shortages of long and short-term government bonds, which are perceived to be the safest of investments. Pensions funds need these in particular (cf. the Caisse’s problems with ABCP), and they form one type of liquidity in the credit system. But in an era when governments run budget surplus, why issue debt? I suppose one answer could be to build all that infrastructure (hospitals, roads, waterfront development) that we need, and that got shelved during the days of budget-cutting.