The CMHC Pump and Dump

In a recent Financial Post editorial meeting, Finance Minister Jim Flaherty let slip a statement that hinted at a massive change coming in the housing and mortgage market in Canada:

“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.”[ref]http://business.financialpost.com/2012/04/27/cmhc-could-be-pulled-out-of-mortgage-insurance-business-flaherty-says/[/ref]

In essence privatization of the CMHC, one of the Federal Government’s largest crown corporations.  This one word, though, causes quite a lot of consternation among readers and political activists.  On one hand you have people who reflexively support anything with the ‘privatization’ label and on the other you have people with a knee-jerk opposition to it.

While I am generally in support of anything that shrinks government involvement in the marketplace, after serious consideration of what the privatization of the CMHC would mean all I can say is caveat emptor.

Let’s just imagine for a moment that the CMHC is a private company whose owners are about to make their first public offering of shares (which it essentially is at the moment).  Consider the facts.  The company insures and guarantees nearly $900 billion worth of a market that is currently heading for a disaster.  Most of their assets are in that same market and they have about $250 billion in debt that needs to be refinanced over the next 4 years.  Interest expenses already consume the majority of their revenue at the current, depressed rates and the company is sitting on a razor-thin capital cushion that could evaporate if the market takes even a modest downturn.

Would you buy that stock?

Maybe it’s my innate distrust towards everything the government does but I have a feeling there are other reasons why the idea of privatization is being brought up right now.  Housing prices have begun to decline in Canada and this could spell disaster for the crown corporation.[ref]http://business.financialpost.com/2012/02/29/canadas-home-prices-drop-for-second-straight-month/[/ref]  Could it possibly be that the government is trying to divest itself of what it now deems an unacceptable risk?  Call me cynical, but I don’t think it’s beyond anyone in government to pump and dump a company stock.

As a crown corporation, the government guarantees all of the CMHC’s debt.  If the guarantee remains in place then there is little reason to be privatizing the CMHC except perhaps to raise more capital for an ailing company.  If the government stops standing behind the CMHC post-privatization then I think it’s obvious what is really going on in their heads.  They simply don’t want to be the ones holding the bag when things turn sour.

Economics teaches us that incentives matter and, despite what naïve statists want you to believe, government officials act to enhance their own personal welfare, not the general one.  You’ll have a lot easier time understanding why people in government do what they do when you realize that they’re just as opportunistic and rent-seeking as anyone else, often more so.  Being the Finance Minister whose name is attached to one of the greatest financial blunders in the nation’s history just doesn’t look good on a resume.  Though, failing upwards is often the mark of a successful bureaucrat.

A full-scale privatization of the CMHC could ultimately be just what Canada needs in order to restore stability to the housing market.  In the event of a financial disaster, the losses will be contained and only the private shareholders and mortgage investors lose their investment.  This is preferable to the losses being diffused out across every Canadian taxpayer, which is what bailouts and government backing do.  Private insurers, fully facing their own risks, will do a far better job than a bloated government bureaucracy.  The only problem is that proper privatizations rarely ever take place.  Usually we’re only met with half-measures (or no-measures) that leave the economy even more distorted than it already is.

In conclusion, I believe that great skepticism is warranted here.  And I certainly won’t be buying the IPO.

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One Response to “The CMHC Pump and Dump”

  1. Ohhh Henry says:

    Is this just Flaherty thinking out loud, or is it something he's cooking up with CMHC? I doubt that CMHC want to be fully privatized, and exposed to real competition with no backstop. Maybe they want to be "privatized" with all of the elephantine salaries, super-bonuses and gold-plated benefits and perks of a private company, but with the extra advantage of being a de-facto government monopoly with for all intents and purposes a government backstop against bankruptcy and shareholder lawsuits (and who knows, maybe de-facto immunity from fraud investigations and perp walks).

    Call me cynical, but I think that nothing is ever "privatized" in Canada. Look at the history of Air Canada. Canadians don't know what "private" means and they don't want to hear anything about it either. Just wrap them in their cocoon of regulations, subsidies and welfare payments and whisper in their ear that everything is going to be alright, just trust us.

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