Wednesday, February 16, 2011

The Merger of the Toronto and London Stock Exchanges

Hunting dogs never follow the pack.  You will always find them running along ahead of the group.  At a fork in the road, they will pursue whichever fork attracts their attention.  Should the hunters take the other path, the dogs will scramble through the brush until they are, once again, leading the pack.

Sound familiar?  Sound like any politicians we might know?  I had blogged previously about the potential costs from the government blocking the Potash take over.  Since the politicians saw nothing wrong with what they did the last time around, they are about to put their foot in it again.  Up to this point there are few popular political points to be had either way.  If there are any, they would be found in protecting Canadian financial services and Canadian jobs (in the short term).  The Canadian banks are hardly going to support more competition for their newly formed Alpha exchange.  Oh, remember the reason for creating Alpha in the first place was to provide competition for the Toronto Stock Exchange (TSX).

I find it interesting how the politicians were against the Potash take over, as was the electorate, at large.  The same government was in favour of competition in the mobile telephone sector despite uncertain foreign investment rules (as was the electorate).  Now, I doubt the merger of the TSX and the LSE will happen because there are few, if any, votes to be won by making it happen.  How's that for consistency (especially the vote getting part)?

So why should we, as investors care?

Let me start by pointing out the aversion business has to government interference and tax grabs.  We have a unique opportunity in the post financial crisis period to create a stable environment in which to attract foreign capital and business.  The result would be more growth, more jobs, perhaps even a more diversified Canadian economy.  Governments that focus on vote-getting and tax grabs do little to inspire businesses to make large capital investments.

Are we really in such denial that we think Canada is such a great place to work and play (which it is) that businesses will just ignore how difficult it is to navigate all the red tape and, in the end, be subject to the whims of politicians at the local, provincial, and federal levels?  I laughed out loud when everyone was quick to point out how protectionist our fellow Americans were, when it was our own provincial trade barriers which were the real reasons they didn't want to relax their constraints.  We wanted to be able to play in their back yard as long as they weren't allowed to play in ours!

Our banking system is seen as being one of the best in the world.  One could make the argument that it is our rules and regulations that got us to this point.  I might point out that the amount and type of regulation is irrelevant when governments just make up the rules as they go.  How many foreign investors did Canada lose with the change in the Income Trust rules?  How many because of the increase in Alberta oil royalties?  How many because of the Potash deal?  How many if we stop this merger of stock exchanges?

Two things are abundantly clear.  First, we need to define, then follow, the rules we expect investors to abide by so they don't feel they are being ambushed all of the time.  Then, we need one (national) regulator to enforce those rules.  While we are at it, why don't we give that same regulator the power to protect you and me and our fellow investors from ponzi schemes, corporate crime (think Bre-X) and the like.

As for me, I am tired of all the fighting between different levels of government, and self-serving agencies, especially the all-talk and no-action part.  I am even more fed up (pun intended!) with governments which rely on the absence of clear regulation to twist events into situations for vote-getting.  While it guarantees them a job and furthers their pension, it is costing you and I real money, money which comes out of our own investment funds, and pension funds.

How do you feel?  Are you in favour of the merger between the TSX and LSE?  What about having a national regulator?

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