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Special investigation: How high-risk mortgages crept north Add to ...

Another federal official who declined to be identified said the wording of the provision was eased because Genworth's name had changed and the government wanted to leave room for additional switches.

Despite these explanations, executives and advisers to a number of U.S. insurers and Canadian players said the paragraph was widely interpreted as a signal that Ottawa was opening the country's mortgage insurance sector to outside competitors.

Intended or not, the shift followed years of mobilizing by U.S. insurance companies, all hungry for a piece of what is regarded as one of the most lucrative and the second-largest mortgage insurance market in the world. At the forefront of this movement was mammoth AIG, now in near ruins as a result of its role in the U.S. subprime crisis.

U.S. competitors had envied premium rates on Canadian mortgage insurance policies for years. With only two players competing in the space, Triad's Mr. Tonnesen said CMHC and Genworth were so profitable that they were "basically printing money."

Eyeing the rich northern market, representatives from at least three U.S. insurers made regular trips to Ottawa for meetings with the Finance Department and Office of the Superintendent of Financial Institutions, the insurance regulator. But AIG created a strategic advantage by hiring Bill Mulvihill, a Canadian mortgage expert who had spent years as the chief financial officer at CMHC. Mr. Mulvihill, who is still a director of AIG's Canadian operation, declined to comment.

"The difference that Bill Mulvihill made was that he was able to connect into the policy folks with OSFI and at Finance and convince them that we were for real," said a former AIG executive who asked not to be identified. Following in AIG's footsteps were such U.S. insurers as PMI Group Inc., Triad and the Milwaukee-based Mortgage Guaranty Insurance Company.

Ultimately, Parliament did not vote on the Finance Department's proposal, thanks to the 2006 federal election and the Conservatives' rise to office. But the U.S. insurers' efforts weren't for naught; the new Harper government quickly embraced the idea of them coming north.

On May 2, 2006, in his first budget, Mr. Flaherty announced that not only would Ottawa guarantee the business of U.S. insurers, it was doubling the guarantee to $200-billion.

Twenty-four hours before Mr. Flaherty's announcement, AIG's mortgage subsidiary first registered with Canada's lobbyist commissioner, according to a federal registry. At the time, companies who spent more than 20 per cent of their time lobbying the government for changes in policy were required, by law, to register. It is not known how much time AIG spent promoting its cause to the government.

In a statement, AIG's Canadian chief executive officer, Andy Charles, said the company began a "preliminary investigation" of Canadian opportunities years ago. He said the company "did not engage in discussions with elected officials until we became aware that our market entry was being debated." Until that point, he said, the companies' "interactions were with the Department of Finance and Office of the Superintendent of Financial Institutions."

The lobbyist AIG hired was John Capobianco, a former aide to various MPPs in the Ontario government of Mike Harris and a defeated candidate for the federal Tories in the 2006 election.

Mr. Capobianco said in an interview he wasn't familiar with any of AIG's negotiations with the federal government before he was retained in May. He was brought aboard to promote AIG's argument that more competition was good for consumers and massage the proposed policy through the finance committees of the House of Commons and Senate.

By the time he was hired, Mr. Capobianco said, "the rubber was on the road."


Although new U.S. insurers didn't generate any press coverage or public concern from the opposition parties, there was at least one lawmaker who had misgivings.

Garth Turner, the former financial journalist turned politician who has bounced between the Conservative and Liberal parties, urged the finance committee to hold a day of hearings on the new U.S. insurers. He was a Conservative MP at the time, but was wary of his party's proposal.

"We had a fairly stable market at a time when the American market was already starting to go to hell," Mr. Turner said in an interview. "I was quite concerned that mucking around with our mortgage fundamentals would have the potential for chaos."

During a day of hearings, executives from the new U.S. insurers all pledged to make home ownership more affordable for people on the cusp of being approved by a traditional lender. AIG's new Canadian mortgage insurance chief, Mr. Charles, promised to service the neediest - immigrants, the self-employed and those with blemishes on their credit scores - who were mostly ignored by CMHC and Genworth.

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