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Old 02-05-2012, 09:12 AM   #1
KC
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Default Secret Canadian Bank Bailout?

What a major blunder. The government could have taken HUGELY PROFITABLE equity stakes in the crisis.

I sure wonder what insiders were doing during this? Were they buying shares knowing what was really going on?
The second article is very interesting.




Did Canadian banks receive a secret bailout?

Peter Henderson, Postmedia News Apr 30, 2012 http://business.financialpost.com/20...ecret-bailout/

excerpts:
“Ever since the global financial crisis struck in 2008, Canadians have been subjected to a constant refrain: Canada has the ‘most sound banking system in the world,’” MacDonald writes in the report. “During the worst of the crisis — 2008 to 2010 — the official line was that Canada’s banks did not require the extraordinary bailout measures that were being offered in other countries, particularly in the U.S.

“At its peak in March 2009, support for Canadian banks reached $114-billion. To put that into perspective, that would have made up seven per cent of the Canadian economy in 2009 and was worth $3,400 for every man, woman and child in Canada.”


"...“The federal government claims it was offering the banks ‘liquidity support,’ but it looks an awful lot like a bailout to me,” says MacDonald. “Whatever you call it, government aid for the country’s biggest banks was far more substantial than the official line would suggest.” "

"MacDonald study says that, at one point, three of the country’s biggest banks — CIBC, Bank of Montreal and Scotiabank — were receiving government support that was equal to or more than the value of the company’s shares."




Canada Bank Bailout: Yes, There Was One, And Here's Why It's Important To Remember That

http://www.huffingtonpost.ca/2012/04...anada-business

"So the banks’ logic is circular: They were never in danger of collapsing, they say, because they got the guarantees they needed to make sure they didn’t collapse! Amusingly, the CBA seems to have admitted that the banks were in danger in the very note where it argued they didn’t need/didn’t get bailouts."

"The banks don’t dispute that the Canada Mortgage and Housing Corp. bought $69 billion of mortgages off of their books. And, technically, that’s not handing over taxpayer money -- it was a purchase, not a handout. But a Crown corporation bought $69 billion worth of mortgages that banks didn’t want on their books. Does that sound like a good bargain for taxpayers?"...





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Old 02-05-2012, 10:09 AM   #2
Marcel Petrin
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From your second link:

Quote:
So when the CCPA says the Canadian bailout was “secret,” they’re being inflammatory, or maybe even misleading -- it wasn’t a secret. It was simply overlooked by the media in the midst of the economic chaos breaking out all over. And if that lack of media attention helped out the banks and the government during the crisis, all the better for them.

And that brings us to the CCPA’s side of things, and the assertion that Canada’s bank bailout amounted to $3,400 for every man, woman and child in the country.

That may have been the total amount in mortgage sales and emergency lending that the banks got, but let’s be absolutely clear about this: These were loans. Taxpayers are not on the hook for this money. And the bankers’ association says the loans ended up turning a $2.5 billion profit for the lenders (the Bank of Canada and the U.S. Federal Reserve).
The CCPA is about as agenda-free as the Fraser Institute, just on the opposite side of things. And they're clearly pushing an agenda with this report.

Of course there was government support of the Canadian financial system. The global financial system around the world was melting down. The fact remains that none of our banks were insolvent or going bankrupt, and that the problems here were miniscule compared to those experienced in the US, Britain, and elsewhere. But no, we're not immune and yes we need to be proactive in ensuring we have a sound financial system.
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Old 02-05-2012, 10:13 AM   #3
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Lender of last resort

In common with central banks around the world, one of the functions of the Bank of Canada is to act as a "lender of last resort" (LLR). The Bank's LLR policies, and links to related documents, are found below.

Bank of Canada Lender-of-Last-Resort Policies:

Introduction
Standing Liquidity Facility (SLF)
Terms of the SLF
Access to Bank of Canada settlement accounts and the SLF
Emergency Lending Assistance (ELA)
Terms and conditions of ELA
Eligibility Criteria for ELA
Implications Regarding Eligibility for ELA
Managing ELA
Foreign currency ELA
The Relationship between the SLF and ELA
Systemic Risk and Bank of Canada Intervention
Forced LVTS Loans

http://www.bankofcanada.ca/financial...f-last-resort/
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Old 02-05-2012, 10:29 AM   #4
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Quote:
Originally Posted by Marcel Petrin View Post
From your second link:

The CCPA is about as agenda-free as the Fraser Institute, just on the opposite side of things. And they're clearly pushing an agenda with this report.

Of course there was government support of the Canadian financial system. The global financial system around the world was melting down. The fact remains that none of our banks were insolvent or going bankrupt, and that the problems here were miniscule compared to those experienced in the US, Britain, and elsewhere. But no, we're not immune and yes we need to be proactive in ensuring we have a sound financial system.
I had to bold the one statement...very very true statement. I've seen way too many reports lately that are just that....staged to push an agenda. Some do it well and make a compelling case, others are pure slander.

I have no doubt that the Canadian Banking System had its issues. The global meltdown hit many hard, but we were a bit more insulated with our more regulated market. I was in the US during the drunk and disorderly Greenspan years and the amount of credit being thrown around...blew me away. There was no way that was sustainable. Canada always looked more stable...
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Old 02-05-2012, 11:04 AM   #5
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One thing, my guess is that bankruptcy is a almost always a result of a liquidity problem. If for whatever reason you can't pay your mortgage and other bills and the lenders grant you an extension, you were at risk of bankruptcy but you skirted it. A lender extension is a bailout in my mind.

The Bank of Canada is a lender of last resort. The Canada Mortgage and Housing Corp. took over paper they'd insured so had everything fallen apart they'd have been in no different a position - you'd think. However, they didn't pay fair market value for them at the time did they? They probably paid a hold-to-maturity price. Accountants/auditors almost always demand that assets be valued at what an arms length transaction would yield a FMV (Fair Market Value). Here's a good discussion:

"Hold to Maturity" verses "Fire Sale" prices

http://economistsview.typepad.com/ec...o-maturit.html

"Now, if the price Treasury pays is very low - anything comparable to what financial institutions are able to sell the stuff for now - it's going to do nothing for confidence and capital. If the price is high, confidence and capital will improve - but taxpayers may well take a big loss. The premise of the Paulson plan - though never stated bluntly - is that these assets are hugely underpriced, so that Uncle Sam can buy them at prices that help the financial industry a lot, without big losses for taxpayers. Are you prepared to bet $700 billion on that premise?"

"But how can we help the financial situation without making that bet? By taking an equity stake. That way, if it turns out that the feds are pumping money in at above-fair prices, at least they get ownership, just as a private white knight would have.

There is no, repeat no justification for refusing to grant equity warrants that provide some taxpayer protection. This is, for me, an absolute deal or no-deal point."





Bank bailout claim pure propaganda
http://www.torontosun.com/2012/05/01...ure-propaganda

"The federal government’s response to this problem was to find ways to get cash into the hands of banks so banks could do what they are supposed to do and lend it to businesses and households.

"One way this happened was in exchange for Ottawa’s cash, the banks would sign over a pile of mortgages held by those banks.

The mortgages, virtually all of which were already insured by the federal taxpayer through the Canada Mortgage and Housing Corp., would go on the government’s books and act as collateral for the billions lent to the banks."

"But our banks would have survived without the federal government’s actions in 2008."

How Canada Avoided A Bank Bailout
http://canadianprofiteer.com/canada-...-bank-bailout/
"A helpful guide as to why Canadian banks avoided the global financial collapse of a few years back spearheaded by the American banks disastrous mistakes. It also goes into detail as to how the American banks woes are affecting Canadian ones."

"6 Comments
RJ says:
January 5, 2012 at 2:35 PM
This is straight up BS. Do your research, Canada bailed out its banks."

Last edited by KC; 02-05-2012 at 11:06 AM..
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Old 02-05-2012, 11:10 AM   #6
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Quote:
Originally Posted by KC View Post
One thing, my guess is that bankruptcy is a almost always a result of a liquidity problem. If for whatever reason you can't pay your mortgage and other bills and the lenders grant you an extension, you were at risk of bankruptcy but you skirted it. A lender extension is a bailout in my mind.

(...)
You are using the words, but implying the very issue that is the problem with the "agenda" claim...


...you are equating "bailout" to imply they were given a financial gift or forgiveness of their debts....at least that is the impression that I am getting from your line of thought....

...lender extension is a reprieve, not a bailout...at least in my opinion. The expectation is that the monies are returned...paid in full....


...even if they extended more credit...so that bills could get paid...that is still a refinancing exercise...not a bailout...regardless if it saves your behind from bankruptcy...
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Old 02-05-2012, 11:27 AM   #7
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^exactly and as per my post, maintaining liquidity is an integral part of the BOC with regards to the main financial institutions. In their act it is part of their mandate and one that is critically important.
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Old 02-05-2012, 01:28 PM   #8
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^And these financial institutions, in turn, deserve profits during that time? As it points out, it would have been cheaper for us all to buy stocks and be paid out, than for a limited amount of shareholders to receive that money. If they were 'loans', why would CMHC purchase $69B in toxic mortgage debt? I don't see how that benefits the Canadian government or average citizen. It's all a smokescreen for our own housing market problems.
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Old 02-05-2012, 01:58 PM   #9
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Over levering by the financial industry and poor review/regulation of various financial instruments as well as poor personal financial management put the BOC in a bit of an awkward situation. I for one am fine with them doing what they did to retain stability in our financial system. That said, the underlying problems that put the banks into those situations should be addressed, and are currently for the most part, and be reeled in. Was this ideal, no not really, but was it exactly how 'the system' was set up, yes.
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Old 02-05-2012, 03:41 PM   #10
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Quote:
Originally Posted by GreenSPACE
As it points out, it would have been cheaper for us all to buy stocks and be paid out, than for a limited amount of shareholders to receive that money.
What would nationalizing the banks have done to increase lending and liquidity? The answer is nothing. A bank's market capitalization and it's balance sheet or lending capacity are completely different things. Comparing the two as the CCPA does is comparing apples and oranges.

And I'm not sure I even understand what you mean in the second part of that statement. Which limited amount of shareholders received that money? The money did not go to shareholders, bur rather was used to continue lending.

Quote:
Originally Posted by GreenSPACE
If they were 'loans', why would CMHC purchase $69B in toxic mortgage debt?
The mortgages it purchased were NOT toxic. They were perfectly normal, well performing mortgages that the government has since made a profit off of. The reason for purchasing them wasn't because they were "toxic", but so that the banks could make more loans with those mortgages off their balance sheets.

You seem to be confusing the CMHC purchases with the asset backed commercial paper debacle, or something. Which as far as I know the Canadian Government nor the Bank of Canada ever bailed out.

Last edited by Marcel Petrin; 02-05-2012 at 03:44 PM..
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Old 02-05-2012, 09:52 PM   #11
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Quote:
Originally Posted by Marcel Petrin View Post
Quote:
Originally Posted by GreenSPACE
As it points out, it would have been cheaper for us all to buy stocks and be paid out, than for a limited amount of shareholders to receive that money.
What would nationalizing the banks have done to increase lending and liquidity? The answer is nothing. A bank's market capitalization and it's balance sheet or lending capacity are completely different things. Comparing the two as the CCPA does is comparing apples and oranges.

And I'm not sure I even understand what you mean in the second part of that statement. Which limited amount of shareholders received that money? The money did not go to shareholders, bur rather was used to continue lending.

Quote:
Originally Posted by GreenSPACE
If they were 'loans', why would CMHC purchase $69B in toxic mortgage debt?
The mortgages it purchased were NOT toxic. They were perfectly normal, well performing mortgages that the government has since made a profit off of. The reason for purchasing them wasn't because they were "toxic", but so that the banks could make more loans with those mortgages off their balance sheets.

You seem to be confusing the CMHC purchases with the asset backed commercial paper debacle, or something. Which as far as I know the Canadian Government nor the Bank of Canada ever bailed out.
All good points. The CMHC may have served its own best interests by taking the mortgages under its own umbrella but was that within its mandate? It was actually good to see government break with dogma to be pragmatic and do what works but the dogma still crept in to the process by not allowing the government to profit from the failure of the banks. Asymmetric capitalism.

Applying free market principles would have had the government treat the situation as a long-tail risk. If you go to an insurance company when you are sick and want insurance they will charge you a higher premium. In a sense the gov't gave the banks a free ride - so shareholders benefitted.

Part of the issue is the price they paid for the mortgages. ie. right now natural gas prices are depressed due to unusual market conditions. Would you be happy if your utility paid something like a ten year average price because that "seemed" like a better "normal" price, and then passed the costs on to you.




Over seven years they will profit by $2.5 billion on $69 billion in purchases. Hmmm. Let's make that six years. Now calculate the annual return.

Did Canadian banks receive a secret*bailout?
http://business.financialpost.com/20...ecret-bailout/
"The CMHC’s purchase of $69 billion in home loans in 2008 and 2009 is expected to net the government $2.5-billion by 2015, according to projections in the 2012 budget."


It's the principle-agent problem, taxpayers being the shareholders, and it's analogous to what Warren Buffett said in the 80s about stock options; "if they aren't a form of compensation, what are they..."

Last edited by KC; 02-05-2012 at 10:52 PM.. Reason: Add new link
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Old 03-05-2012, 01:13 AM   #12
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Finally, the msm (mainstream media) is picking up on the myths of Canada's "safe" banking system.

Yes, the Fraser Institute put out a report back in 2010 titled "Mortgage Finance Reform: Protecting Taxpayers From Liability" outlining the risks to taxpayers and suggesting a privatized mortgage market structure. The study confirmed that the taxpayer risk from a housing collapse is greater in Canada than elsewhere:
http://www.fraserinstitute.org/publi...amp;terms=cmhc

There have been a number of economists who have sounded the alarm on taxpayer risk for a few years now.

A fairly well-balanced and rational blog I would reference on this subject:
http://theeconomicanalyst.com/conten...sing-addiction

Bank bailouts, and particularly secretive bailouts with public funds is what I would term lemon socialism (well, economist Joseph Stiglitz coined the term) and it surely is not capitalist nor democratic.
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Old 03-05-2012, 09:50 AM   #13
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The government of Canada willingly took on mortgage risk when they created the CMHC so that people that would not qualify for a mortgage could get one. The CMHC is willingly taking on risk for which they receive a healthy premium. The government doing anything to protect the mortgage market are protecting themselves first and foremost.
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Old 03-05-2012, 09:52 AM   #14
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^I was critical of the CMHC insurance before the melt down. I realized then, when it happened, that I was wrong. Canada was very, very fortunate to have this scheme, and not the mess of Fanny Mae or AIG like the US. Like you say, yes the government took on some risk, but would we rather that most young or poor Canadians couldn't ever afford houses?
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Old 03-05-2012, 10:06 AM   #15
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Easier access to credit leads to inflated housing prices as more people being able to afford houses increases the demand. Higher housing prices lead to higher rental rates over time as well. CMHC should be requiring higher down payments than they do now and there might be more stability in the housing market.
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Old 03-05-2012, 10:33 AM   #16
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^its a balance between inflationary pressures, and allowing Canadians to buy homes. I think its reasonable that first time home buyers be allowed to put 5% down, its hard starting out today.

On a side note:
Quote:
Canadian banks invoke their strong capital levels, the country’s conservative lending culture and strict regulatory oversight under a single supervisor as reasons for their showing. The supervisor requires Canadian banks to hold a higher level of capital than do international standards.
http://business.financialpost.com/20...rongest-banks/
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Old 03-05-2012, 09:49 PM   #17
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The government of Canada willingly took on mortgage risk when they created the CMHC so that people that would not qualify for a mortgage could get one. The CMHC is willingly taking on risk for which they receive a healthy premium. The government doing anything to protect the mortgage market are protecting themselves first and foremost.
" The CMHC is willingly taking on risk for which they receive a healthy premium.".

Please explain. How much did they make? If you want to know what I think, see my above.

I have no problem with gov'ts taking action to bail out the economy in a crisis but I don't like the spin and hubris coming out of it - and possibly an unseen transfer of taxpayer wealth.

Our banks offered 40 yr mortgages until the govt stepped in and shut them down and would have closely followed the US lead it they could have. They aren't the allstars they are made out to be.

During the liquidity program I suspect value was transferred from Canadian taxpayers to the banks after which bonuses and dividends were paid. CMHC assumed 100% of the mortgage risk and I suspect that they paid par value rather than a deeply discounted price for the privilege.

The liquidity programs allowed the banks to essentially lend even lower cost money thus expanding their margins and resulting profits. Employees and shareholders thus received any value transfer.



http://www.cbc.ca/news/story/2008/10/15/40-year.html
"According to a TD bank representative, about 60 per cent of first-time home buyers were opting for a 40-year mortgage, which indicates that they are having a hard time affording the house and need to stretch the payments out in order to make the purchase."
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