Enough with the "no Canadian bank bailout" fairytale
Lies we tell ourselves / You ain't fooling anyone / Nobody's saying nothing
Recognizing that National Flag of Canada Day is not the best time to beat-up on our fair land, the chorus of:
It’s time for Canada to finally grow up (The Globe & Mail)
Canada’s economy and sovereignty are under threat. (The Toronto Star)
Canada needs to change its economic path to stay independent (The Toronto Sun)
…reminds us about the need for brutal honesty right now, as I’ve said many a time previously (see representative prior post “Canadians needed ‘Honesty’ before ‘Fairness’ in Budget 2024” April 17-24).
There are plenty of reasons why the Liberal Party might find Mark Carney to be their perfect post-Vogue era candidate, but the rationale cannot include fairytales about how well the Canadian banking system performed during the 2008-09 global financial crisis (GFC). I wouldn’t dare take us back to that gut-wrenching period if Winnipeg Free Press columnist Dan Lett hadn’t floated this pitch right over the plate: “Although politics and economists still debate [Carney’s] specific contributions, it’s hard to dispute the fact that Canada came out of that crisis as the only G-7 country that didn’t have to bail out a chartered bank.”
I will not mock Mr. Lett, a National Newspaper Award winner, for repeating a canard that so many Canadian officials and bankers still tell us all. For those who are unaware of the backstory, or if you’re a journalist who plans to cover Mr. Carney in the coming days and weeks, I am here to serve.
For anyone unfamiliar with the arcane world of banking, every U.S. lending subsidiary of a Canadian bank is regulated by either the OCC or the Federal Reserve, depending on whether the institution is operating under a national licence or a State charter. Separately, the FDIC handles applications for U.S. deposit insurance. As such, whether you own Harris Bank or CIBC USA (both based in Chicago), for example, you’ve got U.S. regulators in your life — plus the Office of the Superintendent of Financial Institutions (OSFI) as the regulator of the Canadian-based parent.
Although it can be a hassle to have so many different organizations in your jeans each week, this detail is important because, for the purposes of accessing the Fed window, for example, that U.S. bank subsidiary is a traditional U.S.-based bank — with all of the luxuries that come with being associated with the largest balance sheet in the world should the need ever arise.
During the GFC, the highest profile U.S. liquidity program was called the Troubled Asset Relief Program (TARP), and although the crisis had been coming for a long time (see representative prior post “‘Panic’ sets in to the debt markets” July 29-07), the need wound up growing by the week (see representative prior post “TARP passes, but brace yourself for the second shoe to drop” Oct. 3-08 ). The U.S. government devised the program to be able to take a “troubled asset” off a bank’s hands and give it cash in return.
To understand why that was essential, a bank balance sheet is made up of endless assets and liabilities, but for today’s purpose, they have three key assets:
cash
listed/unlisted securities (backed by a pool of mortgages, securitized credit card receivables, loans, etc.), Gov’t T-bills, bonds (meaning the debt of a gov’t or corporate entity)
mortgages, and personal / commercial / corporate loans they’ve made to their own clients (inc. other banks)
Normally, banks would trade such things between themselves and other institutional investors, but the GFC meant that the market went essentially “no-bid,” so there was no one to sell to at anything resembling even an unfair price. This drove down the value of the assets that every bank already owned, if they weren’t already impaired due to underlying weakness of the issuer in question. Banks could hand over a government bond and get back cash, but they also had the choice of utilizing the Fed for liquidity using far less credit-worthy paper than a U.S. government T-Bill.
The five largest Canadian banks tapped the Fed for financing to the tune of $111 billion via their U.S. divisions. If that government cash hadn’t been available, three of the five Canadian banks would have had to raise as much, or more, in additional capital than was represented by their public market caps at the time (circa Feb/March 2009).
That’s not a bailout?
In terms of how we get from $111 billion to $186 billion of bailout bucks, we learned of the initial $25 billion CMHC mortgage program (exactly 10% of the US$250 billion U.S. bank capital injection announced initially) on October 10, 2008. I always assumed we did 10% given the relative size of the two economies; the CMHC asset swap program — which eventually grew to $75 billion — was designed to give Canadian banks early liquidity so that they could put more money back into the Canadian economy (see prior post “Political expediency trumps free market” Nov. 3-08).
The tool Mr. Flaherty used was simple: give us Canadian mortgages that are already backed by CMHC and we’ll give you back cash. But that was long before the banks had to hit up the Fed.
This was wrapped-up in a blog I wrote on December 2, 2010, titled “Canadian bank bailout total touches $186 billion.” That was the week that the U.S. Federal Reserve disclosed (H/T Globe & Mail) that the U.S. government had provided $111 billion of direct financial assistance to Canada’s five largest banks (via their U.S. bank divisions) during the GFC.
I wasn’t alone: Economist Ellen Russell, a research associate with the Canadian Centre of Policy Alternatives, wrote about this dynamic in November 2011. Her colleague, David Macdonald, led a team that published a paper in April 2012 confirming my key points, although his bailout math comes to just $114 billion.
If you’re still unclear how it worked, this is from a post in 2009:
There is only a subtle distinction between injecting capital into a bank and relieving it of assets so that it can avoid a capital injection. Kind of like your Dad temporarily buying your bike from you when you ran out on money in University, and then selling it back to you six months later when you were flush from a summer job.
Enough with the "no Canadian bank bailout" fairytale. You ain't fooling anyone.
MRM
(note: this post, like all blogs, is an Opinion Piece; disclosure: several different bank positions are owned in this household)
(lyrics by P.O.D.)
Accessing the window and getting a TARP injection was not the same thing as you well know - the bike analogy is not on point . Our regulations and oversight along with a more conservative attitude towards risk allowed us to survive relatively unscathed. Mark Carney’s leadership and oversight deserves a big chunk of credit along with the diligent job performed by the regulators and our banks’ governance teams. We didn’t let our mortgage underwriters nor our investment and mortgage bankers get out of control as a result - as they did in that wonderful unregulated landscape and home of the brave south of the border.
Said differently, the Communist praxis can be summarized extremely simply:
1) Find people who are struggling
2) Promise them the moon and an end to their struggles through Communism
3) Arrange things so they'll blame anti-Communists when it doesn't work
4) Repeat
And, I want to mention what the now common refrain Fascism really is: simply another form of religious state idolatry just like Marxism/Communism and distinctly un-democratic.It’s not smaller government or the downsizing of government so to call President Trump a fascist is wrong on it’s face.
His chaos strategy is bang on for the times and appropriate to combat the machine politics of his opposition. JD Vance’s speech in Munich was both insightful and inspiring to those so inclined.