The debate over whether or not Canadian banks were bailed out has turned into a game of he-said, she-said.
On one side is the progressive Canadian Centre for Policy Alternatives, arguing that Canadian banks found themselves in serious trouble during the crisis and needed a bailout that, proportionally, was larger than the U.S.’s -- $114 billion in emergency lending and cash injections at the bailout’s peak.
On the other side are the Canadian Bankers’ Association and the Harper government, who argue that there simply wasn’t a bailout.
But what has become clear -- and what neither side can really dispute -- is that the fantastical notion of Canada’s banks being immune to global problems is little more than an illusion. And it’s a notion that -- for the sake of our own well-being -- needs to be shattered.
Why? Because of the dangers of over-confidence.
Take a look at Canada’s housing market today -- it’s overvalued by 35 per cent (by the Bank of Canada’s estimation), it has driven consumer debt to a record 153 per cent of average household earnings; and affordability is abysmal. At the same time, the job market is lacklustre.
And now, our national financial regulator is telling us that Canada’s mortgage market is beginning increasingly to resemble the U.S. subprime mess.
We need our banks (and mortgage holders) to stop living with the illusion that we have an infallible economic system, that house prices and bank profits have nowhere to go but up, and we need to recognize that our economy, after several years of rock-bottom interest rates, is beginning to look like a big, fat bubble.
Canada has become addicted to the sort of cheap credit and easy loans that can only last so long. And like any addict, the first step to recovery is to admit you have a problem.
Our financial institutions need to stand up and say, “Hi, I’m a Canadian bank, and I have a lending problem.”
But first, let’s clear up the two most obvious factual pitfalls in this debate between the CCPA and the banks: There was a bailout, but banks didn’t take $114 billion from taxpayers. And it wasn’t a “secret” bailout. It was just ignored by the media, which gave politicians the opportunity to obscure the truth.
WHAT IS A BAILOUT, ANYWAY?
And obscure they did.
“We have, I think, the only banks in the western world where we’re not looking at bailouts or anything like that,” Prime Minister Stephen Harper said on CNBC in February of 2009. “We’ve gone in and done some market transactions with our banks to improve liquidity.”
That was four months after Canadian banks began drawing on money from the Bank of Canada and the U.S. Federal Reserve by the billions, according to the CCPA’s study.
The bankers’ association uses a more nuanced argument to deny the bailout.
“The Oxford dictionary defines bailout as ‘financial assistance to a failing business or economy to save it from collapse,’” the CBA wrote Monday. “That definitely was not the case here: not one bank in Canada was in danger of going bankrupt or required the government to buy an equity stake under taxpayer-funded bailouts.”
By defining a “bailout” as being funded directly with taxpayers’ money, the banks can shield themselves from the accusation they got “bailed out” in the sense that U.S. banks got bailed out -- with $700 billion in cash from the U.S. Treasury, courtesy of the American taxpayer.
This is a trick of wordplay -- they are defining "bailout" as that which did not happen in Canada.
Let’s look at the CBA’s response yesterday to the bailout report.
The bankers’ association explained in its note that in 2008, “due to the crisis of confidence in global credit markets, some funding sources that banks normally relied upon became unavailable.”
It went on to say that one-third of Canadian banks’ funding came from these global credit markets that had dried up. And that’s where the bailout actions came in: They were measures taken by the Bank of Canada, the CMHC and the U.S. Federal Reserve designed to make Canadian banks “liquid” in the face of a credit crisis.
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?
The bankers’ association says says it was a safe investment for the CMHC to buy those mortgages because they were insured … by the CMHC.
Think about this: A federally owned corporation buys $69 billion worth of mortgage policies, and then pays insurance to itself on them. Then, if the mortgages default, presumably the CMHC will be fine, because it’ll pay out the insurance policies to itself.
Never mind that this turns the CMHC into a financial snake eating its tail -- the whole point was to get cash into the hands of Canadian banks.
(The Harper government, in its own publicity material, says it was prepared to spend as much as $125 billion on these cash injections.)
Those who say this wasn’t a bailout argue Canadian banks had a “liquidity” problem, not a “solvency” problem like the U.S. banks. What this means is that Canadian banks had the collateral needed to get loans to pay their bills, something the U.S. banks didn’t have.
But if the problem was that no one wanted to lend to Canadian banks, as the banks themselves say, then they would have had to sell assets to pay their bills, and pretty soon the banks’ “liquidity” problem would have become a “solvency” problem, just like the U.S. banks.
Without the bailout, the Canadian banks wouldn’t have been able to pay their bills. It’s as simple as that.
Taken all together, the BoC’s, CMHC’s and Federal Reserve’s actions amounted to a bailout for Canadian banks. That the government called it “liquidity support” is irrelevant; this wasn’t ordinary, day-to-day banking. These were emergency measures of the sort seen once or twice a lifetime. And they were meant to keep Canada’s banks and financial system running in the face of an imminent standstill in global lending. They would only have happened if there was a significant threat to Canada’s banks.
The fact that the bailout didn’t go through Parliament -- as it went through Congress in the U.S. -- doesn’t change that it happened.
QUIET, NOT SECRET
What it did change, perhaps, is the perception surrounding it. With debate raging in Congress, in September and October of 2008, about handing over $700 billion in taxpayers’ money to the banks, it was hard to ignore what was happening in the States.
In Canada, that public debate never happened. The Bank of Canada and the CMHC -- the two principal institutions through which the Canadian bailout happened -- don’t need to go to Parliament to buy up mortgages from banks, or lend money to banks. And the government’s announcements about assistance to the banks were few and far between.
So Canada’s bailout “passed” with little fanfare, and especially compared to the doom and gloom at the time in the U.S., it seemed like Canada’s problems were mere hiccups, barely worth reporting. Hence the perception, built up over the following years, that Canada’s banks are infallible, and were the only banks in the Western world that somehow avoided the need for emergency government aid.
In fact, Canada’s banks are very much part of the global financial system, and they are in no way immune from crisis.
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).
Ultimately, Canada’s banks seem to insist on hanging on to their image of infallibility -- or at the very least, they insist we believe in that image.
But that belief is dangerous. Assuming your bank knows best is exactly how it has come to be that more than one million Americans are losing their homes to foreclosure each year.
Assuming your bank knows best is how the U.S. allowed itself to gut its regulatory practices to the point that the country’s entire financial system ran amuck on bad loans and bad bets, coming within a hair of total collapse.
Now, when Canada’s banks themselves begin to whisper that maybe tougher mortgage regulation may be needed, our finance minister declares no, he won’t do that, he trusts the banks to do it themselves.
Unlimited confidence in the infallibility of bankers is no substitute for a sober, responsible financial sector. We should learn the lesson that Canada’s banks needed bailing out, if for no other reason than to look with open eyes at our financial institutions, for the first time in years.
The financial support extended to BMO amounted to 118 per cent of the bank's value at the time, <a href="http://www.policyalternatives.ca/publications/reports/big-banks-big-secret" target="_hplink">according to the CCPA</a>.
The financial support extended to CIBC amounted to 148 per cent of the bank's value at the time, <a href="http://www.policyalternatives.ca/publications/reports/big-banks-big-secret" target="_hplink">according to the CCPA</a>.
The financial support extended to RBC amounted to 63 per cent of the bank's value at the time, <a href="http://www.policyalternatives.ca/publications/reports/big-banks-big-secret" target="_hplink">according to the CCPA</a>.
The financial support extended to Scotia amounted to 100 per cent of the bank's value at the time, <a href="http://www.policyalternatives.ca/publications/reports/big-banks-big-secret" target="_hplink">according to the CCPA</a>.
The financial support extended to TD amounted to 69 per cent of the bank's value at the time, <a href="http://www.policyalternatives.ca/publications/reports/big-banks-big-secret" target="_hplink">according to the CCPA</a>.
<strong>Profit per dollar earned by the CEO: $162.27</strong> National Bank's Louis Vachon took home $7.5 million, the lowest total of any of the six major banks, but the most in terms of the bank's net income.
<strong>Profit per dollar earned by the CEO: $326.32</strong> Gerry McCaughey's total compensation grew 12 per cent, to $9.5 million, in 2011. Source: <a href="https://www.cibc.com/ca/pdf/investor/proxy2012.pdf" target="_hplink">CIBC Management Proxy Circular</a>
<strong>Profit per dollar earned by the CEO: $330.81</strong> Bill Downe's total compensation for 2011 was up 4.2 per cent from his 2010 pay of $9.5 million. Source: <a href="http://ca.reuters.com/article/businessNews/idCATRE81Q1W320120227" target="_hplink">Reuters</a>
<strong>Profit per dollar earned by the CEO: $480.40</strong> Gordon Nixon's total compensation fell 8 per cent in 2011, to $11 million. Source: <a href="http://www.rbc.com/newsroom/2012/0206-proxy.html" target="_hplink">RBC Management Proxy Circular</a>
<strong>Profit per dollar earned by the CEO: $501.71</strong> Waugh's total earnings for 2011, at $10.6 million, were down slightly from the $10.66 million he earned in 2010. Source: <a href="http://www.thestar.com/business/article/1137400--scotiabank-ceo-s-pay-down-slightly-from-2010" target="_hplink">Toronto Star</a>
<strong>Profit per dollar earned by the CEO: $517.45</strong> Ed Clark's total compensation for 2011 was meant to be around $12 million, but the bank's board scaled it back to $11.3 million -- roughly the same as in 2010. Source: <a href="http://www.thestar.com/business/article/1135817--td-bank-ceo-ed-clark-s-pay-down-to-11-3-million-in-2011" target="_hplink">Toronto Star</a>