Canadian Bank Bailouts

[Keepitsimple]

Terms like cashflow, liquidity and bailing in the context of a bank make it pretty obvious that we're either pouring something into the bank or the bank is pouring something out. Pumping or draining are even more obvious descriptive terms. Leaking is yet another.

It was just an exchange of assets. Lets make it simple. You're a very small, tiny bank and you have $200,000 to lend out.....so you give it to Joe Blow as a mortgage. Joe's a reputable fellow and qualifies for a mortgage. The tiny bank sits back and collects 5% interest, but they have no more money to lend out to the next guy. So the government takes over the mortgage agreement and gives the bank $200,000.....so now the bank can lend it to the next guy. The government now sits back and collects 5% - after borrowing the money at 1%. To make it even better, the mortgage is insured by CMHC. Multiply that buy tens of thousand and it's pretty clear it was an astute deal. A simple exchange of assets. Very smart....we are not the USA where people bought houses with no down payments and walked away when the housing market collapsed. We're here in Canada. Very smart deal.

Edited June 7, 2010 by Keepitsimple

[YEGmann]

That doesnt matter. Speculating on securities is not a natural function of the government. In this case their decision to do so resulted in 50 billion dollars ending up in the pocket of financial institutions. Thats financial industry bailout whether or not those turn out to be good investments. Just like it would have been a bailout if they bought 50 billion dollars worth of vehicles from Ford and GM that they didnt need.

I see. You have no idea what mortgage is if you compare a mortgage on a house to the price of a car. By the way, even not touching such thing as house evaluation, downpayment, appreciation/depreciation, the banking business is not to sell mortgages like car manufacturers sell cars. It is their business to keep morgages with themselves and have their 4 - 5 - 6% for many years, often returning twice as much as was originally lended. Any car manufacturer can only dream about this situation.

[dre]

I see. You have no idea what mortgage is if you compare a mortgage on a house to the price of a car. By the way, even not touching such thing as house evaluation, downpayment, appreciation/depreciation, the banking business is not to sell mortgages like car manufacturers sell cars. It is their business to keep morgages with themselves and have their 4 - 5 - 6% for many years, often returning twice as much as was originally lended. Any car manufacturer can only dream about this situation.

Thats how it worked about 50 years ago.

But now lenders sell mortgages just like car companies sell cars. Mortgages are bundled into MBS's (mortgaged backed securities) which are then sold on a global market. Those MBS's are sold in a series of different tranches to different purchasers based on the level of risk they are willing to assume and the potential reward they expect.

These are whats commonly referred to as derivatives.

[Keepitsimple]

Thats how it worked about 50 years ago.

But now lenders sell mortgages just like car companies sell cars. Mortgages are bundled into MBS's (mortgaged backed securities) which are then sold on a global market. Those MBS's are sold in a series of different tranches to different purchasers based on the level of risk they are willing to assume and the potential reward they expect.

These are whats commonly referred to as derivatives.

Ottawa didn't exchange cash for derivitives. They acquired individual CMHC insured mortgages. You don't seem to accept that what went on in the US did not happen here in Canada......or are you somehow aware of thousands of Canadians who have "walked away" from the mortgages that Ottawa acquired? Wouldn't the media just love to get hold of a story like that. Let it go Dre.....it's OK to be wrong once in a while.

Edited June 7, 2010 by Keepitsimple

[Yesterday]

http://www.globalresearch.ca/index.php?context=va&aid=12007

This is a little old but it is a very well written article about the financial obligations that are following this transfer of funds regardless of the reasoning.

[M.Dancer]

And when I heard the government was buying $50 billion in risky mortgages off the banks, -k

There is no risky or un risky...they bought secured debt...which is a sound investment.

[geoffrey]

These are whats commonly referred to as derivatives.

A derivative has no underlying asset. MBS are not derivatives, they are collateralized securitizations. There are real assets backing every dollar of an MBS. Not true of derivatives where there are no real assets.

Don't get confused with synthetic MBS derivatives like what Goldman was dealing in... the current SEC investigation.

http://www.globalresearch.ca/index.php?context=va&aid=12007

This is a little old but it is a very well written article about the financial obligations that are following this transfer of funds regardless of the reasoning.

The article was written by someone that seems to have no futher than a grade 6 education. There are so many fundamentally incorrect statements in that article... don't waste your time with such drivel.

There is no risky or un risky...they bought secured debt...which is a sound investment.

Further, it was debt they already guarnteed through CMHC, so they were on the hook regardless.

[geoffrey]

And what happens if there is a serious downturn in the economy?

Actually not. Individuals pay insurance premiums at market (maybe even above market) rates for CMHC guarntees. CMHC is a profitable business for the government.

CMHC is already holding the bag. But has made a huge fortune off mortgage insurance since inception. I'm not worried about CMHC.

And Leafless, did you miss something or did you not see that we've already gone through the biggest downturn since the Great Depression. Less than 2% of mortgages defaulted and less than 1% foreclosed in Canada. Let's say that triples over the next year. CMHC is still profitable.

By conducting this transaction, the government actually reduced risk as it's now collecting a spread on the mortgages versus it's own funding. Before it only had insurance premiums, but had equal liability.

http://network.nationalpost.com/np/blogs/fullcomment/archive/2010/02/10/we-should-privatize-cmhc.aspx

CMHC is only effective because it has a government guarntee. It doesn't work without it. Again, there is no real risk there. Just a bunch of people that don't understand how this all really works.

[Yesterday]

Thanks for the derivatives lesson Geoffery. Perhaps currently the overall risk of Canada's finances rate better than some. Even without understanding the finer points of finances if people like you keep talking someone like me will get it quite thoroughly, thanks. Oh yes, perhaps the last article mentioned was not a well written one in your words but was the content (other than the bail-out preference of terms) a true account of what the PM and the finance minister said. It does seem to contradict other statements at least from Flarherty.

Edited June 9, 2010 by Yesterday

[Leafless]

Actually not. Individuals pay insurance premiums at market (maybe even above market) rates for CMHC guarntees. CMHC is a profitable business for the government.

No matter how you slice it the federal government via CHMC is directly subsidizing the banks and indirectly subsidizing the construction industry.

Isn't it amazing how both the liberals and the conservatives utilize socialistic policies to further their political agenda.

And Leafless, did you miss something or did you not see that we've already gone through the biggest downturn since the Great Depression. Less than 2% of mortgages defaulted and less than 1% foreclosed in Canada.

Higher income individuals who own homes were not nearly affected as were lower wage earners who can only dream about owning their own homes. Just like the new jobs being created are mostly minimum wage to $12 per hr.jobs.

[Keepitsimple]

No matter how you slice it the federal government via CHMC is directly subsidizing the banks and indirectly subsidizing the construction industry.

1) So when Ottawa sells the mortgages back to the banks, and has actually made a small profit - what is that - a reverse subsidy?

2) How come the entire international community agrees that Canada has not had to bail out our Banks?

[Yesterday]

1) So when Ottawa sells the mortgages back to the banks, and has actually made a small profit - what is that - a reverse subsidy?

2) How come the entire international community agrees that Canada has not had to bail out our Banks?

A completely unsubstantiated personal opinion...because Harper et al wants in the Basket. China would prefer to align currencies with us for many reasons as well as Russia and the EU. They all have substantial financial investment in our mineral resources and would love to see the end the US dollar international position. I am not yet sure who I would want to say actually has vested interest in our international reputation and why but this is my current hunch.

[punked]

The Canada Mortgage and Housing is a crown corp and this is their job. They make money for the government on this stuff it is not a bail out it is that that Canadian housing market is hot and a lot of Canadians want to buy houses.

This is the socialism that M. Dancer hates. I call it a mixed economy and a win win for everyone, the government the banks and the house owners. Sometimes the government is the only thing big enough to make life easier for everyone.

Edited June 11, 2010 by punked

[Yesterday]

The Canada Mortgage and Housing is a crown corp and this is their job. They make money for the government on this stuff it is not a bail out it is that that Canadian housing market is hot and a lot of Canadians want to buy houses.

Are you sure?

http://www.thestar.com/business/article/820548--canadian-housing-starts-down-in-may

http://www.reuters.com/article/idUSN1021097020100610

This is the socialism that M. Dancer hates. I call it a mixed economy and a win win for everyone, the government the banks and the house owners. Sometimes the government is the only thing big enough to make life easier for everyone.

[punked]

All business loses money sometimes but yes they make money.

[dre]

The Canada Mortgage and Housing is a crown corp and this is their job. They make money for the government on this stuff it is not a bail out it is that that Canadian housing market is hot and a lot of Canadians want to buy houses.

This is the socialism that M. Dancer hates. I call it a mixed economy and a win win for everyone, the government the banks and the house owners. Sometimes the government is the only thing big enough to make life easier for everyone.

Its not win win for "everyone". By propping up the realestate market and preventing a price correction hundreds of thousands of people were rendered inelligable to purchase a home. Its a win win for the "ownership class" but not "everyone".

[dre]

A completely unsubstantiated personal opinion...because Harper et al wants in the Basket. China would prefer to align currencies with us for many reasons as well as Russia and the EU. They all have substantial financial investment in our mineral resources and would love to see the end the US dollar international position. I am not yet sure who I would want to say actually has vested interest in our international reputation and why but this is my current hunch.

They all have substantial financial investment in our mineral resources and would love to see the end the US dollar international position

No thats not true. Countries like China are dependant on both the US dollar and its huge consumer base, and are desperately trying to keep the US afloat despite the US governments best efforts to destroy their own country economically.

When countries are really serious about cancelling the reserve status of the US dollar youll know about it because the market for US bonds, and treasury bills will dry up. We arent there yet.

[punked]

Its not win win for "everyone". By propping up the realestate market and preventing a price correction hundreds of thousands of people were rendered inelligable to purchase a home. Its a win win for the "ownership class" but not "everyone".

That just isn't true. The Canada Mortgage and Housing provides money so MORE people can get loans and MORE people can own houses. It is WIN WIN. Look into the Canada Mortgage and Housing and what it does before making those silly statements.

[Yesterday]

A completely unsubstantiated personal opinion...because Harper et al wants in the Basket. China would prefer to align currencies with us for many reasons as well as Russia and the EU. They all have substantial financial investment in our mineral resources and would love to see the end the US dollar international position. I am not yet sure who I would want to say actually has vested interest in our international reputation and why but this is my current hunch.

This article discusses Canada's position as quoted by the IMF in regards to deficit ratio of GDP by 2014. Could give you an idea of a projected strength of our dollar in the next few years.

http://www.voxeu.org/index.php?q=node/4561

[Yesterday]

No thats not true. Countries like China are dependant on both the US dollar and its huge consumer base, and are desperately trying to keep the US afloat despite the US governments best efforts to destroy their own country economically.

When countries are really serious about cancelling the reserve status of the US dollar youll know about it because the market for US bonds, and treasury bills will dry up. We arent there yet.

Hi, this article will give you an idea of where I am coming from. You might be surprised at what China is saying...

http://www.voxeu.org/index.php?q=node/4101

Look at the shananigans since the 80s over the Sask. mineral fields. This story would really give you a good idea of who's who in the ownership of the largest inland mineral field currently known on earth. ( not my quote) The portfolio of owner's/operators is quite diverse.

Edited June 12, 2010 by Yesterday

[jbg]

It wasn't a bailout. It was a gift.

There's a difference between saving a failing institution (a bailout) and insuring the liquidity of their product, in this case loans.

[Yesterday]

There's a difference between saving a failing institution (a bailout) and insuring the liquidity of their product, in this case loans.

I have to agree with you. Punked has put up a valiant effort at helping us to understand this. You are both right. We did not require the same "bail-out" as the US. And yes, I can see the need to keep the market liquid, foreign interest in our country right now is imperative to the long term goals of our dollar (I've got some articles for this) and any bump in our liquidity or weakness of any kind would greatly impede the dollars direction.

[Yesterday]

Alex Nicholson and Paul Abelsky, Bloomberg · Tuesday, Jan. 19, 2010

Russia’s central bank has started buying Canadian dollars and securities, First Deputy Chairman Alexei Ulyukayev said.

“The Canadian financial market isn’t very big,” Mr. Ulyukayev told reporters in the central Russian city of Tula Wednesday. The bank can invest a “significant amount” in the Canadian currency, “but the securities market is limited.” He didn’t specify how much the bank had invested.

Russia aims to diversify its reserves, the world’s third-largest stockpile, and promote regional currencies in trade and finance to reduce risks posed by the dominance of the U.S. dollar. The central bank said in November that it planned to add Canada’s dollar to its reserves and might consider including other currencies later.

Bank Rossii is “discussing” the possibility of buying Australian dollars, chairman Sergei Ignatiev said last month.

Russia’s reserves were previously made up of 47% U.S. dollars, 41% euros, 10% pounds and 2% yen. The stockpile fell 2% in December to US$439-billion, the central bank said on Jan. 15. The country keeps about 35% of its international reserves in U.S. Treasury debt.

The central bank doesn’t plan to shift reserves to private corporate assets from sovereign bonds, Mr. Ulyukayev said.

“We are such conservative investors that we won’t invest in private bonds even though spreads are smaller,” he said.

Bloomberg.com

Read more: http://www.financialpost.com/Russia+central+bank+starts+buying+loonie+stocks/2463910/story.html#ixzz0qpROoqjM

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[Topaz]

Here's another view on the so called bailout that Harper says never happened. http://thechronicleherald.ca/Opinion/1188139.html

[Yesterday]

Here's another view on the so called bailout that Harper says never happened. http://thechronicleherald.ca/Opinion/1188139.html

Hi, great article, now I sit on the fence again...I had heard the 100 some odd billion figure before. Here it is again, mmm. I'd like to see a bank run...yup sometimes I feel like I want to be an activist, even a mild one. In my mind, a run would be the simplest most efficient way to make our point about the banks and force some sort of real change.