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“What we’re trying to do is save this $35-billion from a meltdown and destruction,” | Purdy Crawford


More on the Canadian plan to fix the $35bn ABCP market.  Turns out the Canadian Banks have indicated receptivity, but did not participate yet.  The $35Bn appears to represent ABCP owned by various private funds. 

ABCP committee plans road show to sell deal

Noticeably absent, however, were Canadian banks, which have yet to agree on their role in restructuring the market.

There are three categories of ABCP involved.

ABCP committee plans road show to sell deal

  1. About $3-billion of the total holdings in ABCP contain traditional assets, such as credit card receivables and auto loans, and those trusts will be worked out separately and on a series by series basis and holders will be given “TA tracking notes.”
  2. A second tranch of $26-billion in assets, which are largely trusts holding synthetic products, will be split into two separate pooled trusts, MAP1, which will hold $15-billion in assets and MAP 2, which will hold $11-billion in assets. Most corporate investors will likely be placed into MAP 2.
  3. A third category ABCP holding about $3-billion in assets has too much exposure to sub-prime loans and will be worked out separately on a series by series basis.

Despite Banks apparent non participation, they have agreed to assist with lines of credit to assist in developing liquidity.  Clearly this is a delicate balancing act, that will only be as the weakest link in the chain.  The quote taken from the article, and used as the blog post title, sums it up.

Written by Colin Henderson

December 25, 2007 at 15:50

Posted in subprime

Identity – how can you prove you are you?


Identity is an interesting subject. How can you prove you are you?

This is something that was a compulsive topic in the late 90’s but died down after the assumed solution of PKI was understood as too hard to implement.

Recently a colleague re-opened the topic. It was noted that Dave Birch has been on about identity recently too through his exploration of how Government mandated free provision of API services to be delivered by UK banks resulted in alternative business model thinking.

Dave has some interesting ideas particularly in the area of “attribute verification” whereby Banks could provide positive attribution to third parties on customers identity, creditability, positive bank account experience etc.

I took some time to reflect on what the Canadian Government have been saying. It is hard to keep up because the pace is so slow, but in 2009 they produced

Federating Identity Management in the Government of Canada: A Backgrounder

Since that time the activities of SecureKey have dominated the discussion although they have largely moved south in their predominant efforts as witnessed by their home page featuring the US Congress building.

The focus in Canada has been on the limited space of identity in respect to Government of Canada and Provincial services.

This is very clear from this GoC page on Cyber Authentication.

All this to say that the UK government is particularly pro-active in this area with pressure on the banks, and the Canadian government is not. Directionally this probably arose from the particularly weak position that the UK Banks were in post 2007 vs the strong position that Canadian Banks found themselves at that time and despite the underlying risk merely being shifted off balance sheet.

Identity management services as a business model in Canada is up for grabs it would appear.

Written by Colin Henderson

April 5, 2015 at 23:35

Posted in Uncategorized

New CCPA report | Several Canadian banks drew government support (in 2009) whose value exceeded the bank’s actual value


I have written here at length about Canadian banks and how the world impression that they are industry leading in strength is at best coloured by superb behind the scenes co-operation between the banks, the government and the Bank of Canada.  The biggest example I could write about was the 2008 freeze on interbank and inter institutions derivatives hastily forced on the banks in 2008.

Purdy Crawford/ Pan Canadian Investments: The Canadian government did presciently freeze $35 billion in derivatives back in 2007.

But if you flip through the Canadian Banks search on this blog there is a general theme that Canada’s banks are not materially better capitalised than other banks in the world.  And now we have the ammunition many of us knew existed but had no evidence.

Todays bombshell from the Canadian Centre for Policy Alternatives, authored by chief Economist David McDonald, provides clear evidence of the extent of Government assistance to the Canadian banks during the crisis.  The amount of that assistance is $114bn.  This is several times total Canadian Bank equity.

The report begins;

The official story of the 2008 financial crisis goes like this: American and international banks got caught placing bad bets on U.S. mortgages and had to be bailed out. But not in Canada. Through the financial crisis, Canadian banks were touted by the federal government and the banks themselves as being much more stable than other countries’ big banks. Canadian banks, we were assured, needed no such bailout.

However, in contrast to the official story Canada’s banks received $114 billion in cash and loan support between September 2008 and August 2010. They were double-dipping in not only two but three separate support programs, one of them American. They continued receiving this support for a protracted period while at the same time reaping considerable profits and providing raises to their cE Os, who were already among Canada’s highest paid. In fact, several banks drew government support whose value exceeded the bank’s actual value. Canadian banks were in hot water during the crisis and the Canadian government has remained resolutely secretive about the details.

Now some details;

CCPA Report (pdf)

The first point of interest in the report is the extent of support as a percentage of the banks’ market capitalisation.  This one should be read in the context of the high leverage that banks enjoy courtesy of government support through deposit insurance and liquidity advances from the Bank of Canada on a day to day basis.

In the reports own words;

Three of Canada’s banks—ciBc, BMO, and Scotiabank—were at some point completely under water, with government support exceeding the value of the company. In March 2009, ciBc stood out for receiving support worth almost one and a half times the value of all outstanding shares. It would

have taken less money to have simply bought all the shares in CIBC instead of providing it with support.

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The irony of CEO remuneration during this period is not lost on the report;

To top it off, the CEO of each of Canada’s big banks ranked among the highest paid 100 CEOs of Canada’s public companies and at the height of government support between 2008 and 2009 each CEO of each bank received raises in total compensation. For instance, Edmund Clark of TD Bank saw his overall compensation jump from $11.1 million in 2008 to $15.2 million in 2009.

The total support to Canadian banks and the surprise that CMHC was the primary conduit.

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Individual bank support;

RBC

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TD

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Scotiabank

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BMO

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CIBC

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And the reports conclusion which most would support;

A healthy financial system cannot be based on massive government support for which the details remain secret. It is only through an honest and transparent examination of what occurred and how it can avoided in the future that a stronger financial system can be built, which is in everyone’s best interest.

Relevance to Bankwatch:

This is a stellar piece of work and probably the best report on the Canadian bank system of the 2008 banking crisis.  Recommended reading for anyone interested in banking and how it really works.  There is no magic Canadian bullet.

Written by Colin Henderson

April 30, 2012 at 21:04

Posted in Uncategorized

The Canadian bank model secret? | risk aversion


The general theme that the ‘Canadian Bank model’ is superior has constantly intrigued me, having been personally involved there.

Size and Diversification: They are smaller and less diversified, so some risk mitigation appears there. This is probably the biggest reason.

Number: There are only five of them, of any consequence, so a couple of regulators can do a lot of supervision there.

Loan restriction: there is a restriction on loan participation relative to capital.

Purdy Crawford/ Pan Canadian Investments: The Canadian government did presciently freeze $35 billion in derivatives back in 2007.

But no … in aggregate there is no enormous winning theme, or singular secret in Canada.  In typical Canadian form its the softly softly approach, and David Olive in todays Star sums it up nicely with this quote below.

They are just plain old fashioned ‘risk averse’ supplemented by being too small (asset size is whats important here, not market cap) to take part in large scale international risky investments.

Obama eyes Canada as bank model | The Star

As a result of their largely shunning the purchase of multimillion-dollar packages of U.S. junk mortgages, Canadian banks have earned international acclaim for their continued sound condition. But that had nothing to do with the Canadian banks’ size or diversity of functions, and everything to do with prudent risk decisions and scrupulous regulatory supervision.

Written by Colin Henderson

May 4, 2009 at 16:00

Memo to BofC | Canadian lesson ought to be benefit of early co-operative action – not “it began outside … “


I have to take issue with this statement by the Bank of Canada Deputy Governor made this morning to the House of Commons Standing Committee on Finance.  Without a full and proper understanding of the crisis, how can our leaders be exepcted to appropriately address it.  In particular this is central bank advice to the House of Commons.  Yes a global solution is required, but no it begain inside all countries borders, and here is the Canadian experience followed at this blog.

Opening statement by Pierre Duguay Deputy Governor of the Bank of Canada to the House of Commons Standing Committee on Finance

Because the crisis we are facing is global in nature and began outside our borders, most solutions must be found at the international level. …   I would note that there has been a great deal of interest worldwide in the resilience of Canada’s financial institutions in the face of the global economic crisis. Unlike their counterparts in other major economies, Canadian banks have not been materially affected by the financial crisis.

To state that the global problem began outside our (Canadian) borders is just incorrect.  I imagine his defense of that statement would be to make the point that the sub prime crisis was American. But that statement belies the now understood nature of the problem being derivatives and SIV’s that were assessed in mathematical terms with improper understanding nor accounting for risk.

The global problem of derivatives which are still over $600 trillion exists because those instruments were a result of real assets being dissected into different components and repackaged as new instruments that bore no resemblance of, nor clear line of sight to the original asset.  This is well known now, and to suggest that world market passed Canada by, is disingenuous at best.

All countries had banks participating in the international money market investing in securities they did not understand and Canada is not exempt from that fact.  Back when I started counting the extent of the problem when frankly few acknowledged it publicly (early 2007), Canadian banks were north of $6bn in write offs associated with sub prime and other very high risk investments, such as the 3/4 billion natural gas speculation at BMO.  CIBC though led the way with $3bn of sub prime losses at that point.  In July of 2008 Dundee Securities painted CIBC as a takeover candidate.  I have since lost track of the sub prime losses in Canada, but they have not gone down.

Then there was the Pan Canadian Investments arrangement orchestrated by Purdy Crawford on behalf of the Bank of Canada (yes, the place where Duguay works) and Government of Canada, whereby some $31 Bn in derivatives, involving secondary players in Canada, were removed  from the financial system and sheltered in an arrangement that ensured no immediate demand for payment on the Canadian banking system would occur.  This was a visionary move taking place in 2007, and before the extent of the world crisis was understood.  But those $31 bn do exist, and I believe Canada could have had its own “Lehman Brothers” crisis in 2008 had that action not occurred in 2007, and being wrapped up in January 2009.  Pages 1 & 2 of this pdf prepared by Pan Canadian and hosted on the E&Y site, highlights the direct involvement of the banks, including $21 bn of it relative to CDS (Credit Default Swaps).

So to say Canadian banks were not materially affected is something of a glossing of the facts.  A better approach for the speech would be to focus on Canadas natural conservative tendencies, early action to address problems,  foresight etc.

Canada took conservative and early action to prevent becoming embroiled in the fiasco being played out in US and UK particularly whereby even Lloyds, that bastion of risk adversity is on brink of full government ownership.  With Debt to Equity ratios ranging from the excellent TD at 14 :1 to CIBC at 25 :1 Canadian banks are on average in better shape now than many others around the world, assuming their bad debts allowances are reasonable and assets well valued, however at the lower end care and watchful eyes are required to ensure stability.

All this to say that Canada is not exempt from the roots as well as the woes of the crisis, and there are lessons to be learned from early action, and proactive work between the government, the central bank and the banks’ – lessons that the US could learn, rather than their naturally adverserial approach.  But lets not pretend we are being dragged into someone elses problem and unwillingly help to fix it.

Written by Colin Henderson

March 5, 2009 at 15:39

Arrangement shelters ABCP worth 27% of Canadian Bank equity base


The always clear thinking Fareed wrote this piece on the Canadian Banking system and how it is the envy of the world.  The facts outlined are indisputable and the distinctions between the US and Canadian systems that favour care and moderation in Canada are all true.

However there is one other event he does not mention, that has quietly gone on for the last 14 months and in fact just completed in January this year with the announcement noted below on the E&Y site dated Jan 21st, 2009.

The story here goes back to December 2007, when I first noted it here.  At that time the Canadian government strong armed the Banks in a prescient move to avert crisis in the Canadian component of the ABCP crisis. Recall that ABCP is lending by Canadian banks managed off balance sheet therefore not subject to capital requirements.

The arrangement in effect froze $25 Bn in Asset Backed Commercial Paper by transferring them into a series of trusts. [note this link is to a pdf on the E&Y site].  It explains ABCP, and explains the arrangement. In particular note this little gem on page 6 entitled “Alternative to the Plan”.  They have turned off copying so I saved the screen shot here, and typed the first few words …

The Investors Committee believes that failure of this plan would likely lead to the forced liquidation of billions of dollars in assets that back ABCP ….  the value of the affected ABCP in the context of a forced or voluntary sale is uncertain because there is currently no public market for the notes.

This financial trick was managed with the hesitant support of bank credit lines, and essentially (as I understand it) tooremoved the immediacy for settlement from the paper.  However that paper remains contingent off balance sheet debt of the Canadian Banks.

The reason I raise this now, is that the Fareed article suggests that Canadian Banks are perfect, but the Pan-Canadian Investors Committee manouvre hides part of that truth that ought to be factored into the picture for completeness.

Here are the equity bases of the Canadian Banks from Google Finance – how significant is the $32 Bn – you can judge for yourself.  In particular note that pre this arrangement, TD and I think one other were not engaged in ABCP as much, so the percentage would be much higher (worse) against those ABCP participating banks.

Royal    $ 31Bn

BMO     $ 19 Bn

Scotia   $ 22 Bn

TD         $ 32 Bn

CIBC    $ 14 Bn

$ 32 Bn as a percentage of $118 Bn = 27%

_________________________________________________________________________

Most recent update on the E&Y site relative to the euphemistically named Pan-Canadian Investors Committee.

Canadian Commercial Paper : Ernst & Young

Press Release
For Immediate Release
ABCP Restructuring Completed
Plan to Be Implemented on January 21, 2009
Toronto, January 16, 2009 – The Pan-Canadian Investors Committee for Third-Party Structured Asset-
Backed Commercial Paper is pleased to report that all of the principal legal documentation needed to
implement the restructuring plan affecting $32 billion of third-party ABCP has been finalized and is being
signed today by all of the necessary parties.
Final reconciliations and verifications are now being conducted and the Court-appointed Monitor is
expected to file the certificate required to implement the Plan and complete the closing on January 21,
2009.
– 30 –

For further information:
MEDIA
NATIONAL Public Relations
Toronto Montreal
David Weiner Roch Landriault
Tel. (416) 848-1633 Tel. (514) 843-2345
Cell: (416) 931-4633 Cell: (514) 249-4537
INVESTORS
Ernst & Young Inc.
Pierre Laporte
Tel. (514) 874-4383
GOODMANS\\5676758.1

Written by Colin Henderson

February 13, 2009 at 14:20

Canada banking sector is avoiding the troubles in US and UK


The press is all doom and gloom at the moment.  Not without reason, but the causes and implications are getting blurred.  So I did a simple analysis comparing three stock markets, their fall since mid 2007, and the relative importance of the banking sector in that fall.  The results suggest that it does depend where you live.  There is an all out banking crisis in the US and UK, based on market sentiment.

 

us can uk comparison 

Somehow Canadian banks are not regarded with such fear as the others.  This no doubt partly due to the early work of Purdy Crawford and the Federal Governments efforts last year to manage the $35bn in ABCP.  In retrospect this was a far-sighted move (Fall 2007).  In a very complex manouvre, they carved the $35bn held by smaller banks and investment houses into tranches that were backed by hastily arranged lines of credit from the Banks.  In any event the outcome was an orderly shift away from certain bank or investment house bankruptcies.

Written by Colin Henderson

October 5, 2008 at 13:21

Canadian Banks restructure debt | Globe & Mail


Reported in the Business section today, the Canadian financial institutions have agreed on a restructure of $33 Bn in Asset Backed Commercial Paper (ABCP). That ABCP has been frozen and not able to be traded since August, when the US Subprime crunch hit.

The deal includes a $14 Bn credit facility, and basically exchanges short term notes for longer dated paper.

Interestingly the spokesperson for the group that arranged the deal, is a Toronto lawyer, Purdy Crawford. The group is called Pan-Canadian Investors. Based on conversations with a colleague, I suspect this is all a front for the Bank of Canada attempting to calm the markets, by replacing short term pressure on the market with longer terms.

Written by Colin Henderson

December 24, 2007 at 10:06

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