The Lebowski Blog: Canadian Banks got $114 Billion

"Where's the f'ing money, Lebowski?"

Back in April, the Canadian Centre for Policy Alternatives released a report outlining that, contrary to popular rhetoric, Canadian banks got a massive bailout during the economic recession between 2008 and 2010.

While the Canadian government has in several international spaces claimed that its banking industry was a model that did not need government assistance, the CCPA study lays waste to that claim.

It's not the first time that the CCPA has hit the economic nail on the head.  Back in 2006 they warned that Conservative cuts to corporate taxes of $6 Billion could put the country into a deficit position if a recession hit.  They were ridiculed, but ended up being right.

As usual, the CCPA did its homework and dug deep.  There have been ongoing signs that the government bailout-out the banks since at least 2010, though the banks themselves repeatedly deny this and there wasn't any hard data to back it up. 

The government programs that loaned the banks the money were not releasing info on who they had loaned to or why. So the CCPA had to go through a lot of financial info released by these programs and match them to bank quarterly and annual reports.

The results were alarming to say the least. 

Canada's "Big-Five" banks all received tens of billions. Canadian Imperial Bank of Commerce (CIBC), Bank of Montreal (BMO), Scotiabank, Toronto-Dominion (TD) Bank and Royal Bank of Canada (RBC) all received between $17-$26 Billion at their peak of support.

The billions came from three sources, two of which were funded by Canadian taxpayers.  The US Federal reserve offered $33 Billion in short-term loans to Canadian banks.  On the Canadian side, the Bank of Canada gave $41 Billion.

The largest government support program was by the Canadian Mortgage and Housing Corporation (CMHC) which started buying a bunch of mortgages from banks to the tune of $69 Billion.  

To understand what these programs did you first have to understand what a bank needs in order to operate.  All banks have "minimum capital requirements" that they need in order to be able to lend money.  

Usually the ratio is about 1-20, meaning that a bank would need to have about $5 million sitting in their vault (or that they could somehow come up with in cash) to be able to lend out $100 million.  One of the main reasons that caused the economic crash in 2008 was that banks, specifically in the US, were at some point allowed to hold super-safe investments in lieu of cash to meet their requirements.

Those super-safe investments turned out to be Collateralized Debt Obligations (AKA CDO's AKA subprime mortgages) and worth nothing, meaning that a number of banks around the world all of a sudden didn't have enough capital to justify all the loans they had made.

When this happens, a bank is technically insolvent.  The loans they've made will not be paid back and that $5 Million they had in the above example vanishes.  Unless they get a sudden injection of cash-on-hand, they have to close down.

And it's here where the Bank of Canada and CMHC come in.

If a bank wanted raise some cash-on-hand in order to cover their current loans or to loan more, they would normally ether sell some investments/assets to anyone in the global finance community.  But during the recession, this became impossible.  No one was buying anything or risking any money for fear of a massive collapse.

Banks often require short-term loans to balance their books on a nightly basis.  Before the recession they would usually get this from another bank (inter-bank lending) for a shot term period.  However when the banks stopped being able to get this or other short-term loans, the Bank of Canada provided $41 Billion in cash.

When larger sums of money were required for longer periods, the CMHC directly bought mortgages from the banks.

For some who have followed the bank bailouts, this might remind you of the US (Toxic Asset Relief Program) TARP.  In the US, the government was buying crappy assets that were essentially worth nothing (usually subprime credit derivatives AKA CDO's) from banks just to ensure that banks had the cash on hand.  

The Canadian program was different.  All mortgages that Canadian banks own are insured by the CMHC already, so whether they were at risk of defaulting or not didn't matter.  That's right, in Canada, banks who loan out money for a mortgage already have it both ways.  They get profit if someone pays their mortgage.  If someone defaults though, any loss is insured by the CMHC.  Banks get the profits while the tax payer is on the hook for the risk.   

The CMHC program was buying actual mortgages, not derivatives.  These were not loans, but instead an exchange of a mortgage (form the banks) for cash (form the CMHC).  Because of this, banks and Canadian Bankers' Association President, Nancy Hughes Anthony have repeated again and again that they did not get a bailout and that they just got money for lending:

"Unlike other countries, not one bank in Canada went bankrupt or required a cent in taxpayer-funded bailouts.

"When the global credit markets seized up, the government of Canada bought insured mortgages from the banks to ensure that credit continued to flow to consumers and businesses."

But the CCPA report shows that the level of buying mortgages went far above just ensuring that banks had some extra cash-on-hand to ensure they could lend.

The report by the CCPA shows that 3 of these banks were "underwater" at February and March of 2009, meaning they were getting more cash from the government than they were worth.  A general rule to determine how much a bank is worth is to look at the total value of all the outstanding shares.  This is called its market capitalization.  

The level of support being given to CIBC, BMO and Scotiabank during these periods was between 100%-150% of their market capitalization.  In other words, these banks got cash from the government for more than they were actually worth.  Instead of loaning them the money, the government, could have just hypothetically, just bought all of the shares of the bank and owned it outright for the same amount of money.

Nancy Hughes Anthony claim that these banks did not require "a cent in taxpayer-funded bailouts" is also just not true.  It's was aline repeated by Finance Minister Flaherty in response to the CCPA report.  Because the government would already pay for bad mortgages, Flaherty said, the mortgages bought were already liabilities the government would have to pay for if they went by.  Of course he never mentioned why, if that was the case, the government took out $69 Billion anyways and just gave it to the banks directly.

In 2008, the federal government committed $75 billion in their budget to the Insured Mortgage Purchase Program, the program run by the CMHC. 

In 2009, they committed an additional $50 Billion.  To put this into perspective, the 2009 budget included cuts to programs and ran a deficit of $55 Billion.  In other words, without bailing out the banks, the deficit would have been eliminated and/or cuts to programs would not have been necessary. 

Perhaps the greatest injustice is that this amounted to a straight transfer of money from average Canadian taxpayers to banks, their staff and their shareholders. during the time of the programs, the banks reported $27 Billion in profits, while each of their CEO's (already among the 100 highest paid CEO's in Canada) got raises.

The Liebowski blog tracks big piles of money.  It appears regularily on the Toronto Media Co-op.