Why did Canada (safest banks in the world) miss the mortgage crisis?

[banned from Kos]

From 2008, Canada ranked #1 in bank soundness while the US was #40.

http://www.reuters.com/article/2008/10/09/us-financial-soundest-banks-idUSTRE4981X220081009

So how did they do it? They function like US banks. In fact, there are thousands of branches in the US. Canada has a central bank like the Federal Reserve and they mirror us in structure.

Three big reasons:

1- Canada has full recourse - you default on your mortgage and banks can collect your OTHER assets (like securities, savings).

2- Canada has no mortgage interest tax deduction thus making renting more attractive.

3- Canada does not allow fixed 30-yr mortgages - thus floating interest rates which protect the banks from rate spikes.

Its pretty good to be a banker in Canada.

[Indydem]

1. Uhhh, Yeah.

Adjustable Rate Mortgages were one of the major contributors to the meltdown. Every mortgage being an adjustable rate makes me never want to own property in Canada.

No wonder people rent; it has little to do with the deduction (no one buys a house because they can write off the interest - that is idiot accounting) and everything to do with the general conditions for purchase being unfavorable.

[mmonk]

2. But there are other reasons. Canada wouldn't allow some practices

and all regulation comes from the federal government.

One clear issue of distinction is the pattern of 'deregulation' that has characterized the banking/finance industry in the developed world over the last twenty years. This passion for deregulation was most noted in the USA and UK (under the rubric of "neoliberalism"), but the fact is, France, Germany, Netherlands, Switzerland, Ireland and Iceland all engaged in exactly the same game (if not more so since they had many more regulations to deregulate than the Americans did). Fact is, when it comes to over-leveraged balance sheets, European banks are in far worse shape than most American banks. The 'hot shot in red suspenders' playing fast and loose with high risk games on Wall Street' wasn't limited to just Wall Street.

It is to be noted that Canadian banks tried hard to join in that same game and lobbied the government furiously for the same deregulatory changes that would let them adopt similar financial strategies being followed by Citigroup and BofA. The Canadian Government (Minister of Finance Paul Martin to be specific) said "no". These same Canadian banks also lobbied hard for permission to merge together and to purchase insurance companies so they could create some monster-sized banks like the ones in the USA. Again, Finance Minister Paul Martin said "no".

As a general rule, Paul Martin's decisions had wide public support and approval. The banks were seen as exactly what they were - seeking opportunities to expand profit opportunities that had no beneficial effect for their customers or society in general (and thus were denied).

-snip-

http://www.discussionworldforum.com/forum/archive/index.php/t-462.html

[banned from Kos]

3. Good find. I agree that banks should be regulated as public utilities are.

Some here falsely believe the system must be torn down starting with the central bank.

Paul Martin got it right it seems.

[mmonk]

4. Yep, He did.

He didn't find anything compelling in the public interest to allow it.

[mmonk]

7. I'm a stockholder and depositor in Royal Bank of Canada in Raleigh NC.

This year, all operations here are being sold to PNC. Not real wild about it.



RBC Plaza here



RBC Center-Home of the Carolina Hurricanes

Guess things around here are going to change.

[Prometheus Bound]

5. It's because property prices in Canada have kept rising.

If they had fallen 25-50% like many areas in the US I guess Canadian banks would not be looking quite so sound.

[banned from Kos]

8. property prices were stable or higher due to the lack of speculative buys

since Canada has full recourse.

I knew many people who purchased 3-5 properties in 2005-07 to flip. They lost their low down payments and points only - a fraction of their worth.

Not so in Canada.

[girl gone mad]

22. lol.. no.

http://www.crackshackormansion.com

[banned from Kos]

26. Crack Shack or Mansion to refute me????

You are kidding?

I have a classical liberal accounting/Econ education - you latched onto this MMT thing.......

I really like your perseverance!

[girl gone mad]

27. Yes, that is my refutation.

Housing market speculation has been rampant in Canada. The bubble is set to burst.

[ellenfl]

6. perhaps canada didn't have goldman-sachs selling them

mortgage-backed securities. goldman did sell them to greece and probably other european countries.

ellen fl

[Name removed]

9. Deleted message

Message removed by moderator. Click here to review the message board rules.

[polly7]

10. Wow. Harsh. Gotta link for that? nt.

[banned from Kos]

11. yeah - straight from the primary German source.

http://www.spiegel.de/international/europe/0,1518,676634,00.html

Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. "Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future," one insider recalled, adding that Mediterranean countries had snapped up such products.

The German people are sick of the Greeks.

[ellenfl]

18. sure

link

As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.

link

Feb. 17 (Bloomberg) -- Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.

No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.

google is your friend.

ellen fl

[banned from Kos]

23. Total Fail - your link recounts $15 billion of bond sales FOR Greece

NOT "MBS bond sales" TO Greece as you previously claimed.

Greece was ripping OTHERS off - get it?


Show me bond sales TO Greece to prove your illusive point.

[ellenfl]

29. right, to hide their financial problems.

google it. i got lots of responses. no matter how much you want to protect g-s, they still played a role in greece's crisis, just as they did in ours.

ellen fl

[alittlelark]

28. +100

[Dawson Leery]

12. Canada does not have CDO's and securitization.

If the bank or financial institution hands out a loan, that institution owns it.

[banned from Kos]

13. But CDO/MBS were not the root cause of the crisis at all - INSTEAD

the underlying failed mortgages contained within MBS were.


Put 500,000 mortgages in a finance vehicle and none fail - the MBS does not fail. Canada discouraged shitty loans - and voila! Canadian banks are fine.

[Dawson Leery]

14. Subprime loans were the trigger to the crisis.

There was no reason to have these CDO's and default swaps made against these loans.

[banned from Kos]

15. Agree fully. Bundling sub-prime mortgages into MBS made it 100X worse.

then insuring that crap with CDS like AIG did was insane.

Since Canada avoided NINJA and Liar Loans they avoided the whole fiasco.

[mmonk]

16. Yes, a major reason it all became gambling and betting.

Add in too big to fail and it was all a house of cards. Of course, Martin made the right call. The whole set up was not in the public's interest.

[eallen]

20. The MBS market drove the creation of those mortgages.

Financial institutions made hundreds of billions of dollars by creating and selling mortgage-backed securities of various sorts. For a few years, it was like printing money: buy mortgages, chop them up into traunches, package them with or without credit default swaps, and sell them off. And to keep that money machine going, those institutions needed a continuous supply of new mortgages. Which created a whole industry of mortgage originators who kept pushing all varieties of mortgages in every way they could

How bad did that get? For a while, one of the top products advertised in spam -- spam email! -- was high-leverage, back-end loaded, mortgages even to those with bad credit.

Don't fool yourself. The MBSes weren't a passive way to optimize what mortgages already existed. The MBSes drove the mortgage market.

:hippie:

[banned from Kos]

24. Good point - Yes it was a chicken and egg scenario

Sub-prime initially created bad MBS then MBS devoured more sub-prime until the I-banks were sated.

[jberryhill]

17. Because homes in Canada melt in the spring

[Broderick]

31. LMAO

that was good!

[roamer65]

19. Canada may be about to have the same crash we did.

Their home prices have peaked and are starting to drop. From what I am told by a Canadian friend, it used to be that u pretty much had to have 20% down to buy a house in Canada. Now they have allowed much smaller downpayments...around 5% or less. Sound familiar?

[SidDithers]

25. Canada has allowed 5% downpayment for years...

We put 5% down when we bought our first townhouse in 1993.

Sid

[Shagbark Hickory]

30. That's good news for anyone potentially wanting to move in November 2012.

[applegrove]

21. The Liberal Government of Jean Chretien with finance minister Paul Martin

did not allow much deregulation of the banking sector. They saved our banks. And our economy. Of course the conservatives take ownership of our economic prowess. When it was Paul Martin.