More Aid to Canadian Banks

lender-aid Canadian lenders are asking for help.  That’s according to the National Post, who says the Finance Department is “ready to step in and guarantee new borrowing” among banks.

The pledge was made “behind closed doors” according to the Post.

This announcement essentially means that Canada’s government may stand behind billions of dollars in loans that banks make to each other.

With this backing, the supply of money will hopefully improve in the mortgage market.  Without this guarantee, Canada will purportedly be at a big capital-raising disadvantage to other countries–whose banks have received their own government’s backing.

The National Post also says the Canadian government is prepared to dramatically increase the amount of mortgages they agreed to buy back last week. The number is apparently rising from $25 billion to as much as $225 billion.  That buyback starts this Thursday.

Inevitably, all of this will smell like a bank bailout to some.  However, Finance Minister Jim Flaherty says it’s simply not so.

“We are not looking at a rescue package for banks” or “any additional risk for taxpayers,” said Flaherty, who was quoted in the Globe. The buyback entails solid assets that are already guaranteed by the government (because the mortgages being purchased are insured).

In a nutshell, these moves are a strategy to increase the availability of Canadian lending–availability that has suffered considerably in recent months thanks to severe credit tightening worldwide.

  1. 225 Billion??? Are you kidding me? Adjusted for population that would be a 2.25 Trillion bailout for the US.
    I know everyone in Canada with our “smugness disesase” (someone made that great comment on a previous thread) is convinced that the US housing crash was a “subprime” issue. Furthermore people here insist we “don’t have subprime here”.
    My question is this….IF the Canadian housing market tanks like it did down south, what kind of bill are we the taxpayers going to be left holding?
    While I understand the need to make capital available, I would like to know where the gov’t is getting their valuations from? The original value of the mortgage? The outstanding balance? Some mark-to-fantasy value? Obviously it is not a market value since there is no market in the world willing to buy mortgage-backed securities at this point. Makes you wonder…
    Doesn’t the general public deserve to know the specific details of this (non) bailout?

  2. This saga reminds me of an old joke in the software development community.
    Microsoft is notorious for releasing buggy software as everyone knows. Sometimes they deny that something is a bug when clearly it is. They even go so far as to classify it internally as a “NotBug”.
    Anyway, sometimes when a “NotBug” becomes especially embarrassing they will release a “NotFix” to deal with the situation.
    All joking aside, we seem to be approaching the point of failure that Austrian economists warn is inherent in the fiat money/fractional reserve lending system that the world runs on.
    Eventually you get to a point where no one wants to borrow any more even if they are capable of doing so. This is why the governments of the world are now committing to borrowing unlimited amounts of money on our behalf. The only thing that scares a banker more then the thought of people defaulting on their debts is the thought of those same people not taking on more debt.

  3. The bank of canada has injected billions of dollars of liquidity into the market before. It’s not new. They have done it several times over the last year alone using purchase and resale agreements, etc.. Yet, we don’t call those actions bailouts. Why the uproar in this case?

  4. Toronto Bear,
    Rather than coming on here day after day complaining that you don’t know the details, why don’t you go read them. They are all available in the press release linked above.
    I know it is hard, but try doing some research before asserting that taxpayers are being kept in the dark. There is a very detailed “backgrounder” that provides all of the details on the competitive auction process.
    To give you a hint, it is all under the section called: “Standard Terms for NHA MBS Auction Operation”

  5. Hi Kevin,
    I think the uproar is a capitulation of sorts….probably due to the upprecedented size of this one, along with the timing.
    Mr. Simpson,
    I don’t’ see why people on blogs have to take things so personally?
    I have been to the CMHC site and read as much as I can but I am far from being an investment banker. I apologize for that, and this is why I’m hoping someone will translate into something that is slightly easier to digest.
    That being said, it appears to me that the MBS valuations are reliant on Moodys/S&P ratings systems, which we know in the case of the US MBS, were totally flawed.

  6. I am just wondering, even the mortgages that government took over are insured, what if the premium pool couldn’t cover all the defaults? Obviouly those mortgage are higher risk because of the low downpayment. I don’t think it is a fair deal but politician wants to “keep” their promises and they have to call the same thing different name.

  7. I don’t really get it.
    Could someone explain why freeing up credit can save the economy? Isn’t it better for everyone to stop borrowing their way out of a recession?
    Isn’t it like increasing someone’s credit limit when they are already maxed out, just so they can max it out even more?

  8. quote: Not everyone is “maxed out.”
    Well, that doesn’t really answer my question. However, the US deficit is approaching 1 trillion. I’d say the country has some paying back to do.

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