The Semantics of “Bailout”

bailoutIn The Big Banks’ Big Secret, the Canadian Centre for Policy Alternatives (CCPA) asserts that banks received $114 billion in financial support and guarantees at the peak of the financial crisis. What’s more, it claims the government tried to cover some of it up.

Report author David Macdonald says that what Ottawa calls “liquidity support” was actually a bailout. It’s a story that’s become a game of semantics.

Finance Minister Flaherty’s office calls Macdonald’s report “completely baseless” and the Canadian Bankers Association tells the Huffington Post:

The Oxford dictionary defines bailout as “financial assistance to a failing business or economy to save it from collapse”. That definitely was not the case here: not one bank in Canada was in danger of going bankrupt or required the government to buy an equity stake under taxpayer-funded bailouts.

Macdonald’s own numbers show the banks posting $27 billion in profits during the “aid period,” supporting government and industry claims that said support was not needed to keep banks afloat.

The government has since been paid back on the loan portions of this assistance. On the mortgage buyback portion, CMHC expects to net taxpayers $2.5 billion. This is profit from the purchase of mortgages that were already insured for the most part, creating little new financial risk at the time.

Contrary to claims of a cover-up, the government says the liquidity facilities in question were openly disclosed in aggregate. (We wrote about some of them at the time, like the IMPP and CLAF programs.)

But Macdonald claims the government won’t disclose important “details,” including what individual banks received, when they received it, and what collateral they put up for loans. He does make a valid point—taxpayers deserve to know what risk they incur.

Despite all the fuss, there’s little argument that these government liquidity programs (or whatever you want to call them) prevented an abrupt and potentially severe housing downturn at the time. Macdonald told CBC’s Kevin O’Leary he “absolutely agrees” that these initiatives saved the Canadian financial system. Maybe that’s an exaggeration, but they certainly prevented enormous economic pain when lending markets seized up.

Rob McLister, CMT

  1. There is apparently a difference between a hand-up and a hand-out.
    Bears will say that the Fed should have let the air out of the housing market back then, intead of attempting to manage a soft landing.
    I disagree. America’s seemingly never-ending housing debacle is exhibit one.

  2. I am reminded of Bruce Anderson’s repeated remark on the CBC At Issue panel last year: “The banks backstopped us!”
    This is of course an oxymoron, but is explicable perhaps by the fact that Anderson, like Drummond etc., works for the banking industry while pretending to do public policy. (More accurately, they both do public policy–in the interest of the industry that pays their salaries.)

  3. I recall the government being very clear about its actions at the time — that’s the whole point, to let all market participants know that you’re backstopping the banks and allowing them to shore up their balance sheets.
    I do recall several government statements since, to the effect that our banks did Just Fine without any government intervention, which I thought were outrageously economical with the truth given the actions.
    Flaherty’s statement quoted above is disingenuous. Oh, it wasn’t an equity stake! Oh, they weren’t going to collapse anyway! Did the government step in and offer unusual assistance, in a big way, rather than letting events take their course within the banks and in the capital markets? Yep.

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