Waugh to Flaherty: Ease Off

Rick-Waugh-ScotiabankIt’s been a long search but finally one has emerged: A top banker who’s not afraid to hold Finance Minister Jim Flaherty publicly accountable for his anti-competitive rate actions.

Scotiabank CEO Rick Waugh said the following about Flaherty’s persuasion of banks to raise their mortgage rates:

“As a minister of finance, he’s obviously concerned about the well-being of the country. However, to price products for businesses — whether it be banks or manufacturers — is not what I would have expected.”

“I understand why the finance minister is concerned about the Canadian economy, but I just philosophically don’t think government should be setting product pricing.”

“Despite the difficulties of central banks to use interest rates, the alternative of trying to manage specific products or prices, to me, is fraught with difficulty.”

“The government sets the framework, but you’ve got to let companies go out and use their business judgment rather than the government’s business judgment.”

Consumers will applaud Waugh for being one of the only banking executives to openly challenge Flaherty’s efforts to deprive Canadians of lower competition-driven mortgage rates

The government has every right to set the general level of mortgage rates (via the Bank of Canada and securitization policy), but harassing individual banks and coercing them to reverse 10-20 basis point rate discounts is beyond its mandate.


Siderbar: Speaking separately about mortgage volumes, Waugh said he expects a “soft landing” in the market:

“Volumes for mortgage brokers and banks will be affected, but I don’t see it as a credit event of any significance.”


More: Flaherty Talks Another Bank into Higher Rates

Quote Sources: Bloomberg, Chronicle Herald


Rob McLister, CMT

  1. Glad to see Scotia CEO speaking up – since others did not. Seems Flaherty’s micro management since last year has done the economy more harm than good.

  2. If Mr. Waugh feels so strongly about Flaherty’s intervention in the free market, put your money where your mouth is. Drop BNS’ posted rates 20 basis points and challenge the Minister.
    Not going to see it, folks. The impact of doing so will be expensive for the bank with the excessive oversight that will be imposed by OFSI.
    Oh wait …. didn’t we just give the Minister full control of OFSI? That was the start of this very bad – and likely to get even worse – scenario. Enforcement should always be separate from policy.

  3. It’s not a surprise that the esteemed Mr. Waugh is “talking his book”. In essence, he’s telling the Finance Minister “hey, let us fill the punch bowl and let the party continue”
    The central question, however, is who is left holding the bag once the market corrects like it did in 1987; and recently in the United States. I’m sure calls for “more government regulation” will once again scream from the headlines.
    Careful what you wish for.. you might get it.

  4. First of all, don’t make yourself look uneducated by comparing the US and Canadian markets. Their fundamentals are apples and oranges.
    Secondly, the market isn’t going to crash because rates are 10-20 basis points lower.
    Third, if you want Flaherty setting individual product prices, why don’t we just get it over with and sell all private enterprise to the government? Then the finance minister can have complete control of every business function. Who needs capitalism anyway.

  5. BMO also stood up to Flaherty by leaving its 2.99% rate in effect after it got Jim’s call. Unfortunately its CEO Bill Downe didn’t go on record about how inappropriate Flaherty’s actions were.

  6. Flaherty needs to back off and let the banks do their jobs. Does he want to be the financial god and tell everyone what’s good for them? They have already put in enough restrictions on mortgages and need to let things settle and catch up. If a bank or lending institution wants to offer a low rate, let them. The borrowers would have to qualify for it and they banks usually don’t give out money to just anyone.

  7. The canadian banks appear to be be the biggest enablers of tax deferral (interest free loan from taxpers), avoidance and evasion. They have also leveraged offshore influence to negotiate deregulation and regulation loosening through threats, coersion and ultimatums to federal governments around the world. Flaherty doesn’t have the tools, the power or the balls (despite his Irish heritage) to dictate to the chartered banks. CAnada is a minor player and would be bankrupted if he chose the tougher route. He’s doing all he can – jawboning. Frankly, the free enterprise defense that banks always trot out to justify their demands and their monopolies/oligopolies is pathetic. Failing tighter regulation of the TBTF/TBTBail banks, I’d like to see the War Measures Act used and a few treason convictions to solve this problem. Bail-in is pure third-world bull$#!1.

  8. Banks are an essential service in our societies, enablers of economic activity – like infrastructure, sewer, water and electrical services, education, medical services. In it’s current form, banking is competing with other economic activity to the extent that our economies are focused primarily on financial services. It has become parasitic, much like political services which are primaily enablers of the financial service sector profitability. The excess profits within the financial services industry should be regulated and/or taxed back for redistribution as they are profits that would show up elsewhere in the economy if it were better balanced.
    Social Democrat, if you must know my political lean, which the media would likely teach you to think of as Communist.

  9. don’t make yourself look uneducated by comparing the US and Canadian markets. Their fundamentals are apples and oranges.
    Here are the fundamentals that matter:
    1. House prices.
    2. Incomes
    3. Ownership rates
    4. Interest rates
    All of which are substantially similar between the US circa 2006 and Canada now. Except house prices are higher here. We can argue the minutae of lending practices, but in the end it’s about people buying houses with their incomes, so the result is what matters.

  10. Hi LS,
    The unsustainable home price appreciation down south had numerous causes. It was a bubble that was built on systemic flaws, including:
    • Mortgage fraud on a scale the world has never seen
    • Lenders not qualifying borrowers based on their true incomes
    • People being qualified on teaser rates, and incurring huge rate risk
    • 20%+ subprime penetration versus 5% in Canada
    • Subprime mortgages being securitized and packaged like prime
    • Regulatory failings
    • Double the securitization in the U.S. compared to Canada
    • Faulty appraisals
    • Negative equity and negative amortization financing
    • Minimal-recourse loans in many states
    • Incredibly lax documentation requirements
    • Over-reliance on credit scores
    • Rampant speculation fueled, in part, by subprime investment financing
    And one could go on and on……
    Virtually none of these risks exist to a threatening degree in today’s Canadian marketplace. Moreover, as much as I differ with certain elements of the Finance Minister’s mortgage policy, some of his post-2007 actions have undoubtedly saved the market from a harsher potential outcome.
    That’s not to say certain overvalued locales won’t correct. Selected niches in the market could descend painfully. But the epic national crash that some like to put on magazine covers will likely remain hypothetical without soaring employment or rates.
    Cheers…

  11. Thanks to Rob for putting a stop to the silliness of comparing Canadian mortgage lending to the melt down in the USA in 2007 – 2008. Lending practises are the whole story of that meltdown and as Rob said his was only a partial list.

  12. Redistribute excess profits? Are you joking? Last time I looked we live in Canada, not North Korea.
    We have the strongest banking system on the planet. It is the very reason Canada is a AAA nation. Over-regulate banks and pillage their profits, and witness our standard of living plunge.
    PS – Please entertain us with your proposal for replacing the economic output of financial services.

  13. Robert, I understand that there are important and substantial differences, but in the end don’t you think the results are important?
    Canadian banks are lending to just as big of a percentage of the population as the US banks were. Assuming that in general, a 70% ownership rate means that the top 70% most credit worthy individuals are owners, then no matter the lending criteria that led to that situation, it should be a similar result.
    Then there are prices themselves, which again, despite Canadian banking regulation have appreciated just as high and higher than in the US.
    Then there are interest rates, which in Canada are no lower than in the US (in fact they have the large advantage of easily available 30 year terms).
    Then there are incomes, which are substantially similar as well.
    It comes down to what you think the cause was for the US meltdown. Was it prices that were too high, or was it the subprime mess primarily. Ie, if there was no subprime, would US real estate prices be just as high as Canadian ones right now?

  14. Hi LS,
    When U.S. home ownership peaked over 69%, a sizable percentage of those folks were under-qualified and undercapitalized. It didn’t take much of a catalyst for liquidity to dry up and for defaults, forced selling and price declines to snowball.
    By contrast, a far smaller ratio of Canadian homeowners have the inability to debt service, ability to avoid repayment upon default, exposure to higher rates (exacerbated in the U.S. by teaser rate resets, extreme debt ratios,…), etc.
    To quote research cited by the Cleveland Fed: “the quality of newly originated mortgages was worsening every year between 2001 and 2007.” By contrast, Canadian mortgage underwriting has been strengthening every year from 2008 to date.
    There’s no argument that prices are high and subject to correction in some cities. But a correction is far more likely than a U.S.-style mortgage-induced crash. Barring severe income deflation or drastic increases in rates or unemployment, it’s highly probable that over 99% of Canadian borrowers keep paying their mortgages.
    Cheers…

  15. When U.S. home ownership peaked over 69%, a sizable percentage of those folks were under-qualified and undercapitalized….
    By contrast, a far smaller ratio of Canadian homeowners have the inability to debt service

    For this to be true, one of the following also has to be true:
    1. A smaller percentage of americans are credit worthy than Canadians.
    or
    2. US lenders were lending to unqualified individuals in preference to qualified ones.
    Otherwise you can’t have ~70% ownership rate in both countries, but one country’s borrowers are supposedly sound, while the other’s are not.
    Option 2 seems exceedingly unlikely. If there were still many qualified borrowers left, US lenders would not have had to lend to unqualified ones.
    So, are Canadians fundamentally more credit worthy than americans? I think it’s an interesting question that deserves more research.
    By contrast, Canadian mortgage underwriting has been strengthening every year from 2008 to date.
    That’s apples to oranges. You can’t just ignore the period from 2000 to 2008 when restrictions were being loosened significantly.
    But a correction is far more likely than a U.S.-style mortgage-induced crash. Barring severe income deflation or drastic increases in rates or unemployment
    Agreed. Part of the US crash is attributable to the policy bungling. However already we see our economy doing poorly as our housing market starts to decline. The correction will certainly weigh on employment, given how heavily Canada’s economy relies on the FIRE industries.

  16. Hi LS,
    When it comes to comparing U.S. credit quality (pre-crash) and Canadian credit quality today, there are countless differences and reasons for those differences. Those are beyond this thread’s scope. A quick Google search, however, will reveal several comparisons of the U.S./Canadian mortgage markets by reputable sources.
    Regarding credit quality improvement 2008-2013, the point was that numerous actions have been taken to reduce risk in Canada. That’s something that didn’t happen pre-crash in the U.S. Moreover, the Canadian loosening that occurred pre-2008 was not wholly comparable to the irresponsible policies south of the border. We’ve got to a point now where some Canadian lending guidelines are notably more stringent than even pre-2006.
    Cheers…

  17. Ok last comment.
    A quick Google search, however, will reveal several comparisons of the U.S./Canadian mortgage markets by reputable sources.
    I haven’t seen any that don’t discard half the picture, but I do find this table interesting:
    http://www.theeconomicanalyst.com/sites/default/files/u3/fannie_vs_cmhc.jpg
    Regarding credit quality improvement 2008-2013, the point was that numerous actions have been taken to reduce risk in Canada. That’s something that didn’t happen pre-crash in the U.S.
    Yes. Let’s see if it makes any difference, or maybe it will just exacerbate the decline.
    We’ve got to a point now where some Canadian lending guidelines are notably more stringent than even pre-2006.
    2006 being after some important loosening actions, like the removal of price limits for CMHC and 5% down for everyone. However at least they’re moving in the right direction. Who knows, with Flaherty’s jawboning at the banks proving impotent, he may just tighten regulation again….

  18. If you want more than half the picture I wouldn’t be referring to Rabidoux’s website. That table is laughably misleading.
    Where does it compare the definition of sub-prime, the amount of Alt-A product held by each entity, the prevalence of teaser rates, the amount and frequency of equity take-outs, appraiser misconduct – which alters LTVs, the prevalence of negative amortizations and the pervasiveness of stated income and stated assets. Frankly, equating the past and present business models of FNM and CMHC is the mark of an amateur critic.
    More than that, it’s only half the picture, which is surprising for a supposedly full picture guy LS. Delinquency rates for mortgages purchased or guaranteed by FNM were substantially lower than for mortgages securitized by other financial firms. That makes FNM only partially to blame for the crisis. By targeting FNM, you’re ignoring bushels of other bad apples, apples that Canada does not have in its barrel.

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