The secret Canadian bank bailout

Major banks receive billions during economic crisis

“The federal government’s $25 billion takeover of bank-held mortgages to ease a growing credit crunch faced by the country’s financial institutions is not a bailout similar to recent moves made in the United States and other Western countries.”

- Prime Minister Stephen Harper, October 2008

The meme persists, especially in the wake of Mark Carney’s elevation to economic “rock star” status. Canada’s strong economic fundamentals helped it endure the recession better than most other countries in the world.

In particular, unlike the United States, Canada did not need to bail out its banks.

With uncritical praise being lavished on Mr. Carney and the fearless crew of the HMS Canada, there is more myth than reality to the perception of Canada as an economic colossus enduring through the stormy seas of an early 21st century crash.

The findings of a study from the Canadian Centre for Policy Alternatives, which was released in April of this year, is quite different.

The report, The Big Banks’ Big Secret: Estimating government support for Canadian banks during the financial crisis, asserts that the period between October 2008 and July 2010 saw a tremendous amount of cash injected directly into Canada’s top banks by the Canadian taxpayer.

According to David Macdonald, the author of the report, these huge Canadian financial institutions turned not only to the Canadian government, but to the Bank of Canada and even the U.S. Federal Reserve for the capital they needed to continue their operations.

As it states in the report, by March 2009, support for these banks coming from these three institutions topped $114 billion, or roughly seven per cent of the Canadian economy.

The first of these fiscal maneuvers began during the 2008 federal election when Finance Minister Jim Flaherty explained that Canada’s largest banks would see a $75 billion cash infusion through the use of the Canadian Mortgage and Housing Corporation (CMHC).

CMHC, as one of its main functions, insures banks which hold mortgages secured by homeowners. In the event of a default, CMHC covers the banks, thereby freeing up the banks to provide more credit to the general public.

The CCPA report states that the CMHC purchases of insured mortgages is not much different from the U.S. government’s Troubled Asset Relief Program (TARP) except that the U.S. purchases only targeted “troubled” mortgages.

The CMHC transaction covered all mortgages they insured whether they were troubled or not.

To put it another way, this transaction was like an insurer paying out $100,000 on a fire insurance policy even though the house has not yet burned down.

This transaction was like an insurer paying out $100,000 on a fire insurance policy even though the house has not yet burned down.

Moreover, in his 2009 book, Beyond the Bubble: Imagining a New Canadian Economy, York University economics professor James Laxer pointed out that the government would raise the capital to purchase the mortgage pools through the sale of government bonds and other financial instruments.

According to the CCPA report, in addition to the contributions through CMHC, the major banks got $33 billion and $41 billion in collateralized loans from the U.S. Federal Reserve and the Bank of Canada, respectively.

Still not convinced this was a bailout?

Consider that according to the report, at one point, three of Canada’s largest banks, CIBC, BMO and Scotiabank, were receiving more government support than their net values.

To take one example, by March 2009, CIBC was receiving more of this kind of support than all their share values were worth.

To quote author Macdonald from the executive summary, “It would have taken less money to have simply bought all the shares in CIBC instead of providing it with support.”

So, the big banks in Canada did receive bailout money, and if opposition politicians and journalists were doing their jobs, this fiscal sleight of hand would today be as prevalent in the public’s imagination as Carney’s latest job promotion.

A government looking to cut back on all kinds of program spending in the interests of steering the national fiscal ship should be questioned about this tremendous concession to these private for-profit entities.

Michael Welch is news director at CKUW 95.9FM and host of the Global Research News Hour.

Published in Volume 67, Number 14 of The Uniter (December 7, 2012)

Related Reads