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Of Bailouts and Liquidity Shakedowns

Here is an amazing multimedia article published by Bloomberg Markets Magazine in the U.S., that lists all of the individual banks which received financial assistance from the U.S. Federal Reserve during the 2008-09 crisis.  It shows each bank’s peak borrowing from the Fed, the number of days they held the funds, and the timeline for paying it back.  You can sort the banks by name, amount borrowed, and other crteria.

How did Bloomberg get this?  From a big freedom of information request, which they then assigned dozens of researchers to compile and analyze.  Fascinating stuff …

The Big Five Canadian banks are all on Bloomberg’s list.  Together they borrowed (at peak) $28 billion from the U.S. Fed, holding funds for as long as two years.  Scotiabank was the biggest Canadian borrower from the U.S. lender of last resort, holding $9.5 billion (U.S.) as of December 2008 — and its Fed borrowings were worth almost half of the bank’s market value at one point!

CBC Radio’s Mike Horbrook reported on this Bloomberg feature this morning, and interviewed me among other commentators on the silly old question: “Were our banks bailed out?”  Does a hedge fund executive drink fine wine?

The $28 billion in assistance from the U.S. Fed received by our big banks pales in comparison, of course, to the line of credit worth up to $200 billion that was provided by our own federal agencies (including the Bank of Canada and CMHC) through Jim Flaherty’s Extraordinary Financing Framework.  I would love to see similar details (as in the Bloomberg report) on the banks’ use of these Canadian funding sources during the same period.

Nevertheless, the bankers have the gall to deny that this was not a “bailout”, but rather constituted normal liquidity smoothing interventions by the central bank.  This is historically false, and morally offensive to the taxpayers of Canada who were on the hook if this emergency assistance proved to be insufficient to stabilize the banks.  The reality is that our governments (and the U.S. government, too, we now know) provided enormous sums of finance to the Big Five banks, at virtually zero interest, at a moment in time when commercial funding was unavailable.  Canadian banks, like any other leveraged private banking institution (lending out their capital 20 times over or more), faced a real risk of collapse if the crisis of confidence worsened.  Having a $200 billion line of credit in your pocket, sure helps people have confidence in your future.  And confidence is a leveraged bank’s main asset.  So the banks were absolutely stabilized, and possibly saved, by these extraordinary government interventions.  Whether you call that a bailout or a “liquidity injection” is all in the semantics.

In response to that bailout, the banks owe the state and its taxpayers an enormous debt of gratitude.  They should also be more cooperative when it comes to the taxes and regulations that would help to prevent this kind of crisis from arising again in the future.  At a bare minimum, they should lose the arrogance which characterizes their self-righteous, whiny denials that they ever had to turn to the nanny state for their own survival.

As I told Mike Horbrook in my interview with him, if Tony Soprano shakes you down, he might call it a “liquidity injection” — but it’s still a shakedown!

Enjoy and share:


Comment from Roy McPhail
Time: December 1, 2011, 4:22 pm

As per Nassim Taleb’s commentary, institutions such as chartered banks ought to be treated much more like crown corporations than hedge funds when it comes to executive compensation. How does our Canadian system set top bank management salaries? Are we providing incentives for risk taking rather than for ensuring antifragility?

Comment from Harvey Malovich
Time: December 10, 2011, 11:07 am

C’mon Jim, give us break! As much as I may disagree with you I’m still bookmarking you on my iPhone – next to Krugman!

Comment from John Lewis
Time: December 11, 2011, 1:56 pm

How much of the $125 billion set aside in the EFF to purchase mortgages from the banks was actually used? I found this CMHC website which lists about $70 billion in purchases.
Per capita that would work out to more than the $400 billion the Americans spent in the TARP program.

I also found this Time magazine article warning the Obama administration not to do want the Canadian government did- i.e.- hand out the money with no strings attached because the Canadian banks just sat on the money they were given.,8599,1880327,00.html

Has any of the opposition parties asked the Budget Office to look into the value for money the taxpayers got from the spending of this $70 billion? This just goes to show that the myth of the Canadian banks not being bailed out is just that a myth.

I also find it interesting that the government is now preaching the importance of paying off debt and saving in the midst of a recession. It seems counter intuitive if you want to kick start the economy. I don’t think its any coincidence they’re saying this right at the time the big banks are trying to recapitalize. So much for government policy be directed at the good of the economy as a whole.

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