Rejoice! Dividend Increases Await

An open letter to the world at large:

“Bank shareholders rejoice.  Pension funds rebound.  Hark, the Globe and Mail comes bearing good news my brothers and sisters.   Yes, the drums beat steady.  The heart skips irregularly.  The palms sweat profusely.  Because soon, soon, the big banks will engage in our society’s number one passtime.  Well yes, of course, I speak of income distribution — from the poor, to the rich, by way of that strange beast we call the “private banks” but which I prefer to think of as the original, most fantastical, most clever public-private partnership (that’s 3P for you folks inside the Queensway) ever devised.  The Globe has all the salacious details here.

But before you or your fund manager hop a plane to personally thank Mr. Nixon et al., might I suggest that you also send a thank you, appropriately stylized for the festive season (oh joy!) with pro forma statements to the effect that your mark-to-market stylings are compliant,  to your friendly member of parliament for it is she or he or it who, through IMPPish slight of hand, has made all this beneficence possible. And to arrive at this conclusion I draw on no less a source than the CD Howe Institute which, through a priceless (hat tip VISA) pairing of incoherence and inattention — such a truly lovely pairing, has in a single publication managed to on the one hand deny the existence of bailouts explicitly while on the other hand make it clear that this is in fact what transpired during those magical moments we now refer to as the financial crisis.  Consider, dear reader, the following:

  • On page i (just before page 1), the Howe notes “While Canada did not experience the same difficulties as other countries, it was hit by the fallout and introduced TBTF-type policies, although there was no bailouts of large banks.”  Oh parachuted sentence fragment.  Such a rough landing.   Might I suggest a warm bath and some silicon salt?
  • Then, on p. 1, the author says : “The bailouts took a variety of forms: (1) government recapitalization of insolvent or non-viable entities,  (2) guarantees (explicit and implicit) to uninsured creditors, (3) special central bank programs to provide liquidity well beyond the typical lender of last resort role, (4) relaxed regulation and supervision of financial institutions as well as (5) special programs to provide direct credit or to facilitate access to credit by households and businesses as banks reduced their lending.`”
  • Later, on p. 1, the author provides a nice overview of the assistance programs from the federal government – look at how many of these efforts “fit” into the bailout definition above: “In Canada, the Bank of Canada expanded its liquidity framework by lengthening terms to maturity of various facilities, expanding the size of its facilities and transactions and expanding the range of counterparties and eligible securities that could be used to acquire liquidity (=3 above). The federal government announced measures intended to improve access to financing for Canadian households and businesses at a potential cost of up to $200 billion (=5).  These initiatives included measures to purchase insured mortgage pools, to buy securities backed by loans and leases on vehicles and equipment and increased resources for the Export Development Corporation (EDC) and the Business Development Bank of Canada, temporary expansion of EDC’s mandate to support financing in the domestic market and “assurance facilities” to provide insurance on the wholesale borrowings of federally and provincially regulated deposit-taking institutions and federally regulated life insurance companies. Finally, the Office of the Superintendent of Financial Institutions relaxed its capital rules to permit a greater use of preferred shares by federally regulated deposit-taking institutions (=4).
  • Q.E.D. : there was a bailout in Canada.

Now if this were not sufficient, I would also urge to consider one more element of logic that has escaped the attention of our truth tellers, namely the simple fact that the IMPP program effectively allowed the banks to move forward their profits (albeit at a loss relative to what might have been) on CHMC-insurance loans and in so doing, provide a short-term stimulus to shareholder equity — another word for CAPITAL as in BASEL — without having to issue as many shares as they might otherwise have had to, which is another way of saying that the IMPP program effectively protected shareholders who, very soon, will be rewarded for their remarkable patience and forebearance (oh the horror — a paltry 4% or 5% dividend yield to ride out the worst economic crisis — thanks to the all powerful being that the festive season fast approaches).

All this while I have it on the most impeachable of authority that some of the major banks are scaling back lending to rural areas and especially those rural areas unfortunate enough to have manufacturing facilities (thanks be to the BoC for the high dollar policy).  Again, the logic is crystal clear: policymakers have read their economic development theory and are making another stab at compelling an exodus of excess labour from the rural hinterland to the manufacturing, err, service, err, housing, err…whatever, heartland of urban Canada.  Wages will fall, employment will grow, prosperity will reign. Rest assured.

Your humble narrator,



  • Great post Arun, I was waiting for somebody to get a deeper look into the dark recesses of the financial Canadian glare that the banks have been chest thumping through the crisis. We need more digging and more miners.


  • That seals it. Anyone who is dumb enough to buy an annuity through a Bank or at all is a jack-ass. Just buy bank stocks.

  • Do banks sell annuities directly? So far as I know, if a bank sells an annuity it does it through an insurance subsidiary.

  • You may be right but go their web pages and you see them offering them as part of their general mix of investment vehicles / wealth management services. My point was simply buy bank stocks instead. They will throw off a de-facto guaranteed income via dividends and at least give the chance of guarding your initial investment. Annuities are like a reverse mortgage: Planned capital destruction

  • I think you may be right in the current low interest rate environment, although Moshe Milevsky argues in a number of his books and papers that annuitizing enough to meet basic needs is a good idea.

    If bonds were yielding 10% it might be a different story, depending on inflation – annuities might look like a good deal.

  • Yah but annuities are tied to bond yields in some respects with a bunch of fess thrown in. My point is, and related to the main post, that you can buy bank stocks get the yield, get the implied (historic) inflation protection, sleep easy knowing that the CDN banks are de-facto G-backed, get the preferential treatment on taxes, AND preserve your capital.

    True if interest rates go to 15% dividends will suck. So shift out and go into other areas. But If you have prostrated yourself to an annuity that capital is gone but gone. That is you can’t shift without paying big penalties which dwarf whatever transaction costs would be involved in portfolio shifting.

    Anyway why buy a annuity when you can buy the bank. Sure if you have to throw 100,000 into the toilet that is an annuity and get 423$ for thirty years. But if CDN banks are doing 5% in dividends why bother?

Leave a Reply

Your email address will not be published. Required fields are marked *