Trusting Bureaucrats and Politicians Will Cost You Money

Before the financial crisis in Cyprus, the Cypriot president assured voters that the government would never seize their bank deposits.

Then guess what happened?

On April 4, CMR asked if the Canadian government would have a Cyprus-like response to a banking crisis, as was implied by the language of pages 144-145 of the new budget.

The government is trying to assure us now that they won’t steal your deposits to prop up an insolvent bank. Yet Mark Carney himself wouldn’t rule out the possibility.

“Canadian institutions have substantial unsecured debt obligations in the wholesale market and as well as other classes of capital, and they have substantial capital as well, so once you stack all of that up, regardless of whether one would look to reach into it … it’s hard to fathom why it would be necessary,” the Bank of Canada governor said.

“Hard to fathom”? That is not exactly what I’d call “comforting language.” Especially because this is from a guy who is wrong nearly every time he opens his mouth.

He admitted the queue of capital buffers for banks would likely include some types of deposits, but did not elaborate.

Yet Carney also referred to a response from Flaherty’s office, which stated:

“The ‘bail-in’ scenario described in the budget has nothing to do with consumer deposits and they are not part of the ‘bail-in’ regime. Under a ‘bail-in’ arrangement, a failing financial institution has to tap into its own special reserves or assets (which it has been forced to put aside) to keep its operations going.”

“Nothing to do with consumer deposits.” Okay.

Remember Rockwell’s Law: always believe the opposite of what state-officials tell you. If they say you have nothing to worry about, then you should start worrying.

But let’s say for the sake of argument deposits are supposed to be excluded from any proposed “bail-in” scenario. What is the bank going to do? Canadian banks are capitalized about as well as Lehman Brothers before things went bad.

Consider TD. They have $818 billion in assets. They have $768 billion in liabilities. Very little equity is available to withstand losses in asset value or income. All the big Canadian banks are like this. A tremendous amount of special reserves need to be put aside to withstand even a 10% drop in the value of a Canadian bank’s assets.

There will be more crises. Canadian banks cannot survive a crisis without a government bailout. Don’t take any comfort in anything coming out of Ottawa and the BoC.

— Read more about this story at CBC — 

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Cyprus: could something like that happen in Canada?

Marc Faber contends that at some point, everywhere will become like Cyprus.

It will happen everywhere in the world. In Western democracies, you have more people that vote for a living than work for a living. I think you have to be prepared to lose 20 to 30 percent. I think you’re lucky if you don’t lose your life … If you look at what happened in Cyprus, basically people with money will lose part of their wealth, either through expropriation or higher taxation.”

But in Canada? No way!

Well… maybe. Check out page 144 of the 2013 “Economic Action Plan” (I hate that term):

The Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.

The details are not made explicit in the budget document. But remember, your deposit is the bank’s liability. When the budget talks about “certain liabilities” being converted into “regulatory capital,” it kinda sounds like Canadian government might be willing to enact a Cyprus-esque solution to a banking crisis.

Apparently, this is not what they mean. Instead, Ottawa wants banks to issue “contingent capital bonds,” something Carney has advocated. These bonds would provide an above-average return. The catch is that if the bank gets into trouble, the bond is converted into shares. The bank would then have emergency capital without a taxpayer-funded bailout.

I think this is a stupid idea. Sure, I suppose banks should be able to issue whatever kind of bonds they want. However, Ottawa claims it wants to “limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are “too big to fail.” The contingent capital bond doesn’t really do anything about that. The moral hazard still is there, because there remains an implicit assumption — which seems to permeate all Western nations at this time — that if anything bad happens to a bank that made bad investments, the entire world will explode. So the government or the central bank will have no choice but to intervene to “save the world (banks)”! We don’t even know that the government itself would not buy these bonds. Or, in a serious crisis, why they couldn’t just buy preferred bank stocks, like a Paulson plan style of bailout/bail-in.

If the implicit guarantee is still there (and why would it not be? Canada’s banks were bailed out in the financial crisis), then contingent capital bonds don’t address the moral hazard issue. Instead, they just let the moral hazard continue with a wink and a nudge, while someone gets a higher yield bond out of the deal. Meanwhile, the explicit generators of moral hazard, like the BoC, CDIC, and the CMHC, continue to exist without change.

Canada’s Big Five banks hold nearly $3 trillion in assets. Their capitalization is about 8%.  So their leverage is so great that they would not withstand even a moderate crisis on a “bail-in” of converted contingent capital bonds. A 20-30% hit on assets would crush them. The idea is a joke.

Yet, the Canadian government, for all its ineptitude, must reasonably fear that a critical Canadian bank failure is a plausible situation. Whatever their “bail-in” plan entails, you must remember that CDIC insurance covers only $100,000 of your chequing and savings deposits, and short-term GICs. It doesn’t cover your stock account or your RRSP accounts. Don’t count on the ‘geniuses’ in Ottawa to regulate the economy so effectively that all your money will be safe.

— Read more at CBC —

Carney is off to the Bank of England — Pray for England

Bank of Canada Governor and ex-Goldman bankster Mark Carney was selected to become the next Governor of the Bank of England. He will now be overseeing a central bank with nearly ten times the assets of the Bank of Canada. That is a big promotion in the world of central planners! Carney will now be able to create even larger disturbances in economic systems.

Truly, the worst rise to the top.

Good riddance, I say. Not that I expect him to be replaced with anyone much better. But there is always a chance.

I feel bad for England, though. They have no idea what they are getting themselves into (from Bloomberg):

Carney, who holds an economics degree from Harvard and a doctorate from Oxford University, swaps oversight of an economy which bounced back from the global recession without witnessing a single bank bailout for one which slipped back into recession in the second quarter and required multiple bank rescues.

Did you see what they did there?

Carney … swaps oversight of an economy which bounced back from the global recession without witnessing a single bank bailout for one which slipped back into recession in the second quarter and required multiple bank rescues.

Carney … swaps oversight of an economy which bounced back from the global recession without witnessing a single bank bailout … 

an economy which bounced back from the global recession without witnessing a single bank bailout …

without witnessing a single bank bailout

Excuse me? The banks that pushed for Carney to be their man in England have surely put the shucks on the rubes.

Of all the deleterious myths that persist about the Canadian financial system, none are more harmful or obnoxious than the bogus story that its banks never needed and/or never got a bailout.

Anyone who says this is simply lying or has no idea what they are talking about. Those are the only real possibilities. We have covered this at CMR previously, but let us quickly review.

The mainstream news doesn’t even try to deny it anymore. The Canadian banks got a bailout. Now they simply try to play down the significance of it. Even though it is was much bigger than anyone was led to believe.

So is this “no bailouts in Canada” proposition challenged by anyone in the UK? Carney is being sold on the pretense that there were no bailouts?   

(Side note: We could also mention that Canadian banks received assistance from emergency Federal Reserve lending facilities, which by itself is very interesting. We could also mention that rather material fact that Canadian banks are basically in a state of “perma-bailout” by virtue of the Canadian Deposit Insurance Corporation. The existence of the CDIC amplifies the level of risk banks are willing to engage in — it is classic “moral hazard.”)

So it would seem one is more likely to see bank bailouts with Carney, rather than less. That is precisely why the UK banking cartel wants Carney in this position.

Yet that is not the only reason citizens of the UK should worry.

Mark Carney is not only a believer in bailouts — he is a believer in Keynesianism and mercantilism. This means nothing more than this: he sees a connection between depreciating the currency and growing the economy. This he shares with nearly all central bankers (except, perhaps, those in Singapore): he regards a strong currency as harmful to “the nation”. Because when he talks about “the nation,” he is not talking about the consumers (i.e. everyone) who use their stronger currency to buy and invest in more goods. For men such as Carney, “the nation” instead refers to politically-connected export industries that are benefited by making it cheaper for foreigners to buy their stuff.

That being the case, Carney will tend to increase the money supply by adding assets to the central bank’s balance sheet whenever he thinks it’s a good idea. But this means prices must rise and debts will deepen. Britain already has big problems in these areas.

This should be the last thing someone in the UK should desire. The British pound has plummeted in value the last five years against stronger currencies like the yen. Here in Canada, it seems Carney’s manipulations have been obscured by strong demand for Canadian commodities, yet with the slowdown in Asia, Europe, and soon the US, I doubt this will persist. The Bank of Canada has been growing its balance sheet for nearly two years now, since offloading some of its emergency acquisitions during the financial crisis.

Also, it should be known that Carney likes to troll citizens whose currency he manages by blaming them for behavior that is strongly encouraged by his own central bank policies. What a jerk.

I am happy to see Carney go. While I am happy he no longer oversees the Canadian dollar, I am apprehensive about who his replacement will be. Most of all, I must also bemoan the lack of justice. Carney should be serving a prison sentence for counterfeiting, rather than getting $1 million a year to manipulate huge economies.

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