Canadian financial institutions suffer as U.S. giants stumbleSeptember 15, 2008
David Friend, The Canadian Press
Web edition
TORONTO — Financial stocks were knocked about on the Toronto stock market Monday as dark storm clouds spread over their U.S. counterparts, but that was not a signal the Canadian economy has been caught up in the widespread U.S. contagion, Prime Minister Stephen Harper said Monday.
Canadian banks already hammered by billions of dollars in writedowns related to the ongoing credit crisis in the United States were caught up in deep pessimism after Lehman Brothers filed for bankruptcy protection.
But "no-one is suggesting that the instability in the financial system in any way emanates from Canada," Harper said.
"In fact, Canada has had a remarkable record through all of this, not just the solvency of our financial institutions but the integrity of our financial regulation."
Wall Street was rattled by the weekend announcement by Lehman, the fourth-largest investment bank in the U.S., and more jitters were caused by the US$50-billion takeover of struggling Merrill Lynch by Bank of America.
The U.S. financial sector on Wall Street has been battered for more than a year by its link to the troubled U.S. housing market, specifically in promoting and selling so-called structured financial products that were based on subprime mortgages.
Overall, the financial services index on New York's Dow Jones has fallen more than 32 per cent since the start of the year, while the mortgage finance index is down 77 per cent.
In Canada, the financials stocks have felt much lesser pain and have fallen just over 12 per cent since the start of January, partly because the Canadian banks are better capitalized and dodged major exposure to troubled U.S. subprime mortgages, which triggered the collapse just over a year ago.
Sub-prime mortgages were loans made to risky U.S. borrowers, often with little or no money down, to finance home purchases. Once rates rose, however, the borrowers couldn't meet their monthly payments and had their properties foreclosed, leading to sharply lower housing prices in U.S. states such as California, Florida, Texas and Arizona.
That means hundreds of billions of dollars in housing loans have been wiped out by lower housing prices, which has spilled over onto the general economy and Wall Street.
On Monday, the TSX financial sector was down 1.7 per cent, CIBC (TSX:CM) the biggest loser with its shares down nearly four per cent at $61.75.
The drop in shares of CIBC, the worst-suffering of the banks hit by exposure to the U.S. subprime crisis, came despite a statement that it doesn't have "large exposures" to Lehman Brothers.
Canadian financial stocks are down about 14 per cent since the credit crisis broke last summer, sparked by the collapse of the U.S. subprime mortgage industry.
"Obviously, this is a situation we've been watching very, very closely for the past year and there've been a range of agencies watching this, not just our government, the Department of Finance, the Bank of Canada, the Superintendent of Financial Institutions," Harper said.
"And we have been in constant consultation with our G7 partners in particular to look at what changes need to be made in the marketplace to increase the transparency and efficiency of the lending practices, particularly as they cross international borders."
Stock in all of Canada's major banks was trading lower Monday, Royal Bank (TSX:RY) down 2.4 per cent at $48.03, TD Bank (TSX:TD) down 2.6 per cent at $60.71, Scotiabank (TSX:BNS) down 0.7 per cent at $47.41 and Bank of Montreal (TSX:BMO) down 0.75 per cent at $48.75.
"There is an enormous temptation to sell everything this morning and run for cover," said David Baskin, president of Baskin Financial, a Toronto-based money manager.
"There is a strong likelihood that those following this strategy will sell at or close to the bottom. In our experience, chickens get slaughtered. As we are seeing, the market is having a very rough opening but will likely improve by the end of the week. Those invested in high quality securities have little to fear."
Meanwhile, central bankers moved to calm financial markets, with American and European central banks providing extra liquidity to market players.
The Bank of Canada issued a brief statement saying it is closely monitoring global developments and welcomes the Federal Reserve's actions to support U.S. financial markets.
The bank did not disclose specific actions in Canada but said it "will provide liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets."
http://news.therecord.com/News/article/415130
