After noting how are economic fundamentals are so great and that there was no plan to bail out the banks which are the strongest in the world Harper nevertheless has the government try to persuade the banks to loan money by buy 25 billion in mortgage. Imagine now the government will own your house. I am sure there will be dolts that will call this socialism rather than a rescue line to help capitalist banks cope in the crisis. The irony is that Harper is one to constantly criticise government intervention in the economy, to praise free markets, and for privatizing anything that moves. Ideology doesn't matter when it comes to buying votes or helping banks.
Mortgage purchase spurs rate cut
Banks reduce prime after Ottawa unveils plan to buy $25 billion in residential mortgages
Oct 11, 2008 04:30 AM
..Rita Truchur Business Reporter
Facing a barrage of public criticism, big banks lowered their prime lending rates again yesterday after the federal government announced plans to buy from them $25 billion in residential mortgages – a massive cash injection designed to shore up this country's banking system.
Just days before a federal election, Finance Minister Jim Flaherty said the move would help domestic banks, which are dealing with skyrocketing funding costs, to raise more longer-term funds so that they can keep providing mortgages to consumers.
The action plan involves the government purchasing up to $25 billion in "insured mortgage pools" through the Canada Mortgage and Housing Corp., a Crown corporation that is responsible for the housing industry.
The extraordinary measure means that Ottawa, through the federal government and the Bank of Canada, will have injected a whopping $45 billion in additional cash into the financial system in an effort to combat the credit crunch that is choking banks around the world.
Even so, Prime Minister Stephen Harper insisted yesterday's announcement was not a bailout of Canadian banks.
"This transaction is simply a market intervention," Harper told reporters.
"What we are doing is exchanging assets that we already hold the insurance on."
Echoing those sentiments was Nancy Hughes Anthony, president and chief executive of the Canadian Bankers Association: "It is definitely not a bank bailout. I mean what has happened in the U.S. was buying up bad assets and those kinds of things. It has nothing to do with that."
Commercial banks, however, reacted by lowering their prime rates by differing amounts. Toronto-Dominion Bank was first to trim its prime rate, by 15 basis points to 4.35 per cent, effective Tuesday. Canadian Imperial Bank of Commerce also lowered its prime rate, to 4.35 per cent.
Breaking ranks with those rivals, though, were the Bank of Nova Scotia, Bank of Montreal, Royal Bank of Canada and National Bank of Canada.
They all cut their respective prime rates by a full quarter-point to 4.25 per cent. Those four banks have now fully matched the Bank of Canada's half-point interest rate cut, a move that will likely quell consumer condemnation of an initial quarter-point reduction from big banks earlier this week.
It was not clear if CIBC and TD would relent and lower rates even further over the coming days. For his part, Tim Hockey, president and CEO of TD Canada Trust, offered this explanation: "The Bank of Canada's rate change is just not a lock-step change in financial institutions' funding these days. It is a very complex mix of deposit costs, borrowing costs through multiple instruments, liquidity premiums, you name it.
"In fact, the Bank of Canada rate change did not lower our funding costs by 50 basis points, not at all." He was unable to specify just what kind of savings TD did enjoy after the Bank of Canada's rate cut, citing competitive reasons. Funding costs do vary from bank to bank.
"But it did have an impact, which is why we decided to move to some degree," Hockey said.
Earlier in the day, some observers suggested that consumer outrage would force banks to completely match the full half-point cut.
"It would look quite bad to the public if they remained at a quarter point, yet they're being perceived as being helped out by the government," said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc.
Canada's stock of residential mortgages amounts to about $773 billion, according to finance officials.
Subprime mortgages represent less than 5 per cent of all outstanding mortgages in the country, compared with about 20 per cent in the United States.
The government said its mortgage program involves "insured mortgage pools" that already carry government backing, creating "no additional risk" to taxpayers. The securities are expected to earn interest that is "well above" the government's own cost of borrowing, officials said.
"It is important to underline that Canada's banks and other financial institutions are sound, well capitalized and less leveraged than their international peers," Flaherty said. "Our mortgage system is sound. Canadian households have smaller mortgages relative both to the value of their homes and to their disposable incomes than in the U.S."
The government will begin buying mortgages next Thursday, with an initial purchase of up to $5 billion. The remainder will be purchased over the coming weeks. Officials said a "competitive auction process" would be used to purchase the insured mortgage pools.
Canadian banks, while more conservative than their American and European counterparts, have found themselves further entangled in the financial crisis in recent weeks as funding costs spiked. Despite massive injections of cash, interest rate cuts and costly bailouts of American and some European banks, inter-bank lending has largely remained frozen.
With worldwide subprime-related writedowns and credit losses now nearing $600 billion (U.S.), banks around the world are terrified to lend to each other. That, in turn, has driven up the costs of borrowing for individuals and businesses.
Canadian banks – while touted this week as being the envy of the world by the World Economic Forum's Global Competitiveness report – have also become less willing to lend to each other. The difference in yield between Canada's three-month Treasury bill and the three-month dollar London Interbank Offered Rate rose to the highest since at least 1990 this week.
"It is not a silver bullet that is going to solve every single problem of this situation around the world but it is certainly going to help Canadian banks get their hands on increased funding," said Hughes Anthony of the bankers association.