Canada's Bank Bailout

On this blog on 17 August 2010, a posting by Benjamin Donato

( http://greenparty.ca/blogs/16756/2010-08-17/canada-had-had-bank-bail-out ) started a discussion on whether Canada had actually had a bank bailout, contrary to statements by Stephen Harper and Jim Flaherty that no bailout occurred. In that discussion thread, the following questions arose: How much money was spent, was it really a bailout, and who benefited? These questions can now be answered.

The cost was $69 billion:

“Through the Insured Mortgage Purchase Program, the federal government purchased $69.35 billion of insured mortgage pools from financial institutions. The program was allowed to sunset on March 31, 2010, as market conditions had improved markedly since its introduction in October 2008.” Quoted from the official government Economic Action Plan website ( http://www.actionplan.gc.ca/initiatives/eng/index.asp?initiativeID=39&mode=7 )

Under the Insured Mortgage Purchase Program, Canada Mortgage and Housing Corporation (CMHC) purchased securities comprised of pools of insured residential mortgages from Canadian financial institutions to provide long-term stable funding to lenders and help them continue lending to Canadian consumers and businesses.

Yes, it was a bailout:

“It (IMPP) supported the banks at a critical juncture in the global financial crisis, and played a big role in keeping mortgage rates from flaring higher late last year, when many global borrowing costs were surging.” Douglas Porter, Deputy Chief Economist, Bank of Montreal quoted in the 2009 CMHC Annual Report, page 69.

So who benefited?

Arguably all Canadians, especially those with mortgages, did reap some benefit by avoiding financial instability; they also assumed risk and debt load in the process. The prime beneficiaries were the financial institutions: banks and mortgage insurers. We are used to thinking of CMHC as the only mortgage insurer in the land, which it was until 2001. That year Genworth Canada (then part of the General Electric conglomerate) entered the Canadian mortgage insurance market. Then in 2006, AIG United Guaranty Canada started offering mortgage insurance even on mortgages with 0% down payment – something unheard of in Canada up to that time. They did so with the approval of the Conservative government. From that point, Canada was headed down the same housing bubble road that would drive American financial markets over the brink. On September 16, 2008, Guaranty's US parent company AIG received the largest government bailout (initally $85 billion) for a private company in U.S. history. This put the whole mortgage industry in Canada in some danger of a meltdown.

So Canada's bailout was of a scale comparable to that south of the border. This is all history, but we're not out of the woods yet!