Will the Flaherty-Harper Ticking Time Bomb be Detonated?

In Jim Flaherty's first budget, he announced that his government was opening up the housing market to  private insurers.  “These changes will result in greater choice and innovation in the market for mortgage insurance, benefiting consumers and promoting home ownership."

Loosely translated, the sub-prime mortgage industry was heading north, and so was AIG.

On May 2, 2006, in his first budget, Mr. Flaherty announced that not only would Ottawa guarantee the business of U.S. insurers, it was doubling the guarantee to $200-billion.

And despite repeated warnings that Canada's financial system was being exposed to far too much risk, Flaherty locked arms with his boss and said "bring it on".

Tick, tick, tick.

If you remember, AIG was one of the early victims of the Wall Street induced economic crisis, and in fact their "innovation" helped to create the collapse, when with the help of Goldman Sachs, they backed too many risky mortgages.

Of course that was the game all along as what are known as "derivatives" became a popular form of investing.  The way it works is that people who wouldn't normally qualify for a mortgage, suddenly became home owners.  This brought more competition into the housing market creating a bubble. 

The investor then took out an insurance policy on the risky mortgages, knowing that they would fail, and when the housing bubble collapsed, they cashed in and AIG cashed out.  Matt Tabbi called it the "swoop and squat".

Yet again, knowing how risky derivatives are to a nation's economy, Jim Flaherty hired a Goldman Sachs employee to help him get the Canadian taxpayer into the game, even investing some of our Canada Pension Plan funds.

Tick, tick, tick.

When the economic crisis hit, Flaherty knew he was in trouble.  The banks after repeated warnings, let him know that they were not going to shoulder the burden of his mismanagement, so he was forced to buy back all the high-risk debt that he had saddled them with.

Unlike the bank bailouts south of the border, where the banks had to pay the government back, this was an outright transfer of rotten paper, in exchange for $125 billion in cold hard cash.  Our cash, now backed by what could very well be worthless junk.  And since we didn't actually have $125 billion sitting around in a safe, we had to borrow the money, adding to our national debt.

Tick, tick, tick.

The International Monetary Fund is now warning that Canada could be facing the collapse of our housing bubble, something that the government was warned about two years ago.

Canada’s average home price is about 10 per cent higher than models suggest it should be, posing a “vulnerability” to the country’s economic outlook, the International Monetary Fund warns in a new report.  A drop in prices would be a blow to already highly indebted consumers. With household debt at record levels of about 150 per cent of disposable income, the domestic spending boom that helped Canada weather the financial crisis already is at its limits.

When Flaherty bailed out our banks, he said that it was to "free up funds", that could be lent to consumers so that they would spend, and help keep up the illusion of his sound fiscal management.  Now Goldman Sach's Mark Carney, head of the Bank of Canada, is blaming consumers for their personal debt, the result of spending that they no doubt would have curbed, had they known just how shaky our economy really was.

Tick, tick .... TOCK?!

The IMF is now investigating CMHC.  Where were they in 2006?

Swindlers Revisited: Why Canada's Occupy Wall (Bay) Steet Movement is Important

A friend left a comment on my blog yesterday, reminding me of a book I had read several months ago, Swindlers.  She was just in the process of reading it herself.  Timely, given the current protests against Wall Street greed.

Anyone questioning why citizens have taken to the streets, need to read this book.

In it, the Rosens (father and son), tell us of how Jim Flaherty and Stephen Harper have signed Canada on to a new set of rules governing corporations.

Thanks to our self-regulated auditors, Canada will soon adopt [Came into effect on January 1, 2011]  new accounting and auditing standards called International Financial Reporting Standards (IFRS). Under IFRS, corporate managers will have even more freedom to distort and manipulate their financial reports to make themselves look better than they really are. Despite the devastating impact it will have on investors and the utility of financial statements in general, auditors succeeded in pushing through the change because of complete disinterest from lawmakers and a lack of recognition by investors that auditors have no interest in upholding their needs. Canadians simply assume that a self-regulatory body like the auditors would look after public interests, not just their self-interests. (Swindlers: Cons and Cheats and How to Protect Your Investments From Them, By Al Rosen and Mark Rosen, Madison Commerce, 2010, ISBN: 978-1-897330-76-0)

They are now legally allowed to lie on their financial statements to lure potential investors.  When I wrote of this before, I received an email asking why it mattered.  After all, it was just rich people cheating other rich people.

However, this affects all of us, because it could mean company pension plans, RRSPs, mutual funds ... things we don't think about every day but they could have a serious affect on our future financial well being.  More from the book:

Judging from the stories that run in the newspaper, you probably think that Canada is a pretty safe place to invest your money. After all, we just survived one of the worst economic downturns since the Great Depression. Some of the biggest names in the world of banking and finance have disappeared, but not a single Canadian bank collapsed. Canada must be doing something right, right?

If you believe that, we have some bad news. The risks you take by investing in Canada have never been greater. And the so-called protection that Canadians think they receive from regulators, lawmakers, and auditors has never been weaker. (ibid)

Good PR (propaganda) at taxpayers expense, has led us to believe that we are financially sound.  We're not.  Since coming to office, the "Harper government" has been on a deregulation drunk.

During one binge, they flooded the market with sub-prime mortgages and the next day found themselves in bed with AIG.  Some morning after.

Another weekend of partying and they bailed out our banks to the tune of $125 billion.  The drunkenomic hangover.

More from the Rosens:

Corporate lobbying power and the absence of an organized investor voice in Canada means that most regulatory actions favour corporate interests. Canada is the only major country in the world that allows the same people who audit public companies to financially control the process that sets the auditing rules. This basic and fundamental conflict of interest means that auditors can set rules that cater to their paying corporate clients over the needs of investors.

There's a lot of money involved in these financial cons. Based on our extensive experience with auditor negligence and executive dishonesty, we estimate that investors have lost hundreds of billions of dollars to scams in Canadian financial markets. Even if you haven't invested a penny in the stock market yourself, these losses affect you. Anyone who collects a pension, saves for his children's education, or simply pays her taxes like an honest citizen suffers from the disinterest of our regulators and lawmakers in prosecuting dishonest corporate executives, aided by acquiescent auditors.

If power is intoxicating, unchecked power is inebriating. 

A few more brown-bagged calamities:

A former Goldman-Sachs employee is running the bank of Canada and has brought along a colleague to act as his assistant.  The same Goldman-Sachs who helped to create the last economic crisis, and the same Goldman-Sachs who warned their clients not to invest in Canada.

Another Goldman-Sachs employee has been signed on to handle Canada's foray into derivatives.  Investor Warren buffet calls derivatives "weapons of mass destruction", but that won't stop Flaherty.  He's even putting some of our Canada pension funds into this risky venture.

Stephen Harper's chief of staff came right off Bay Street to secure the purchase of the F-35s for one of his clients.

And yet Flaherty claims that Canadians have little to protest.

Chantel Hebert is suggesting that instead of protesting Canadians should vote.  Maybe if the media kept us better informed, we would.  Every time they refer to this government as "Tories", they are putting another nail in our coffin.

A Queens University political science professor was asked recently why people are protesting.  She said that the question should not be "why?" but what took them so long.

Jim Flaherty, Golman Sachs and a "Pig in a Poke"

This is the next in my series on Jim Flaherty, Goldman Sachs, AIG and Canada's massive bank bailout. Those following the story already knew of the $125 billion from Canadian taxpayers, but for the first time we heard of how our big five banks also received bailout money from the U.S. Treasury, apaprently in the amount of $111 billion.

But unfortunately the story that appeared in the Globe and Mail vanished almost as soon as it was posted. The only other person who had seen this illusive column was Mark McQueen: Fed's Remarkable Disclosure of Funds for Canada’s Five Largest Banks. His link to the story is also broken.

So I decided to do a bit of digging on my own, and it is indeed true. You just have to let your fingers travel the globe and pick up scraps where you can, so bear with me.

On May 13, 2010, American journalist John Lott reported: Guess What, America, You're Bailing Out Banks All Over the World!

To say that Americans weren't thrilled by the original government bailout of American financial institutions is an understatement. But if they were upset with that plan, imagine how furious they’re going to be when they start to understand that the Obama administration has begun bailing out banks from Japan, Canada and Europe.

.... With the exception of $30 billion to Canadian banks, the Federal Reserve won't reveal how much of these subsidized loans they are giving to foreign banks. And why we would want to subsidize Canadian banks is a mystery in the first place. Compared to the U.S. economy, the Canadian economy has done fairly well during the global economic crisis.

In September of 2008, the U.S. government was already contemplating bailing out foreign banks who had dealing in the U.S., lifting many requirements, and this was being handled by Henry Paulson.

Treasury Secretary Henry Paulson confirmed the change on ABC's "This Week," telling George Stephanopoulos that coverage of foreign-based banks is "a distinction without a difference to the American people."

And who is Henry Paulson? The former Chairman and Chief Executive Officer of Goldman Sachs. He loosened the criteria for bailouts to include anyone who had dealings with AIG. And as we know, that included Canadian banks courtesy of Steve and Jimbo.

The Financial Post reported in March of 2009 that the Bank of Montreal scored big on the deal.

Bank of Montreal has emerged as one of the key beneficiaries of the costly decision by the U.S. government to rescue American International Group. Canada’s fourth-largest bank is among the top 10 recipients of federal bailout money paid to financial counterparties by the stricken insurer, according to documents published by AIG.

The payments were revealed after pressure from Capitol Hill for an account of how taxpayer money had been spent by the company amid a rising populist backlash. The documents show a least US$1.1-billion of bailout money was funneled to BMO alongside payouts of up to US$13-billion each to U.S. and European banks.

So while they were given $125 billion tax dollars so that we could buy back their toxic paper, they also put out their other hand and took from American taxpayers. And while they were losing their homes and their livelihoods, our so-called "good banks" were feeding from the public trough on both sides of the border.

CNN were also reporting on our "good banks" and the difficulty in getting information South of the border. BMO appears on the list. And with some of the money they bought up AIG in Canada. As a result they were investigated by the NY Attorney general's office.

Bank of Montreal is being caught up in a widening probe into the use of bailout funds by American International Group, the distressed U.S. insurer. Payments made by AIG to Canada’s fourth-largest bank are due to be examined by the New York Attorney-General Andrew Cuomo as part of an inquiry into billions in taxpayer money funnelled to financial institutions.

The investigation comes as the attention of U.S. lawmakers turns to the payouts to banks following a political firestorm over bonuses handed by the insurer to staff at a controversial unit that sold credit protection to sophisticated financial clients. "Our investigation into corporate bonuses has led us to an investigation of the credit default swap contracts at AIG," the Attorney-General’s office said. BMO declined to comment.

And according to Insurance News Net:

Reports name AIG's derivative counterparties, including BMO NEW YORK _ The U.S. government bailout of insurance giant American International Group Inc. has benefited at least two-dozen U.S. and foreign financial institutions _ including the Bank of Montreal _ who together collected some $50 billion, news reports said Saturday.

BMO was also a partner in their derivatives game, that brought on the global economic crisis.

So Goldman Sach's Henry Paulson was in charge of distributing funds to banks and is trying to keep quiet how much went to foreign interests, including Canada's big five. Goldman Sach's Mark Carney is now the Governor of the Bank of Canada. Goldman Sach's Timothy Hodgson is his assistant in charge of derivatives, and Flaherty is allowing our CPP funds to be invested in this high-risk gamble.

Our Pig in the Poke

Matt Taibbi in his piece Wall Street's Bailout Hustle, refers to one aspect of the entire scam as a "Pig in the Poke".

The scam's name comes from the Middle Ages, when some fool would be sold a bound and gagged pig that he would see being put into a bag; he'd miss the switch, then get home and find a tied-up cat in there instead. Hence the expression "Don't let the cat out of the bag."The "Pig in the Poke" scam is another key to the entire bailout era. After the crash of the housing bubble — the largest asset bubble in history — the economy was suddenly flooded with securities backed by failing or near-failing home loans. In the cleanup phase after that bubble burst, the whole game was to get taxpayers, clients and shareholders to buy these worthless cats, but at pig prices.

One of the first times we saw the scam appear was in September 2008, right around the time that AIG was imploding. That was when the Fed changed some of its collateral rules, meaning banks that could once borrow only against sound collateral, like Treasury bills or AAA-rated corporate bonds, could now borrow against pretty much anything — including some of the mortgage-backed sewage that got us into this mess in the first place. In other words, banks that once had to show a real pig to borrow from the Fed could now show up with a cat and get pig money. "All of a sudden, banks were allowed to post absolute shit to the Fed's balance sheet," says the manager of the prominent hedge fund.

At about this time, we were in the middle of an election campaign in Canada, and when Stephane Dione sounded the alarm, both Jim Flaherty and Mark Carney laughed and referred to him as "Chicken Little". And yet not long after Flaherty announced his first 25 billion bank bailout, when he started buying their toxic assets on behalf of the Canadian taxpayer.

He tried to say it was not a bailout, but what did the Canadian tax payer get for this investment? The cat in the bag. Our "good banks" played fast and loose with the requirements for loans and mortgages, absorbing none of the risks.

When it all came tumbling down, what did they do? They used their bailout money to buy up defunct U.S. banks, and deregulated our industry to meet the lower U.S. standards, meaning that if there is another meltdown, Canada will not do so well.

And according to Market Watch, that could take place as early as Christmas of 2011.

Yet the Conservatives are using our money to convince us that they are the best to handle the "economy". Our "pig in the poke". We think that somewhere we have money and sound investments, but in fact we have nothing but a boatload of debt and no regulations to protect us from unscrupulous Wall Street. Instead they've been moved in.

Previous:

1. It's Time to Have a Serious Conversation About Jim Flaherty and Goldman Sachs

2. Jim Flaherty, Goldman Sachs and the Foxes in the Henhouse

3. Jim Flaherty, Goldman Sachs and "The Swoop and Squat"

4. Jim Flaherty, Goldman Sachs and AIG Comes Calling

5. Jim Flaherty and Goldman Sachs: The "Cooling Off" period

Jim Flaherty and Goldman Sachs Capers on Film, Part IV

Jim Flaherty and Goldman Sachs on Film: Part III

Jim Flaherty, Goldman Sachs and AIG Comes Calling

This is the 4th in my series on the relationship between Jim Flaherty and Goldman Sachs, and why it matters to Canadians. We have been lied to and this lie is a whopper.

Many of us have been sounding the alarm over our sub-prime mortgages and the massive Canadian bank bailout, but since the mainstream media just keeps playing along to get along, it has gone largely unnoticed. And any economists who bring up the issue are immediately vilified.

It is now common knowledge that Wall Street created the economic crisis, and that the two main players were AIG and Goldman Sachs. But what is not as evident is the fact that these same two players came knocking on Canada's door, when the heat over what amounted to a huge insurance fraud, was threatening to bring it to an abrupt end.

In early 2005, there were warnings by many, including financial expert and Yale University professor Robert Shiller, that the housing bubble might lead to a worldwide recession, given the massive amounts of mortgage-backed securities and other risky investments, that Wall Street was now up to their necks in.

In September of 2005, The Mortgage Insurance Companies of America sent a letter to the Federal Reserve, warning about 'risky lending practices' in US real estate and by the fall the housing market boom halted abruptly, and prices began to fall nationwide.

In May of 2006, subprime lender Ameriquest announced that it would cut 3,800 jobs and closed its 229 retail branches. Merit Financial Inc, based in Kirkland, Washington, filed for bankruptcy and closed its doors, firing all but 80 of its 410 employees.

Mark Carney, Stephen Harper and Jim Flaherty all held onto the myth that no one saw this economic crisis coming, despite the fact that almost everyone did. They just didn't know what to do to stop it, because by the time the first rumblings of despair were heard, it was already too late.

With the American subprime industry drying up, Goldman Sachs needed fresh markets, and where better than Canada. They had a Republican and corporate friendly government in place, and no doubt knew of Flaherty's appetite for shady deals.

Goldman Sachs employee, Mark Carney, was the deputy finance minister who no doubt arranged all the necessary meetings, given his contact list, and he had already made a killing off Canadian taxpayers with his Income Trust fraud.

So on May 1, 2006, AIG registered as a lobbyist and the next day, Flaherty included in his first budget, a little gem. He announced that his government was opening up the market to more private insurers.

“These changes will result in greater choice and innovation in the market for mortgage insurance, benefiting consumers and promoting home ownership,” Mr. Flaherty said. The new rules encouraged the entry of such U.S. players as American International Group (AIG) ..."

The story of how the U.S. housing crisis spread to Canada is a tale of carefully orchestrated U.S. corporate lobbying, failed public-policy promises and government inaction to numerous private and public warnings about reckless mortgage practices.

Flaherty was willing to risk $200 billion of taxpayers money to get in the game.

And we have to remember that the crash in the United States was not the accident of reckless behaviour, it was reckless behaviour engineered so as to cause the accident. That was the only way that Goldman Sachs could clean up on the insurance, bankrupting AIG.

Jim Flaherty and Stephen Harper knew that what they were doing was risky, and intentionally ignored expert advice. That's the way this game works. The sub-prime mortgages created a boom in our house prices and a handful of people got filthy rich. Or filthier richer.

They knew this was a gamble but it was one they were willing to take, because after all, the only losers would be the Canadian taxpayers and the unsuspecting pawns who bought homes they couldn't afford.

And with Canada's household debt the highest of the G-20, bankruptcies on the rise and small business defaults at a record high, we have yet to bear the brunt of this government's foolishness.

I suspect they will try to get an election over with before they have to face the music. They may even pull a Mike Harris and shorten the length of time for the campaign, which will work in their favour. We have to make sure that doesn't happen.

With a Harper majority we will have no place to go but down.

Previous:

1. It's Time to Have a Serious Conversation About Jim Flaherty and Goldman Sachs

2. Jim Flaherty, Goldman Sachs and the Foxes in the Henhouse

3. Jim Flaherty, Goldman Sachs and "The Swoop and Squat"

Jim Flaherty and Goldman Sachs on Film Part II

More to come.

The Story of AIG and the Canadian Government

The Canadian Press has awarded Jim Flaherty the Business Newsmaker of the Year honours for his handling of the economy. "With Flaherty at the helm, Canada's economy outperformed most others last year."

But in a case of what you don't know won't hurt you, I would say that if Canadians really knew what was behind the appearance of a strong recovery in Canada, they might want to make Flaherty the most high-profile Canadian prisoner of the year, because his actions since taking over in 2006, have been criminal.

He's been lauded for keeping a cool head, but there is a big difference between a cool head and not giving a damn. Flaherty falls into the last category. I think when he's finally out of office it will be worse than when he left the Ontario cabinet, and an enormous deficit was found under his desk.

Because what Flaherty has been doing, even when our economy was strong and his government inherited a 13 billion dollar surplus, was to gamble away our future. We've had incompetent governments before, but this is the first to systematically tear down decades of financial infrastructure, put in place to protect our ability to take care of our citizens.

I've already mentioned the sub-prime mortgage mess that he's gotten us into. You can read about it here, here, here and here. But what he's done is actually worse, if that's possible. But first a bit of history.

The Story of AIG

The American International Group, Inc., or AIG, has been in business for almost nine decades, and rose to the top under the leadership of Maurice R. "Hank" Greenberg, "who shifted its focus from personal insurance to high-margin corporate coverage. [Greenberg also] focused on "selling insurance through independent brokers, rather than agents, to eliminate agent salaries." (1)

And the company prospered by following government regulations and maintaining a cautious approach to investing. But while deregulation of the industry began before George W. Bush, his administration virtually turned Wall Street into the Las Vegas strip and AIG took the bait.

Deregulation mania raged .... liberating every corner of the American financial industry from what were patently sensible regulations aimed at protecting the public from reckless bankers, speculators, hucksters, and just the blind stupid greed of the herd on a rampage. Deregulation can't simply be chalked up to the alleged imperatives of globalization or the existence of freer financial markets offshore.

There were international efforts to rein in the financial anarchy, but instead of joining them—even taking a leadership role—the U.S. government actively resisted attempts to bring order and caution to the markets. When the European Union tried to bring the foreign operations of Americas five big investment banks under stricter European regulations in 2004, the Bush administration helped ward off such interference, siding with the banks' request to be left alone to decide how best to regulate their own risky behaviour. (2)

And that risky behaviour resulted in the worst economic crisis since the Great Depression. Some gamblers made a lot of money betting on the crash, but AIG self-destructed.

The American Taxpayer to the Rescue

After telling the government that AIG was too big to fail, the federal reserve began bleeding money to beleaguered corporation. A total of 170 billion dollars. The largest bailout in American history.

You might think that given the generosity of the American taxpayer, that AIG would be grateful and try to show their appreciation by doing a better job of managing their company. Not on your life. They continued to operate as if nothing had happened. They were "victims" who needed rewards.

- The week following the September bailout, AIG employees and distributors participated in a California retreat which cost $444,000 and featured spa treatments, banquets, and golf outings.

- A month after the first bailout, AIG executives spent $86,000 on an English hunting trip. The company responded by saying, "We regret that this event was not canceled."

- And yet on November 10, 2008, just a few days before renegotiating another bailout with the US Government for $40 billion, ABC News reported that AIG spent $343,000 on a trip to a lavish resort in Phoenix, Arizona.

The American taxpayer is suffering, in part because they had to clean up AIG's mess, and the company is flaunting a lavish lifestyle, financed by the suffering American taxpayer. But it doesn't end there.

In March 2009, AIG announced that they were paying out $165 million in executive bonuses. Total bonuses for the financial unit could reach $450 million and bonuses for the entire company could reach $1.2 billion. President Barack Obama, who voted for the AIG bailout as a Senator responded to the planned payments by saying "It's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat?" (1)

Good question. And yet they do. This new culture of greed and entitlement, while a nation suffers as the result of their "risky behaviour" is frightening. What have we created?

Jim Flaherty and AIG

When Jim Flaherty threw the doors open to high-risk mortgages in Canada, with his first budget in 2006, he allowed the American high-risk industry to get a foot hold.

“In the U.S., they are still responding to the fallout of the subprime mortgage mess. In Canada, we acted early over the past year,” Mr. Harper said in a speech to the Empire Club in Toronto. He didn't say that, not only did his own government open the sheltered Canadian mortgage market to U.S. insurers, but it also doubled to $200-billion the pool of federal money it would commit to guarantee their business. The foreigners unleashed what one U.S. insurance executive described as a fierce “dogfight for market share” that prompted rivals, including the giant federal agency Canada Mortgage and Housing Corporation, to aggressively push such risky U.S.-style lending. (3)

And one of those companies that Flaherty and Harper aggressively wooed, was AIG.

On May 2, 2006, in his first budget, Mr. Flaherty announced that not only would Ottawa guarantee the business of U.S. insurers, it was doubling the guarantee to $200-billion. Twenty-four hours before Mr. Flaherty's announcement, AIG's mortgage subsidiary first registered with Canada's lobbyist commissioner, according to a federal registry. At the time, companies who spent more than 20 per cent of their time lobbying the government for changes in policy were required, by law, to register. It is not known how much time AIG spent promoting its cause to the government.

... Banking and insurance officials were so concerned about the alarming rush to 40-year mortgages at the beginning of 2008 that one bank executive warned the Bank of Canada's chief financial stability officer, Mark Zelmer, in a meeting that “the government has got to put an end to this.” (3).

And just so we're clear. AIG and other American firms, can insure questionable mortgages in Canada with absolutely NO risk to themselves. The only ones assuming the risks are the Canadian taxpayers.

And when news of the crisis first hit, Flaherty simply transferred all of the high-risk mortgages from the banks' books, to ours. We now own them and if they default, guess who's left holding the bag? The Canadian taxpayer. Now comrades of the American taxpayers, who have transferred enormous amounts of money to AIG, but got only a bunch of rotten paper in exchange.

And make no mistake. Forclosures in this country, while harder to track, are on the rise. And there are vultures circling hoping to cash in.

AIG and the Bank of Montreal

Another controversy arising in the U.S. over the AIG bailout, is that they paid off their bankers first, before compensating shareholders or the American public. And one of those bankers who had given AIG money to help create the sub-prime tsunami, was the Bank of Montreal, who received 200 million dollars of American taxpayer money.

And guess who recently purchased a portion of AIG in Canada? You guessed it. The Bank of Montreal. We got their garbage and AIG got our money. Good job Mr. Flaherty.

$200 billion to feed our finance minister's gambling habit. And what does our media do? Give him an award. It's much easier than doing their homework, I suppose.

Some might wonder why the opposition is not having more to say about this impending disaster. But when a Globe and Mail reporter asked then Liberal finance critic, John McCallum about it, he said that no one wanted to be responsible for the crash of the housing market.

So, instead, everyone has to go along with the charade. Absolutely frightening.

Sources:

1. Wikipedia

2. The Trouble With Billionaires, By Linda McQuaig and Neil Brooks, Viking Canada, 2010, ISBN: 978-670-06419-9, Pg. 64

3. Special investigation: How high-risk mortgages crept north, By Jacquie McNish and Greg MacArthur, Globe and Mail, December 12, 2008

Another Excellent Posting by Murray Dobbin on Flaherty's Roulette Wheel of Our Finances

Several days ago I posted a tongue in cheek piece on Jim Flaherty's playing fast and loose with our money.

Our biggest concern of course is his inviting sub-prime mortgages into Canada to destabilize our once sound banking system.

And while Flaherty and Harper are loudly suggesting that Canada did not have to bail out our banks, we very much did, by having to buy back an enormous amount of "high-risk" debt.

According to journalist Murray Dobbin:

First, we put up $70 billion to buy up iffy mortgages from the big five banks, through the Canadian Mortgage and Housing Corporation, taking them off the banks’ balance sheets. That is almost the exact equivalent the US bailout – it spent ten times as much, $700 billion, and its economy is about 10 times as large.

Secondly, the Harper government established a fund of $200 billion to backstop the banks – money they could borrow if they needed it. The government had to borrow billions – mostly from the banks! – to do it. ..

Third, the government now insures 100% of virtually all mortgages through CMHC eliminating risk for the banks – and opening the door to the ridiculous flood of housing loans we have seen over the past few years. The result: housing has become unaffordable for tens of thousands of Canadians and new rental housing has dried up.

Yet after loading us with this extra debt and risk, they are fighting tooth and nail against the "Robin Hood" tax, which might help to stabilize our economy.

I know that neoconservatism means starving the beast, but this hungry beast could devour us, as we have been left vulnerable, without the protection we mistakenly believed was there.

Did You See That? Was it the Flash of a Lightbulb Moment?

I have posted on this subject many times, and have been trying to sound the alarm; but the media appears to be asleep at the wheel.

They are drooling over Jim Flaherty's promises to balance the books, something no self-respecting neocon would ever do.

Record deficits are a dream come true.

Today someone sent me an article that is a few months old, but again points to the disaster that Flaherty has created in our once sound banking system.

Now don't worry; our actual banks are not at risk. Jimmy made sure of that. It's the Canadian taxpayer who will wear this mess. The banks were too smart to enter into this nightmare.

And David Dodge, head of the Bank of Canada is already sounding the alarm on this risky venture.

So to refresh your memory:

In May I posted this: Did Jim Flaherty Put Canadian Mortgage Industry at Risk?

In the first half of this year, as the subprime mortgage crisis was exploding in the United States, a contagion of U.S.-style lending practices quietly crossed the border and infected Canada's previously prudent mortgage regime.

The mushrooming of a Canadian version of subprime mortgages has gone largely unnoticed. The Conservative government finally banned the practice last summer, after repeated warnings from frustrated senior officials and bankers that the country's financial system was being exposed to far too much risk as the housing market weakened.

Just yesterday, Finance Minister Jim Flaherty repeated the mantra that the government acted early to get rid of risky mortgages. What he and Prime Minister Stephen Harper do not explain, however, is that the expansion of zero-down, 40-year mortgages began with measures contained in the first Conservative budget in May of 2006.

In June I posted this: Has Jim Flaherty's Poor Judgement Come Back to Haunt Us?

Michael Gregory, a senior economist at BMO Capital Markets said it was likely more than 150,000 households in Canada were experiencing some degree of stress in meeting consumer debt repayments." ... Mortgage delinquencies have also risen.

In October I posted this: Has Jim Flaherty Put Us on the Brink of Collapse?

What do the mid-recession housing boom and the Harper Conservatives' rise in the polls have in common? Answer: the Canada Mortgage and Housing Corporation's massive sub-prime mortgage scheme that is keeping up the appearance of an economic recovery ... But what few Canadians realize is that the housing market has avoided collapse because the Harper Conservatives directed the CMHC to change the mortgage rules to effectively make the Canadian government the biggest sub-prime lender in the world.

What's almost as alarming as this reckless policy is that no one in the financial media is talking about it, even though everyone knows the facts. ... The facts are that over 90 per cent of existing mortgages in Canada are "securitized." That is the practice of pooling mortgages (or other assets) and then issuing new securities backed by the pool ... That's what happened with the sub-prime mortgages in the U.S.

Credit is still tight in the U.S. because no private investor has the stomach for such risky MBSs. That's because those losses were private and not back-stopped by any government. "In order to find buyers for securitized mortgage pools, the government of Canada has put guarantees on them" by directing CMHC to guarantee all Canadian mortgages.

By the end of 2007 there were $138 billion in NHA securitized pools outstanding and guaranteed by CMHC --17.8 per cent of all outstanding mortgages. By June 30, 2009, that figure was $290 billion, a figure Lepoidevin (David Lepoidevin, a financial advisor with National Bank Financial) says, "exceeds the total value of mortgages offered by CMHC in its 57 years of existence!"

And I also posted this: More on Jim Flaherty's Secretive Bailout of Our Financial Sector

The federal government has quietly given Canada Mortgage and Housing Corp. more financial muscle, raising concerns the multibillion-dollar agency is expanding at an unprecedented pace with little oversight.

For the second time since the beginning of 2008, Ottawa has raised the amount of mortgage insurance CMHC can have outstanding. The increase moves the cap to $600-billion, up from $450-billion and nearly double the $350-billion limit in place at the end of 2007.

CMHC is by far the largest provider in Canada of default insurance on mortgages, which home buyers are legally required to have if their down payment is smaller than 20 per cent. As home prices rise and smaller down payments become the norm, CMHC is selling more insurance each year.

And Now From the November's Financial Post: Canada's (Sub-Prime) Mortgage Market - Causing Concern for the Bank of Canada?

Part of the responsibility for this trend is being put at the feet of the Canadian Mortgage and Housing Corp. (CMHC). This government entity is considered by critics to be the Canadian equivalent of Fannie Mae in that its practices are thought to be provoking a rise in lending that could spell trouble for the Canadian real estate market in the future.

This practice was brought about in part by the directive of the federal government to CMHC to effectively "hit the gas" and ensure that mortgage credit was accessible. The theory goes something like this: banks can continue making extended amortization loans to provide prospective homeowners the ability to get into an overheated Canadian housing market because the default risk is being transferred to the CMHC (taxpayers) since it acts as a guarantor for the mortgage market.

We have got to get Flaherty's hands off our money before it's too late. This government has not piloted us through the recession, but instead has put us all aboard the Titanic.

Has Jim Flaherty's Poor Judgement Come Back to Haunt Us?

In May of 2006, in his first budget, Jim Flaherty announced that his government had found a way to make it possible for more people buy homes.

What he didn't say was that it was the result of a deal he made with the now troubled AIG to allow high-risk, 40 year mortgages to infiltrate our banking system.

After many warnings from the financial sector, he then announced that his government acted quickly to stop risky mortgages, the risky mortgages they allowed in, in the first place.

The troubling part of the whole story, is that he committed tax payer money to back up the debts, so if they go into default, the entire burden is on us. And of course, with our economy as it is, the repercussions are beginning to be felt as delinquency is on the rise, and people's mortgage payments are falling behind.

How much will we have to absorb for Flaherty's poor judgement?

Canada's average delinquency rate jumps

A growing number of Canadians have fallen behind on their credit and mortgage payments as unemployment rises, prompting a surge in consumer bankruptcies. It is a situation that is expected to get worse as unemployment continues to grow.

Canada’s average delinquency rate for all types of consumer credit, excluding mortgages, reached 1.52% in May, up 19% from a year earlier, data compiled by Equifax Canada Consulting Solutions showed Friday. The pace of growth accelerated from 13% in April. The delinquency rate is based on payments more than 90 days overdue. ..