19 September 2008

OSC Imposes Temporary Short-Selling Ban

Bloomberg, Sean B Pasternak & Joe Schneider, 19 September 2008

Canada's main stock-market regulator banned temporarily the short-selling of bank and financial stocks following similar moves by U.S. and U.K. regulators.

``We will take the appropriate steps necessary to protect our markets and ensure that they are not used for purposes of regulatory arbitrage,'' Ontario Securities Commission Chairman David Wilson said in an e-mailed statement. ``We will monitor trading in securities of other Canadian financial issuers.''

The U.S. Securities and Exchange Commission halted the short selling of 799 financial companies in a move to combat investors seeking to drive down shares following the collapse of Lehman Brothers Holdings Inc. and the bailout of American International Group Inc.

Short sellers borrow stocks and sell them, betting the price will fall and they'll be able to rebuy them later, return them to the lender, and pocket the difference in price.

Ontario Finance Minister Dwight Duncan said he supports the OSC action.

``These measures are aimed at protecting Ontario and Canadian investors,'' he said in a statement today. ``We are confident that our financial markets are strong and well positioned to withstand the current economic challenges.''

The Canadian companies affected by the ban are: Aberdeen Asia-Pacific Income Investment Co., Bank of Montreal, Royal Bank of Canada, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Manulife Financial Corp., Fairfax Financial Holdings Ltd., Sun Life Financial Inc., Kingsway Financial Services Inc. Quest Capital Corp., Thomas Weisel Partners Group Inc., the Toronto-Dominion Bank and Merrill Lynch & Co.

The U.S. ban, in place until Oct. 2, helped send Canadian financial shares higher for a second day, with the 43-member S&P/TSX Financials Index rising 5.5 percent, led by Royal Bank and Toronto-Dominion Bank.

The Canadian ban will be in effect until Oct. 3, unless it's further extended, the OSC said.

Royal Bank, the country's largest bank, climbed C$3.59 ($3.43), or 7.5 percent, to C$51.43 in 4:16 p.m. trading on the Toronto Stock Exchange. The second-largest bank, Toronto- Dominion, rose C$4.74, or 7.9 percent, to C$64.94, the stock's biggest jump in a decade.
Bloomberg, Sean B Pasternak, 19 September 2008

Royal Bank of Canada, Bank of Nova Scotia and Manulife Financial Corp. are among at least six Canadian companies on the list of stocks for which short selling was halted by the U.S. Securities and Exchange Commission.

The SEC compiled a list of 799 financial companies last night, pressing an assault on speculators after the collapse of Lehman Brothers Holdings Inc. and the bailout of American International Group Inc.

Other Canadian firms on the list include insurers Fairfax Financial Holdings Ltd., Sun Life Financial Inc. and Kingsway Financial Services Inc.
Dow Jones Newswires, 19 September 2008

Bank of Nova Scotia and Toronto-Dominion Bank are included in UBS global bank strategist's top 10 list of those financial institutions most likely to "emerge in a favourable position after the current turmoil in credit and financial markets." He divides the winners into two groups - well-capitalized banks with strong retail depository franchises - an apt description of TD - and banks with appropriate exposure to emerging markets - which BNS has given its Mexican, Asian and Latin American operations.
Dow Jones Newswires, 19 September 2008

Canadian bank shares soaring in wake of US Treasury's plan for financial markets, but Dundee Securities says long-term investors should be selective. Analyst recommends Toronto-Dominion Bank and Royal Bank of Canada because of strong domestic franchises. National Bank of Canada also in good shape, but Dundee remains negative on Bank of Montreal and Canadian Imperial Bank of Commerce even if they are due for the biggest immediate pop. Meanwhile, Dundee cautious on Bank of Nova Scotia as it's exposed to US economy through its Mexico and Caribbean operations. In Toronto, financial services index recently up 4.6%.
The Globe and Mail, Tara Perkins, 19 September 2008

Bank of Montreal chief executive officer Bill Downe was not caught off guard by BMO's exposure to a number of items that became ticking time bombs for financial institutions when the liquidity crunch erupted last year. What rattled him was how the crisis affected them.

"The surprise was the external environment," he said in an interview. "There wasn't anything that we stumbled over and said 'what is this?' "

Mr. Downe, who has a history in investment banking, said he knows well many of the esoteric investments that are at the heart of the crisis. "I think I had the advantage of knowing these businesses as a consequence of having been involved with them as they grew up," he said.

When the non-bank asset-backed commercial paper crisis arose last year, and calls were flying between the Bank of Canada and the country's financial institutions, "I really anticipated that the adjustment process would be a lot harder than people were talking about," Mr. Downe said.

As the crisis has evolved, Canada's financial institutions have been hunting for the next possible explosion and trying to minimize the damage. That process was in full swing this week as they frantically measured their exposure to Wall Street firms whose potential demise was unthinkable not long ago.

At Caisse de dépôt et placement du Québec, employees scoured its exposure to the likes of Morgan Stanley and Goldman Sachs to determine the impact "if the worst occurred" and the firms went under, chief executive officer Richard Guay said yesterday.

"In terms of counterparty risk, we are really fine. We have no worries at all," he said, although the dropping stock markets churned his stomach.

Executives at Canadian institutions admit being taken aback by recent events, but insist Canada's financial sector is differentiating itself from the U.S. and Britain.

At Standard Life Assurance Co. of Canada's offices in Montreal, employees pored through the books and found no worrisome exposure to U.S. institutions.

"Call it lucky, call it smart, but we're fine in terms of exposure, so we're thrilled about that," CEO Joseph Iannicelli said.

He thinks Canadian institutions are benefiting from prudent practices coupled with strict regulations. "I don't think it can be lucky if this many companies in Canada steered clear from major exposure."

Canada's banks are in very good shape compared to global peers, Mr. Downe said. "We are good managers of risk."

That doesn't mean they don't have problems.

Canadian Imperial Bank of Commerce, which had to tap the markets for an equity infusion this year, continues to whittle away at more than $25-billion of risky structured-finance holdings.

Genuity Capital Markets analyst Mario Mendonca said CIBC's writedowns are an issue, "but we all know what's coming." There's more uncertainty about Bank of Montreal, he said.

"BMO's potential to take on some of these off-balance-sheet vehicles and take some major charges would be the single greatest risk right now among the Canadian financials," Mr. Mendonca said.

RBC Dominion Securities analyst André-Philippe Hardy suggested yesterday that clients buy Toronto-Dominion Bank stock and short shares of BMO.

BMO's U.S. exposures could lead to more soured loans; its Canadian consumer banking results are lagging leading banks; and recent events have caused spreads to widen, possibly putting more pressure on the value of its structured investment vehicles (SIVs), Mr. Hardy wrote.

Mr. Downe counters that BMO has earned a reputation for sticking with its customers in difficult times, and will pick up market share as other banks tighten up on credit. "We have proven that we are not fair-weather bankers," he said.

He said the bank has systematically managed through its trouble spots. "If you look at what we've accomplished as a company, we really set about to do things in the correct order," he said.

Top priority as the credit crisis erupted was to make sure that the bank's asset securitization programs were funded, he said.

The next was the SIVs, which have now been reduced in size from $28-billion to less than $10-billion at the end of the last quarter, progress he's very pleased with.

"Those programs were really set up with sophisticated investors, long-term clients of the bank, who really understood the product very well and they didn't want the programs to be liquidated too quickly because they wanted their capital to be protected," Mr. Downe said.

The bank surprised analysts in its recent quarter by boosting its provisions for bad debts related to the U.S.

But Mr. Downe said the higher provisions are consistent with a balance sheet the size of BMO's, given the credit cycle.

And he rejects accusations that the consumer bank has been neglected. Loan growth is good, deposit growth in commercial banking is strong, and wealth management is showing record results, he said.

"I think it's appropriate for analysts to look for confirmation in performance," he said. "And we have talked about the fact that we believed that customer loyalty needed to change in order for us to grow strongly." Loyalty has improved in the last year, and that's beginning to show up in the numbers, he added.
Financial Post, Eoin Callan, 18 September 2008

The chief executives of Canada's largest banks were summoned to an emergency meeting Thursday with Mark Carney, governor of the Bank of Canada, for crisis talks about the meltdown in the global financial system, say people close to the discussions.

The executives filed into the central bank's Toronto office on King Street West Thursday afternoon for a "frank" dialogue that included a "status update" on the stresses the banks are suffering amid a worsening credit squeeze, according to one source familiar with the talks.

The meeting came amid a co-ordinated effort by central banks and regulators around the world to alleviate an unprecedented seizure that had taken hold in money markets and to discourage actions by institutions that risked weakening the financial system.

Central banks injected US$180-billion of liquidity into financial markets worldwide after the U.S. Federal Reserve took the extraordinary step of providing the Bank of Canada and other countries with billions of dollars each to pass on to domestic banks desperately seeking short-term loans of dollars.

After making US$10-billion of dollar liquidity available to banks in the morning, the talks with bankers allowed Mr. Carney to assess the ongoing stress levels in inter-bank lending and discuss contingencies, according to one person briefed on the dialogue.

Called to the meeting were Gord Nixon, chief executive of Royal Bank of Canada, Ed Clark of Toronto-Dominion Bank, Gerry McCaughey from Canadian Imperial Bank of Commerce, Rick Waugh of Bank of Nova Scotia, and Bill Downe of Bank of Montreal and other senior figures.

People involved in the talks were acutely sensitive to the timing of the crisis meeting, coming during a general election and amid an economic slowdown seen as hampering the campaign of Stephen Harper, the Prime Minister.

Officials stressed after the meeting that Canadian banks have healthy balance sheets and absolute leverage that is significantly lower than many of their peers overseas.

Both bank executives and officials in Ottawa also emphasized that the meeting was part of a regular dialogue between the central bank and financial institutions.

That dialogue has taken on heightened importance in the current climate.

But the move to arrange an emergency dollar swap between the U.S. and Canadian central banks underlines how the dysfunction emanating from Wall Street has spread throughout the international banking system.

Central bankers around the world have been following up Thursday's injections of liquidity by impressing on banks the systemic risks that arise if they start refusing to lend to one another.

The collective liquidity actions were unveiled simultaneously by central banks who said they were taking "co-ordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets." They promised to "continue to work together closely" and to take "appropriate steps to address the ongoing problems."

An erosion of trust between many of the world's leading financial institutions after a series of implosions on Wall Street has served to deepen the crisis in recent days, threatening the future of Wall Street pillars including Morgan Stanley.

The emergency actions helped relieve some of the pressure in money markets, while Canadian banks also sought to reach out to clients and stakeholders to reassure them the country's banks remained stable.

While Canadian banks have been reluctant to comment publicly on their exposures to credit markets, they have privately sought to emphasize that the risks they face from troubled sections of securities such as credit default swaps does not threaten their survival.

While Bay Street banks have big positions in credit markets with notional underlying values in the hundreds of billions, the losses they risk collectively on credit instruments overlaying these pools of securities are likely limited to the low tens of billions, according to analysts.

Banks have also been reluctant to discuss the pressures they face in overnight lending markets, though further liquidity actions are seen as likely in the coming period as policymakers monitor the situation closely.