Financial Update

Stocks close sharply lower on worries about automaker aid, lower financials

· TSX -242.1pts(Reuters) as early gains in energy and mining stocks disappeared, losses in financials picked up amid a new wrinkle in the restructuring of commercial paper while telecom stocks fell with death of the BCE takeover attempt. The slide followed a report that Ottawa could be asked to provide between $5b and $10 b to salvage the restructuring of the seized-up market for Canadian asset-backed commercial paper, or ABCP. The plan has been stalled for months by market upheaval.
· DOW -196.33 NY markets also weakened due to a new wave of pessimism over the chances of Congressional approval for a bailout package for US carmakers. Those opposed are arguing that support for the domestic auto industry should carry significant concessions from autoworkers and creditors and reject tougher environmental rules imposed by House Democrats.
· Dollar +1.67c to $81.06US. as commodity prices ticked higher and the U.S. currency weakened.
· Oil +$4.46 to $47.98US per barrel. with traders expecting a significant OPEC production cut next week
· Gold +$17.80 to $826.60US per ounce
· www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices

Article at the bottom Bank of Canada warns of possible debt, mortgage defaults if conditions worsen verifies this is a great time to be mining your data base for refinance opportunities. Don’t wait till after the holidays like your competition,
Here is an interesting commentary and from Forbes Magazine comparing to the US Banks.

In Crisis, Canadian Banks Survive And Thrive

Robert Elliott Caution never looked so good.

TORONTO--We Canadians are not prone to gloating. Still, many of us might be forgiven for having felt a twinge of national pride that our country's financial system has endured the current economic crisis with far less pain than that experienced by other global powers, particularly our neighbor to the south.

Recent estimates tally losses by Canada's six largest banks due to rotten subprime investments to be around $11.7 billion--no trifle, but insignificant in international terms.

Consider that Citigroup alone has written off more than $39 billion in subprime losses, $20 billion in the past year. UBS took a reported hit of $37 billion, while Wachovia incurred a nearly $24 billion write-down for just the third quarter, just before its takeover by Wells Fargo . The sorry list goes on, punishing major institutions across Europe, the U.K., Asia, Australia and the U.S.

To be sure, Canadian banks have suffered substantial credit losses due to exposure to U.S. real estate. In addition to billion dollar write-downs at several large lenders, Canadian banks are affected by the lack of liquidity in global markets. Many businesses have been unable to access the capital markets. The past year also saw a debilitating freeze in Canada's market for asset-backed commercial paper, much of that tied to bad mortgage credit in the U.S.

Still, given the deep interconnectedness of global financial markets--and our reliance on the U.S. for so much trade and investment--Canada's ability to dodge the worst of the crisis is telling.

There have been no bailouts or rescue plans and--significantly for depositors and creditors--no serious risk of systemic collapse, which makes Canada unique.

Was it a fluke? Hardly. Through a combination of regulatory discipline and cultural mind-set, Canada's banks have long operated with a conservatism that until recently seemed out of step with its peers worldwide. Ironically, that historic caution may now create an equally historic opportunity for the Canadian banking sector as it considers what role to play in the rewriting of America's financial order.

The contrast with the U.S. is striking. Since 1784, when Alexander Hamilton founded the Bank of New York, America has fostered a system of state-chartered banks, with federal policy actively restricting the emergence of national banks on the thinking that such oligopolies were inimical to the interests of farmers and small businesses.

The Canadian banking model began with our 1867 constitution giving the federal government exclusive authority over banks. This approach favored national players, with larger banks growing in step with Western expansion and the building of our railways.

Over time a core group of national institutions emerged as larger regional banks took over smaller lenders, consolidation that largely ended by the 1960s. Today, Canada's six dominant banks represent 96% of all national deposits; their portion of all Canadian banking assets surpasses 90%.

In recent decades, as U.S. banks catered to a wave of new investors with huge appetites for risk and asset growth, Canada's banks expanded at a snail's pace. Since the 1960s, Canada's Bank Act has restricted bank ownership, protecting Canadian banks from foreign takeovers but also effectively keeping a lid on domestic mergers. By statute, the five largest banks with equity over $8 billion must be widely held. Canada's current political uncertainty is not conducive to even the consideration of domestic bank mergers, let alone their approval.

Canada was recently ranked as the soundest banking system in the world by the World Economic Forum. Our prime regulator requires that Canadian deposit-taking institutions maintain a minimum of 7% Tier 1 capital and 10% total capital, levels that until recently were significantly higher than requirements in the U.S. and Britain. In the past, global institutions were critical of the high capital cost of doing business in Canada. Now these jurisdictions are demanding that their banks increase their capital.

For years, critics carped that regulatory restraints diminished Canada's banks on the global stage as other institutions went on buying sprees and aggressively built up assets, market capitalization and international prestige. But, as we are learning, the government's curbs and institutional conservatism meant that Canada's banks didn't place nearly the volume of tainted subprime assets on their books as banks in the U.S., Britain, Switzerland, Germany, Iceland and other countries did.

There is another reason Canada has avoided the worst of the subprime mess. Even during the dizziest days of mortgage-driven lending, many Canadian banks were leery about investing in complex and highly leveraged instruments tied to subprime loans. That meant Canada's banks were far less exposed to collateralized debt obligations, collateralized mortgage obligations and large-scale securitizations of subprime debt.

There is an ingrained attitude among many bankers here that if you don't truly understand the asset, it's not a wise play. Canadian banks grasped that one cannot generate creditworthy assets out of inherently uncreditworthy stuff and then spin those assets into ever more highly leveraged instruments. Long before the collapse of Bear Stearns, Canadian bankers expressed concern about the transparency of these "sow's ear" securities--they knew that what they didn't comprehend could come back to haunt them, a lesson not heeded in the U.S.

As the dust begins to settle from the shakeout in the U.S., Canada's banks face some interesting choices. While national politics limit mergers domestically, Canadian banks have a freer hand to invest outside the country.

Many Canadian banks have built a foundation in the U.S. Bank of Montreal owns Harris Bank in Chicago, and Toronto-Dominion Bank has been a major U.S. acquirer, including online brokerage TD Ameritrade ,as well as BankNorth and Commerce Bank, now rebranded as TD Bank. Royal Bank of Canada as over 400 RBC branches in the U.S., and National Bank of Canadahas become known in Florida and New York State for its Natbank centers.

With many U.S. banks searching for investment partners, Canada could become a much bigger factor in the months ahead, alongside Korea, Japan, Spain and other countries buying up sizable shares of U.S. financial institutions.

True to historic form, Canada's banks will not likely rush into the breach, even with the sell-offs of U.S. firms. The very prudence that helped insulate Canadian banks from some toxic assets will also guide their investments going forward. And different banks will have different strategies.

A few factors could keep Canadian banks on the sidelines for some months. First, it's not clear how much exposure U.S. banks still have to a domestic housing market that many analysts fear has not yet hit bottom. Second, the Canadian dollar has drifted from par with its American cousin and is now trading at around 80 cents to the greenback. As oil prices continue to drop, so goes the Canadian dollar, which could have an impact on any acquisitions.

The most likely scenario is for Canadian banks to build on their investments in U.S. regional banks. There are many smaller institutions and community banks that avoided heavy subprime lending but nonetheless were swept up in the same storm as the larger banks. Regional banks remain attractive targets for acquisition, especially in parts of the U.S. that already do significant trade with Canada. That's a potentially large sweep, given that Canada is the No. 1 trading partner for 42 U.S. states.

Look for more activity by Bank of Montreal in the American Midwest, with TD expanding in the Northeast and Royal Bank of Canada in the Southeast. Even Bank of Nova Scotia , with an international franchise in the Caribbean, Mexico and South America, may look closer to home. While not transformational, the acquisition of regional banks or books of U.S. business would reflect the opportunistic and careful growth that Canadian banks prefer.

Canadians may also become more visible investors in other financial institutions--including insurers, finance companies, even mortgage brokers. At some point, Americans' taste for credit will return, and Canadian banks could become an important pipeline for helping finance a new era of economic growth--conservatively, of course.

It wasn't long ago that a list of the world's largest banks would not have saved a spot for any Canadians, with Citigroup hovering around $180 billion in market cap and Bank of Americaat $200 billion. Today, Royal Bank of Canada ($37 billion market cap), Bank of Nova Scotia ($24 billion) and Toronto-Dominion Bank ($27 billion) all comfortably sit at the big boys' table. Indeed, RBC is now larger than Citigroup ($44 billion), and suddenly even Bank of Montreal ($13 billion) doesn't seem so small next to a BofA with a market cap of $74 billion.

As global financial markets continue to contract and regain their bearings, Canada's banks may gain newfound respect. Our country's regulatory scheme and risk management standards could be a role model for other jurisdictions, while our natural self-restraint and aversion to sub-grade assets could help institutions elsewhere establish their own 12-step programs for staying out of trouble.

What precise role Canada's banks will have in rewriting the U.S. financial landscape is still to be determined. But the crisis, one hopes, has taught Americans a new truism about us Canucks: In addition to loving our hockey and always getting our man, we have the soundest banking system in the world.

Robert Elliott, a Canadian banking attorney based in Toronto, is national co-chair of the Financial Institutions and Services Group with Fasken Martineau, one of Canada's largest law firms.

Bank of Canada warns of possible debt, mortgage defaults if conditions worsen
By Julian Beltrame, The Canadian PressOTTAWA - A significant number of Canadians are at risk of defaulting on mortgages and other loans if the global financial crisis deteriorates and triggers a deeper recession, the Bank of Canada warns.

In a sobering assessment of the financial crisis, the central bank concludes that significant risks remain for both the global economy and Canada if credit conditions don't begin to improve.
"With household balance sheets under pressure from weak equity markets, softening house prices, slowing income growth, and record-high debt-to-income ratios, a severe economic downturn could result in a substantial increase in default rates on household debt," the bank writes in its December financial systems review released Thursday.

The Bank of Canada says the number of "vulnerable households" - the three per cent with a debt-to-income ratio above 40 per cent - could double by the end of next year under this pessimistic scenario. That would mean tens of thousands of households could face crushing debt as Canadians lose jobs and family incomes drop to the point where they can't pay their bills.

The central bank notes that this would be a worst-case scenario. The "most likely outcome" is for global markets and credit conditions in Canada to gradually improve, it states.

This is partly because central banks and governments around the world have leaped into action with extraordinary measures such as cash injections, asset swaps and credit guarantees to backstop financial institutions to pump addditional billions of dollars of credit into the economy.

But the Canadian central bank's top officials also warn that the crisis is far from over and that there is "a significant risk of mutually reinforcing weakness in the financial sector and in the real economy."

That's the kind of negative feedback that felled the American economy, noted Douglas Porter, deputy chief economist with BMO Capital Markets, the brokerage arm of Bank of Montreal, adding it is no longer far-fetched to think it could happen here.

"Given the fact we're looking at the recession in the teeth, some of the worst-case scenarios have to be studied a little more closely," he said.

"It looks like we're going to get as close to the bank's worst-case scenario than anyone would have imagined possible as recently as three months ago."

After resisting the call for months, the Bank of Canada declared the economy in recession Wednesday when it slashed its trendsetting interest rate to the lowest level in 50 years at 1.5 per cent.

Most economists are forecasting growth at or below zero for 2009 with job losses of more than 100,000 and an unemployment rate above seven per cent.

For much of the last year, experts said the Canadian economy would perform better than the recession-ravaged U.S., where the housing, financial and manuufacturing sectors have been battered and the services sector is now feeling the effects.

But now, the slump in the auto, manufacturing and forestry industries in Ontario and Quebec has spread to the resources-based West as oil projects get shelved because of low crude prices and mines close because of slumping prices for nickel, copper, zinc and other primary metals.
Pressure is mounting on the federal government to shock the economy into recovery with a big stiumulus spending plan in its Jan. 27 budget. Late Thursday, Bank of Montreal's Porter urged Ottawa to spend as much as $16 billion next year to arrest the economy's slide into recession.

Porter said such a package should include spending on roads and bridges as well as a one-time bonus for seniors on public pensions, temporary cuts to payroll taxes and the GST, and spending vouchers that would give Canadians government cheques on the condition they spend rather than save.

As well, Porter says Ottawa should consider a one-time financial transfer to the provinces, which could put the money more directly to use.

Given the rising uncertainty, the Bank of Canada officials outlined five potential risks for the world and Canada, including a deeper and more prolonged recession as banks compelled to restore cash reserves tighten the screws on credit conditions even further.

For Canadians, the repercussions will be profound - higher joblessness, lower income growth and more home defaults from crushing debt loads, the bank says in its worst-case assessment.
And while Canadians' access to credit has not tightened significantly during the financial crunch, this could change if the crisis persists, the bank says.

The risk assessment is noteworthy for its predominantly gloomy outlook - although it remains a hypothetical one - and for the fact it was written by the bank's governing council headed by governor Mark Carney, rather than by lower-rank bank staff as is usually the case.

In the United States, millions of Americans have lost their homes in the last two years with the collapse of the sub-prime, or high-risk mortgage market, which led to sharply higher interest rates for homeowners with poor credit and produced widespread foreclosures.

In Canada, however, the housing sector has been more stable, but the jump in home prices that led to soaring values in Vancouver, Calgary, Toronto and other cities has begun to reverse.

Statistics Canada reported Thursday that new home sales fell for the first time in a decade in October, dropping 0.4 per cent from September.

According to the latest figures compiled by the Canadian Bankers Association, the percentage of mortgages that have gone unpaid for at least three months as of September was 0.29 per cent, or 11,362 of about 3.9 million mortgages in the country. Arrears in the U.S. are 6.5 times higher.
"Canadian trends are stable. American trends are worsening," according to the bankers' group.
In its report, the Bank of Canada says consumer debt woes will also cut deeply into bank profitability. In their recent financial reports, the six biggest Canadian banks reported a 38 per cent drop in profits for the just completed 2008 fiscal year to about $12 billion.

Much as has happened in the U.S., the central bank officials say the contagion could spread through the banking system and further restrict the availability of credit.

The Bank of Canada does caution that the vulnerability of Canada's housing sector should not be overstated.

It notes that lending practices in Canada have been far more conservative than those in the U.S. and that subprime mortgages account for about five per cent of the market as opposed to 14 per cent in the U.S. Banks are also insulated for defaults through government guaranteed mortgage insurance.

As well, although debt is high, low interest rates means that at present most households are able to comfortably manage their financial obligations.

Merrill Lynch economists David Wolf and Carolyn Kwan warned back in September that Canada was experiencing a similar housing meltdown as occurred in the U.S.

But Derek Holt of Scotia Capital agreed with the Bank of Canada that the situation here is not as dire.

"If we start off by looking at the household balance sheet it's 20 cents in debt for dollar of assets in Canada versus 26 cents in the United States. So we have 30 per cent less debt per each dollar," he explained.