Financial Update

· TSX-302.47pts (Reuters) as analyst downgrades of energy and fertilizer companies combined with a steep drop in crude prices dragged the resource-heavy market into a broad selloff. Also Japanese auto giant Toyota Motor Corp. projected its first-ever full-year operating loss.
· DOW -59.42pts
· Dollar +.26c to $82.03US.
· Oil -$2.45 to $39.91US per barrel. While prices pose a challenge for some investors, the declines in oil prices could have a positive impact on consumers, suggested Bruce Latimer, a trader at Dundee Securities. "You're also seeing gasoline very, very cheap out there," he said. "And that's certainly going to put a few more dollars into consumers' pockets."

· Gold +$9.80 to $847.20US per ounce
www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices

Big banks face rising pressure to loosen credit

Flaherty certain to demand action when he joins Carney in meeting with financial CEOs next month Les Whittington

OTTAWA–The big banks are facing mounting pressure from Ottawa to do more to make credit available to Canadians during the current economic meltdown.

But Finance Minister Jim Flaherty's ability to convince the banks to loosen their lending practices may depend largely on his political skills.

After years of passing up opportunities to tighten regulation of bank practices, Parliament has few weapons at its disposal –other than marshalling public opinion – when it comes to a standoff with the country's biggest financial institutions.

Flaherty, who will join Bank of Canada Governor Mark Carney in a closed-door meeting with bank CEOs in January, is certain to demand action at a time when complaints about a credit squeeze are echoing through business and government right across the country.

"Access to credit is a huge issue – the minister hears about it in every pre-budget consultation he does, and it's something that we need to continue pressing on," a senior government official said yesterday.

Flaherty has made it clear he feels his extensive efforts to help the banks weather the global credit crunch aren't being reciprocated. And the official points out that these special measures by the federal government are temporary and don't have to be extended.

At issue are the Harper government's plan to purchase $75 billion in bank-held mortgages and its guarantee of up to $200 billion in bank borrowing. Both programs, which are meant to free up credit for business and consumers, expire in the spring.

Asked yesterday whether Flaherty would extend them in the current atmosphere between Ottawa and the banks, the official said pointedly, "Generally speaking, if programs are not effective, you don't continue with them."

With businesses closing and jobs disappearing as the economy plummets ever downward, the ability of companies to obtain loans has become a matter of national urgency.

Quebec Finance Minister Monique Jérôme-Forget said after a meeting of federal-provincial treasurers this week the credit crunch was the most pressing topic raised in the closed-door conference.

And Greg Selinger, Manitoba's representative, said ominously that the ministers from across the country ought to have a talk with the bank CEOs about Canada's "national interests."

When Parliament resumes in late January, the bank chiefs can expect to be called on the carpet by the House of Commons finance committee to explain their lending activities, says Dan McTeague, the Liberal consumer affairs critic.

"Members of Parliament like myself have so far received what is a very disturbing number of calls from creditworthy clients who are having a tough go of it and are prepared to take it up with MPs on the hope that we would demand some accountability from the chartered banks," said McTeague (Pickering-Scarborough East).

Previewing his meeting with senior bankers next month, Flaherty says he will expect them to show that they are making credit more widely available.

And, in an unusual move, Carney has publicly urged the banks not to tighten up lending.
Through the federal finance department, the Office of the Superintendent of Financial Institutions and other agencies, Ottawa scrutinizes the banks' operations, their solvency and their consumer-related practices. But the Bank Act gives the government very little power to tell the banks how to operate.

"There's nothing he can do other than threat," Garth Turner, the former MP and financial commentator, says of Flaherty. "He has no big stick to hold over the banks."

And Flaherty's face-to-face talks with bank chief executives promise to be confrontational. Canada's major banks say they are being unfairly singled out for blame in a credit crunch that is affecting everyone.

Nancy Hughes Anthony, head of the Canadian Bankers Association, acknowledges obtaining loans may be getting tougher for some companies.

"With the Canadian and American economies slowing, there is no question that some of Canada's major industries are going through tough times. When providing credit, sound business practices require that such changing economic conditions be taken into account by lenders," she said in a statement this week.

But the banks maintain it is other lenders – not bankers – who are clamping down on credit.
"As many observers (including Carney) have noted, financing through non-bank sources is less and less available to Canadian businesses," Hughes Anthony said.

Duff Conacher, who heads the Canadian Community Reinvestment Coalition, says successive Conservative and Liberal governments have failed to provide the tools federal regulators need to accurately assess banks' lending practices. He advocates expanding the powers of the Financial Consumer Agency of Canada and the federal Competition Bureau to enable Ottawa to audit the banks' books.

Financial Update

A "Santa Claus" rally has become a Toronto Stock Exchange tradition, however it remains to been seen if the economic "Grinch" will steal Christmas this season.

· TSX+126.55pts (Reuters)
· DOW -25.88pts
· Dollar -1.11c to $81.77US.
· Oil -$2.35 to $33.87US per barrel. oil prices fell despite a cut in production by OPEC
· Gold -$23.20 to $836.40US per ounce
www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices

Restructuring plan approved for asset-based commercial paper Gary NorrisThe Canadian Press The 16-month-long nightmare in Canada's asset-backed commercial paper market appears finally to be at an end, thanks to a multibillion-dollar taxpayer guarantee.

The federal government and the governments of Ontario, Quebec and Alberta have agreed to "partner'' in supporting a restructuring of $32 billion worth of ABCP not issued by Canada's big banks.

Federal Finance Minister Jim Flaherty announced yesterday that Ontario and Quebec had agreed to help, and an Alberta Finance Ministry spokesperson said a few hours later that the province "has decided to do its part to support this agreement.''

The governments did not specify the size of the "senior funding facility'' they will provide to backstop what has become known as the Montreal accord.

But Flaherty said the deal will enable investors and commercial-paper issuers to "achieve a stable and effective restructuring agreement'' which "will protect financial stability and the health of Canada's financial markets.''

A Finance Department spokesperson said the size of the public support and other details would be released "later.''

The government had been approached for a guarantee of $9.5 billion.

"Unless someone does something totally irrational, there should be a deal,'' Colin Kilgour, an independent consultant to corporate holders of the frozen paper, said after Flaherty's announcement.

He added that the taxpayer commitment is probably close to the $9.5 billion proposed by a blue-ribbon committee toiling to untangle the mess.

Banks are trying, but can't do it all, association says The Canadian Press Big banks can't reignite the lending market on their own, despite government suggestions to the contrary, the head of the association for Canada's financial institutions said yesterday.

Nancy Hughes Anthony, president and chief executive of the Canadian Bankers Association, agreed that many sources for lending have been pulling back in the wake of the global credit crunch that has rocked financial markets around the world.

"Banks are working to fill the gap,'' she wrote in a statement, as Finance Minister Jim Flaherty stepped up the pressure on the banks to loosen up their lending practices to help revive the battered economy.

"But banks don't have the capacity to do it all.''

Bank of Canada governor Mark Carney and Flaherty are scheduled to meet with chief executives from the country's big banks in January to get an update on their lending practices.
"I expect (the banks) to make it evident to us that they are taking steps to make that more available in Canada,'' Flaherty said at a news conference yesterday in Saskatoon, where he was holding pre-budget meetings.

On Wednesday, Carney also urged the banks to pump more credit into the economy and he called on financial institutions to build up capital in good times and draw on it in bad -- the opposite of what is now occurring as bankers become more risk-averse in a shrinking economy.
The two sides are increasingly clashing over how much responsibility the banks should have toward the broader economy.

While the recession is worsening because of mounting plant closures and workers' rising job insecurities across the country, credit is also drying up, preventing companies from raising capital to invest and expand and consumers from buying cars, houses and other big-ticket items.
"It's a real tug of war that's going on,'' said Patricia Croft, chief economist and vice-president of Phillips Hager and North, a Vancouver-based money manager acquired by the Royal Bank earlier this year.

Croft said that banks and businesses are stuck in a "negative feedback loop,'' which might be more commonly known as a vicious circle: banks are reluctant to lend, which means that businesses cut back on capital spending, resulting in job cuts. That makes consumers spend less and default on credit payments, which in turn causes the banks to become even more reluctant lenders.

Happy Holidays!

Financial Update

Harper eyes stimulus worth $30-billion “We're going to do whatever it takes to get our economy through this recession and on to a long-term recovery”

But even as he put a price tag on the planned aid, Mr. Harper said he's prepared to go further if necessary. “It will be scalable. We will be able to move it up if we need to move it up,” he said.

· TSX -298.76pts(Reuters) led by a drop in energy and gold stocks as the price of oil continued to drop despite a massive production cut by OPEC and economic worries sent bank stocks lower.
· DOW -219.35pts paced by slumping energy-related shares, after the price of crude fell to 4 year lows and 2 of the nation's Big Three automakers said they would halt production
· Dollar -.93c to $82.93US.
· Oil -$3.54 to $40.06US per barrel. oil prices fell despite a cut in production by OPEC
· Gold -$7.90 to $860.60US per ounce
www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices

Flaherty picks team to help shape budget

RICHARD BLACKWELL From Friday's Globe and Mail

Finance Minister Jim Flaherty has reached out beyond his usual coterie of advisers to get help in crafting the crucial January budget that will spell out how Ottawa plans to get the economy back on track.

On Thursday, he announced a special 11-member advisory committee that will consult with him and suggest measures to be included in the budget. But the Economic Advisory Council will live beyond the budget and continue to provide advice in the future.

The group is devoid of bank economists or central bankers. In that sense it contrasts with U.S. president-elect Barack Obama's Economic Recovery Advisory Board, which is headed by a former chairman of the Federal Reserve Board and includes economists in addition to business leaders, labour officials and academics.

Mr. Flaherty's panel is also non-partisan. It will be chaired by Carole Taylor, the former minister of finance in British Columbia's Liberal government. And Power Corp. of Canada chairman Paul Desmarais Jr., a long-time Liberal supporter, will also be at the table.

Business luminaries on the committee include Vancouver entrepreneur Jimmy Pattison, James D. Irving, president of the forest products arm of the Irving family empire, Research In Motion Ltd. president Mike Lazaridis, and Geoff Beattie, president of the Thomson family holding company Woodbridge Co. Ltd.

Mr. Flaherty told reporters in Saskatoon Thursday he talked individually to each member and asked them to participate. “I called them all personally and said: ‘Your advice is needed for your country,' and all of them said: ‘Yes.'”

The group will meet for the first time in Toronto on Tuesday, then reconvene after Christmas.
Ms. Taylor said in an interview Thursday that Mr. Flaherty is attempting to “reach out” and gather views on what action to take. The new council's mandate “is to put together some sort of structure around private sector advice, ideas and opinions,” she said.

It's important to get broad input from experienced business people who are “on the ground,” she said, “because there is no solution we can pull off the shelf here that will deal with this.”

Ms. Taylor, who was dropped from the B.C. cabinet last summer after she announced she would not run again for the provincial legislature, said she is very happy to be back in a key role on a crucial public policy issue. “This is such an important moment in history that I was anxious to participate in some way.”

Another member of the committee is University of Calgary professor Jack Mintz, who has advised the government on tax issues in the past.

Mr. Mintz said it is too early to say how the committee will be organized, or in what form it will provide advice to the government. The group might want to warn Ottawa off some possible measures that could cause more harm than good, he said, in addition to recommending others.
In a recent commentary in The Globe and Mail, Mr. Mintz cautioned against bailing out weak companies. Retraining displaced workers is more effective than “keeping inefficient businesses operating,” he wrote.

Infrastructure spending can help, he added, but only if it is in support of projects that are ready to proceed. And a cut in income taxes is preferable to trimming the GST, he wrote.

Another committee member, Ajit Someshwar, who owns a number of small companies including information technology advisory firm CSI Consulting Inc., said it is a wise move to consult people with different skills when “we are sailing in uncharted waters.”

Mr. Pattison, who will bring another West Coast perspective to the committee along with Ms. Taylor, would not say what he will recommend to Mr. Flaherty. But he noted that “the U.S. is definitely worse off than we are,” and that, at the moment, “things are pretty good out here in B.C.”