On Canada And Derivatives

[onlooker]

YC:

They (Europeans) got tempted by good returns on those derivatives (financial weapons of mass destruction or toxic assets) and got caught with their pants down LOL.

Idiots!

Hasn't anybody other than Canada figured out that you can't spend your way out of debt?

Perhaps, you were one of many who saw Prime Minister Harper’s unabashed view about Canada at a G20 conference in front of the world’s press; and as a result, thought that Canada could do no wrong? 

Here’s PM Harper’s speech: http://www.youtube.com/watch?v=gqTMbSrAnxQ  Best to start at about 8:00.  He said:

"Canada remains in a very special place in the world. . . . first of all just in terms of the immediate crisis, we are the one major developed country that no one thinks has any responsibility for this crisis."

"In fact, on the contrary, they (other countries) look at our policies as a solution to the crisis. We're the one country in the room everybody would like to be."

“They would like to be an advanced developed economy with all the benefits that conveys to its citizens and at the same time not have been the source, or have any of the domestic problems, that created this crisis in the first place."

Is he speaking truths, or half-truths, or lies?

If you believe him to be speaking the whole truth, then IMO, you have fallen for his hypnotically dazzling words.  And, I think that PM Harper would succeed as an excellent salesman dressed in wolf’s clothing who can sell ice to Eskimos.

See: http://media.weirduniverse.net/iceeskimo2.jpg

[onlooker]

There was a 2003 lecture given by Professor Christian A. Johnson of Loyola University Chicago School of Law on the dangers of derivatives (I guess, based on his presentation slides).  He showed that Canadian Banks are dealers of derivatives (toxic assets) and have a symbiotic working relationship with American government agencies.  See: 

Slide 1. 

Regulating Financial RisK:  The Case of OTC derivatives on International Financial Markets
Professor Christian A. Johnson
Loyola University Chicago School of Law

Slide 2.

Warren Buffet
Derivative securities are a “mega-catastrophe” and “financial weapons of mass destruction”

Slide 3.

Warren Buffet
    “We view them as time bombs, both for the parties that deal in them and the economic system.” 

Slide 13.

Canadian Derivative Dealers
-   Bank of Montreal
-   Bank of Nova Scotia
-   Canadian Imperial Bank of Commerce
-   National Bank of Canada
-   Royal Bank of Canada (C$3.2 Trillion)
-   The Toronto Dominion Bank

Slide 26.

Regulation of Bank Activities
United States
-   Federal Reserve
-   Office of the Comptroller of Currency
-   State Regulators
-   Federal Deposit Insurance Corporation

Canada
-   Office of the Superintendent of Financial Institutions
-   Canadian Deposit Insurance Corporation

Slide 34.

Where Do We Go From Here?
-   Hedge Fund Disclosure & Registration

-   Improve Bank Supervision Capabilities
o   Expertise
o   Staffing
o   Examinations

-   Strengthen netting legislation

-   Increase Use of Collateral

-   Increase Cross Border Regulatory Cooperation

See:  http://74.125.113.132/search?q=cache:9ByRXjEo_A4J:osgoode.yorku.ca/media2.nsf/58912001c091cdc8852569300055bbf9/33c5583355a3c2ea8525724a005561c4/%24FILE/Professor%2520Christian%2520Johnson%2520Osgoode%2520Presentation%2520-%252005feb07.ppt+The+Case+of+OTC+derivatives+on+International+Financial+Markets+Professor+Christian+A.+Johnson&cd=3&hl=en&ct=clnk&gl=ca

[onlooker]

Here’s a 2007 Bank of Canada article showing that the dangers of derivatives.

See:

Bank of Canada Workshop on Derivatives Markets in Canada and Beyond
by Toni Gravelle, Financial Markets Department    BANK OF CANADA REVIEW • AUTUMN 2007

Between 2004 and 2006, the average daily volume of financial derivatives contracts at the Montréal Exchange climbed by over 125 per cent. During this period, the proportion of foreign participants at the Montréal Exchange rose from approximately 40 percent to close to 60 per cent.

~    ~   ~   ~

The first challenge relates to the increasing complexity of these instruments, which, for many of the newer credit derivatives products, poses challenges to even the most sophisticated investors in terms of correctly modelling, understanding, and managing the embedded risk.

~   ~   ~   ~

Given this difficulty, concerns were raised about whether the ultimate holders of these instruments always fully grasp the nature of their risk exposures and how these exposures differ from those of more typical debt instruments, such as corporate bonds. The complexity of CDOs, as well as the requirement of many institutional investors to have their fixed-income holdings rated by a credit-rating agency, might also lead to the ultimate investors placing too great a reliance on the rating of the CDO tranches to guide their investment decisions.

Secondly, there are concerns that secondary market liquidity for these instruments, particularly for CDOs, is less robust (or that these markets are more likely to become illiquid), owing to their complex model-driven valuation as well as to the lack of investor diversity and the concentration of intermediaries in these markets. Related to this, concerns were voiced that the cost of this potential market illiquidity was not fully reflected in the pricing of these instruments, leaving market participants exposed to sudden repricing and large mark-to-market losses in their portfolio holdings. This could trigger the simultaneous unwinding of crowded positions that would exacerbate the strains on market liquidity and could lead to detrimental knock on effects on other debt markets and on financial intermediaries’ balance sheets.

http://www.bankofcanada.ca/en/review/autumn07/gravelle.pdf

[onlooker]

In 2007, Canada had its own derivative crisis; asset-backed commercial papers sold through Canadian banks collapsed.  There were federal and provincial government bailouts for some investors.  Because the losses affected the wealthy, not the average Canadians, I suspect this story did not constantly played itself out in the Canadian news media. 
 
See: 

Regulators target dealers over ABCP
By Theresa Tedesco And Barbara Shecter, Financial Post     July 23, 2009

Four Canadian financial regulators are targeting some of the country's largest bank-owned investment dealers in connection with the sale of asset-backed commercial paper shortly before the $32-billion market collapsed in 2007 and are said to be seeking fines and penalties worth tens of millions of dollars.

~     ~    ~

Since the ABCP collapse, some investors were reimbursed through a Pan-Canadian agreement, a privately negotiated restructuring involving federal and provincial government money.

At the same time, investors with more than $1-million in the commercial paper were given longer-term notes that trade little, if at all, because of the difficulty valuing the collection of loan assets.

http://www.nationalpost.com/related/topics/story.html?id=1821281

and see:  http://www.youtube.com/watch?v=6vzOJU2H4dg

So, it is true that Canada is not the original creator of derivatives –financial weapons of mass destruction, but Canada’s banks are dealers of them and knew of their dangers as early as 2003. 

Therefore, IMO, PM Harper (an economist by training) saying that Canada is the only country having absolutely no part in advancing the world’s immediate crisis is not being very truthful.

Once Canada, like Europe is stripped of all her financial secrets; then in front of the world’s press, I hope that our current boastful Prime Minister will not be exposed as just another political: https://zone.artizans.com/image/KRI1049/rcmp-pinocchio-shrugs-his-shoulders/ 

[onlooker]

Here’s an article about one Canadian bank, TD Bank that made the correct decision in 2005 to sell off its derivative holdings.

See:

U.S. regulators could learn from Canada's banks

By David J. Lynch, USA TODAY  Posted Feb 7, 2009

In 2005, for example, Ed Clark, CEO of TD Bank Financial Group, which operates a U.S. retail subsidiary, grew increasingly worried about the complexity of some of the securities in the bank's portfolio.

Clark didn't fully understand how the derivatives would behave in different market environments, and he suspected no one else did either.

So he did something almost no one on Wall Street had the foresight to do: He ordered his traders to ditch the risky but highly profitable positions. Over the next nine months, TD gradually unwound its derivatives holdings at a cost of more than $200 million in write-offs, which looks like a bargain compared with the $2.2 trillion in losses that U.S.-originated derivatives are expected to incur this year and next, according to the International Monetary Fund.

Still, at the time it was a controversial move, even within TD's own ranks. "I actually said internally, 'I'm not going to be proven right in my career,' " Clark recalled. "I didn't see it blowing up that fast."

http://www.usatoday.com/money/world/2009-07-01-canada-bank-regulation_N.htm

However, according to a site poster named  jcarsey, Canadian banks have exposure to derivatives in the trillions.
             

Derivative exposure of Canadian banks by jcarsey
Posted: Jul 16, 2008             

Central to the unfolding US financial disaster are instruments called derivatives, which all large banks, investment banks, and most insurance companies hold. The derivatives are largely "off balance sheet" items, which means they are not visible on the company balance sheet among assets or liabilities (this itself should scare the pants off an investor).

Common types of derivatives are contracts on exchange rates and interest rates. These instruments can be used for hedging and risk management, but also for outright gambling (speculation). There are many more exotic and more dangerous types of derivatives. The now famous CDOs backed by mortgages are a derivative. CDS, credit default swaps, are bets or insurance on bond defaults and risk.

For the sake of keeping this simple, I am going to generalize here... this is a very big and complex issue. In my opinion, the off balance sheet derivatives represent a form of hidden leverage and potential liabilities, and therefore contribute risk to the overall bank. They are hidden because regular financial reporting, even the audited annual reports, do not have to describe the extent of derivative exposure. And derivatives are highly leveraged instruments, meaning they can cause huge losses if they act unexpectedly. The huge losses from big American banks are largely consequences of derivative instruments gone wrong.

What I am sharing in this post are figures on the total derivatives held at Canadian banks. Generally speaking, I am suggesting that more derivative exposure = more hidden leverage = more potential liabilities and risk. These figures are difficult, sometimes impossible, to find in regular financial statements. I have pulled the numbers from the bank regulator, the OSFI

http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=554

In many cases, the values of the derivatives are difficult or impossible to accurately know. These "Level 3" assets are illiquid, impossible to price, and valued based on management's best guess. In the USA, problems in Level 3 assets of banks have been leading to severe losses and near collapses. In my analysis, I am identifying OTC (over-the-counter) derivative exposure, which are similar to Level 3 assets in that there is no major market for the derivatives and valuation is difficult. As a result, many of them are illiquid and subject to counter-party risk.

These figures are from end of 2007 reporting. In order of OTC derivative exposure. See full numbers at:

http://spreadsheets.google.com/ccc?key=pU9QNZH6eVD6HiFudto8wNg&hl=en

Royal Bank ($624 billion assets) ; $4.8 trillion total derivatives ; $4.3 trillion OTC derivatives
TD ($432 billion assets) ; $2.4 trillion total derivatives ; $2.1 trillion OTC derivatives
BMO ($387 billion assets) ; $2.7 trillion total derivatives ; $2.0 trillion OTC derivatives
Scotiabank ($429 billion assets) ; $1.3 trillion total derivatives ; $1.2 trillion OTC derivatives
CIBC ($344 billion assets) ; $1.2 trillion total derivatives ; $1.1 trillion OTC derivatives

You are probably wondering how to read this or what to make of it. In my opinion -- and this is only a generalization -- OTC derivatives are the messiest instruments and have the most potential to cause significant damage in adverse conditions. These banks have trillions in derivatives, and only billions in equity so there can be very severe problems if there are even small losses in those derivative portfolios. Royal Bank clearly has the most exposure, with over $4 TRILLION in over-the-counter traded leveraged instruments.

and see:

Re:  Derivative exposure of Canadian banks by jcarsey
Posted: Jan 30, 2009             

The problem is all about counter-party risk, as you mention.

Every time derivatives have be criticized (prior to 2008 anyway) bankers always say, the positions are hedged and net out against each other, therefore there is no risk exposure. This is true provided that every institutional counter party is solvent and honours its contractual obligations. (Note that some can break the contractual obligations even if they are solvent... it can happen in OTC).

The reason I worry a lot about derivatives is because I do not know which institutions are on the other side of these trillions in contracts. The banks hide all these things off balance sheet to begin with. We definitely do not know who the counter-parties are. How do I know that Royal Bank doesn't have $1 trillion in OTC arrangements against Citigroup, which is a nearly insolvent bank?

Bear Stearns, Lehman Brothers, Fannie ***, AIG, Washington Mutual all had derivatives fallout. Each time a financial giant around the world collapses, more counter-parties on derivative positions see their positions blow up and evaporate, possibly to zero. Remember that most of those blowups happened after I posted this message.

This is an area of serious concern. Financial reporting in this area is so poor that it is almost criminal, in my opinion. Investors should demand to know who the counterparties are, and what is the marked to market value of the derivative instruments.

http://forums.canadianbusiness.com/thread.jspa?messageID=281688

And to date, Canada’s symbiotic working relationship in peddling derivatives with America is still going on strong.

See: 

J.P. Morgan Selected By Government Of Canada For Expanded Derivatives Collateral Management Services

By Business Wire  March 3, 2010   

http://www.thestreet.com/story/10699540/jp-morgan-selected-by-government-of-canada-for-expanded-derivatives-collateral-management-services.html

Derivatives have been called “ticking-time bombs”.   Poster jcarsey said financial reporting on derivatives is poor in Canada. 

IMO, Canada should not be smug about Europe's or America's derivative crises; and lulled into thinking that Canada is a “ticking-time bomb” free zone country.

Still thinking Canada banks are safe?  Still want to invest in derivatives sold in Canada?

[MetalMeister]

That is suspiciously close to the same time frame that JP Morgan got out of MBS exposure.

Maybe your research can shed light on TD officers with ties to JP Morbid?

Here’s an article about one Canadian bank, TD Bank that made the correct decision in 2005 to sell off its derivative holdings.

[MetalMeister]

What are Canada's levies on taxes?

Personal income tax?

Property tax?

Others?

It would be nice to know countries and states that have no property tax.

[onlooker]

Here’s what most Canadian may be thinking about their taxes:

See:  http://www.youtube.com/watch?v=MaPKiYl3te0

Not by design, I once lived and worked in Hong Kong for an extended period of time.

From:  http://sidewindersview.blogspot.com/   Scroll down to April 22, 2010

Peter (Schiff) mentions that Hong Kong had no income tax and has stated he stands corrected that Hong Kong first imposes and income tax in 1947.  It has a top rate of 16%, a high personal exemption, and capital gains, dividends, and interest income are not taxed! Certainly not as good as no income tax at all, but a much better system then the one we have here!

What Sidewinder says of Hong Kong being a tax haven-like is true.

But, despite having to pay the much higher Canadian taxes; for me, I rather thrive in Canada instead of trying to survive in Hong Kong.  For my family and me, the relax, high quality good life in Canada outweighs any tax benefits my family may receive by living in overcrowded, super expensive, concrete jungle Hong Kong.

[onlooker]

I suspect that Americans are now paying equal to or much higher taxes than Canadians.  But, there may be a way out for certain groups of Americans.   

First, the following big step may be taken:

Emigrate to Canada & Beyond, and Leave U.S. Taxes Behind
September 14, 2009 by Robert E. Bauman J.D.

The objective of this migration is not to conquer, but to become Canadian citizens—and thereby reduce the American migrant’s U.S. taxes to zero.

Canada is not an offshore tax haven. Commonwealth and provincial taxes are relatively high. Except in specific programs designed to entice new immigrants to come to Canada (more on that below), there are few tax breaks for foreigners. However, little-known Canadian trust and tax laws, when properly employed, offer Americans a legal way to forever end the obligation to pay U.S. taxes—by becoming Canadians.

~   ~   ~   ~   ~

Tax-Free New Residents

However tough taxes may be for the average Canadian, wealthy immigrants can take advantage of tax-free loopholes available only to them. Here are some of the options for high net worth immigrants who come to Canada: …..

http://www.personalliberty.com/preserving-wealth/emigrate-to-canada-beyond-and-leave-u-s-taxes-behind/

Then, as a Canadian citizen and if one falls into a high tax bracket, the follow steps may be taken:

See:  Canadian tax dodgers: Part I
Posted: April 28, 2008, 4:30 PM by Diane Francis

http://network.nationalpost.com/NP/blogs/francis/archive/2008/04/28/canadian-tax-dodgers-part-i.aspx

See:  Canadian tax dodgers: Part II
Posted: May 03, 2008, 9:23 AM by Diane Francis

http://network.nationalpost.com/np/blogs/francis/archive/2008/05/03/canadian-tax-dodgers-part-ii.aspx

~   ~   ~

Canada is not unlike the U.S.A., Canada wants to crackdown on tax havens.

See: Canada Plans Intensified Tax Haven Crackdown, by Mike Godfrey, Tax-news.com, Washington

January 08, 2010

http://www.tax-news.com/news/Canada_Plans_Intensified_Tax_Haven_Crackdown____41042.html

[onlooker]

OL:

So he (Ed Clark, CEO of TD Bank Financial Group) did something almost no one on Wall Street had the foresight to do: He ordered his traders to ditch the risky but highly profitable positions. Over the next nine months, TD gradually unwound its derivatives holdings at a cost of more than $200 million in write-offs, which looks like a bargain compared with the $2.2 trillion in losses that U.S.-originated derivatives are expected to incur this year and next, according to the International Monetary Fund.

YC:

That is suspiciously close to the same time frame (2005) that JP Morgan got out of MBS exposure.

Maybe your research can shed light on TD officers with ties to JP Morbid?

Knowing that Canadian Banks have a symbiotic relationship with American banks, I think you are correct in suspecting that Ed Clark must have had got a good big ($200 million) tip from one of his allies to sell some of TD Bank’s derivative holdings.

You have burst my bubble thinking that a lone Canuck, Ed Clark could have made such a brilliant move all by himself.  What was I thinking?