Finance Committee on March 12th, 2009

[Maxime Bernier, Conservative, Beauce, QC]

Thank you, Mr. Chair.

I have a question for the Canadian Vehicle Manufacturers' Association. You recently appeared before the industry committee. Your organization said:

The Canadian government is definitely playing its key role through the offer of emergency liquidity funding, extension of credit to suppliers through the BDC and EDC and a secured credit facility, all of which are important, supportive, and highly welcomed measures.

You then said:

Now it's critical that these supportive measures be implemented as soon as possible to be effective and that the government policies continue to be implemented to support the industry in a global competitive manner.

My question is very simple. Do you still think the same thing today?

[Mark Nantais]

Thank you, Mr. Bernier.

Indeed we do, and there are steps that this government has taken that have been very helpful.

Certainly the automotive innovation fund has been very helpful in gaining new product mandates. It's a fund that should continue in the long term. That certainly applies to the secured credit facility, as I mentioned. As you've just mentioned, my testimony on Monday evening was that indeed it is a very positive first step.

Let's get it up and running. However, as I also said today, in terms of the size of the credit market in the auto industry alone, as we go forward, let us take steps on an ongoing basis to evaluate its size and the credit that will actually be available. We think it has to be increased in size.

[Maxime Bernier, Conservative, Beauce, QC]

I have another question, this time for Ms. Nancy Hughes Anthony. In your presentation this morning, you said — or rather, you wrote — the following: “Since so much of the trouble internationally has its roots in the U.S. mortgage market ...” in reference to the global financial and economic crisis. I believe you are absolutely correct when you state that the crisis originated in the United States, particularly in connection with the mortgage market. Some American politicians wanted to promote home ownership a few years ago in the United States, and as you know better than I do, they encouraged American banks to give loans to insolvent people, or people who were unable to make a down payment on a residence. They encouraged American banks to do so through Fannie Mae and Freddie Mac, which guaranteed these loans. Then, and you put it very well, these loans were turned into securities on the international market, some banks acquired these toxic securities, and now we find ourselves facing a financial crisis.

Much has been said about Canada's banking system. Here in Canada, the Canada Mortgage and Housing Corporation, the CMHC, has regulations that ensure that Canadians, in order to buy a home, must put down an initial down payment of at least 5% of the value of the dwelling in question. So we are not at all in the same situation as Americans are.

There has been much discussion about our financial and banking system; you said so. Even the World Economic Forum did not hesitate to state that our system is the most solid system in the world. President Obama even said that his country should use our system as a model. All this is very well and good, and very flattering, but I would like to ask you the following question: in practical terms, have Canadian banks and commercial banking institutions done things all that differently than other banks throughout the world?

[Nancy Hughes Anthony]

That really is a key question, and thank you very much for asking it.

I think that the Canadian regulatory system is certainly one advantage that we have over the Americans. In this regard, I think that you did have Ms. Dickson appear before you. However, as I say quite often, our banking system is structured quite differently in comparison to the American system. We have five or six major, Canada-wide institutions that have a number of diversified activities within their business plans. So that can help balance events in their markets to some extent.

You have seen that in the United States, some institutions were focused only on investment. Obviously, the repercussions of that investment focus were very unfortunate.

From a structural point of view, we have a system that puts us at an advantage, as well as a clear, compact regulatory regime. Stakeholders know each other very well, and are very familiar with the rules of the game. I was in Washington about one week ago, and I must say that from a regulatory point of view, their situation is so confusing that it is very difficult to even determine who does what, whereas here in Canada, it is very clear.

Furthermore, as you said yourself, the mortgage market is an advantage for us.

I see that the chairman wants to cut me off because I can talk about the proper management of banks for a long time. So I will stop at this point.

[The Chair, Conservative, James Rajotte]

Merci beaucoup.

We'll go now to Mr. McKay again.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I don't want to join in on the hallelujah chorus here, for goodness' sake. We are talking about banks and we are Canadians.

I don't know whether it's good luck, good management, or good intelligence, but I thought Ed Clark actually said one of the smartest things about the ABCP crisis. He said they tried to explain this product to him and he didn't understand it, so if he didn't understand it, he wasn't going to invest in it. I do wish that other bankers had actually followed that advice.

I want to actually direct my question to Mr. Nantais. I have a lot of sympathy for your situation, Mr. Nantais, and therefore a lot of sympathy for our own situation as a consequence. The growth in your market is elsewhere. It's not in North America. Your costs are here. Your costs are not terribly competitive. You have a huge capacity. You have to rationalize that capacity. And you're sitting on a whack of inventory and the inventory is not moving, notwithstanding all kinds of incentives on your part.

You come here quite legitimately, in my view, asking for somewhere in the order of $4 billion, $8 billion, or $10 billion worth of bailout, which will just cover off your burn rate for the next few months. You're asking for pension relief from the taxpayers, 70% of whom don't have pensions themselves. You say that the $12 billion the government is proposing is probably not adequate enough, and it should be up to $40 billion, because that market has dried up. I put it to you. That market dried up because the non-bank credit market has said effectively, “We're out of here. This is too much risk and we're not going to be in this any more.”

I appreciate I might have summarized that a little harshly. Nevertheless, is that somewhere close to the truth?

[Mark Nantais]

I'll agree with you that it is a bit of a harsh assessment.

[Some hon. members]

Oh, oh!

[John McKay, Liberal, Scarborough—Guildwood, ON]

I only had five minutes.

[Mark Nantais]

I'll try to be brief, as I would like my colleague, Peter Andrews, to comment as well on the banking side of things.

I'm not going to comment on specific liability plans, but it is really important for people to understand that, like the banking situation, the financial crisis we all face didn't start here, and the auto industry, like other sectors, is one of the victims of it in many respects. This is something that goes well beyond the three big automakers. It is not just us who are asking for a larger secured credit facility. It is the Toyotas and the Hondas of the world. It's the dealers. It's the suppliers. It is something that is not specific to us alone. It is something that is in the greater interest of the overall economy. When you consider it, this is not a totally self-serving request. In our sector specifically, there is a job multiplier of 7:1. We have roughly 3,500 dealers across the country in virtually every major community. This is something that will have pretty significant impacts across the entire Canadian economy.

Yes, we have companies that started deep restructuring well before the financial crisis hit. These companies have taken major steps now, which are reflected in our viability plans, to restructure. It does include wage reductions. It does include concessions on the part of labour, on the part of all the stakeholders. Government asked to be consulted and be part of the viability plan and restructuring. In an industry in Canada where we are 12% of manufacturing GDP, I would suggest it's really critical. The cost of doing nothing, as I touched upon in my earlier statement, is that you have billions of dollars of lost tax revenues to government at all levels and you would have a huge burden in terms of social assistance programs that would have to absorb many of the dislocations of literally hundreds of thousands of workers. This is from studies conducted by outside parties.

I can understand why you would frame the situation in the way you have, but when you look at the importance of our industry and at its interdependence in terms of our supply chains, and when you look at its impact on local economies right across this country, this is something, we believe, that needs to have serious government attention in terms of making sure we come out of this deep recession as quickly as we possibly can.

Peter, do you want to comment on the banking side?

[Peter Andrews]

Yes, if I can.

When you look at the ABCP market--and you commented about Ed Clark specifically; he was talking about the non-bank side and the derivatives and those kinds of things. His bank was an active participant in the ABCP market, supporting and selling automotive paper. That market also was captured in the collapse, so while he didn't understand that piece, and frankly nobody did, his bank and others clearly understand the value of the automotive sector and the paper it generates for retail customers.

Concerning Mrs. Hughes Anthony's comments, what is happening is their volumes are up but they can't possibly support the volume that has disappeared for us, from a liquidity standpoint, to lend money to consumers, to Canadians, to purchase vehicles. Our own book business is just about one million Canadians, and that liquidity is gone in that marketplace.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Doesn't this whole thing just spin in on itself? As a consumer, Mike Wallace being the classic example, looks at buying a car, they are wondering whether that car company will exist in six months. So consumers will hold off on the purchase. The more they hold off on the purchase, the more you folks have to come to ask for money to keep yourselves alive. It's a pretty vicious cycle.

[Peter Andrews]

Yes, I think there is a vicious cycle. I'll separate the two pieces of money we're talking about. Consumers are avoiding purchases of any kind right now, not just specific manufacturers. The entire market in the month of February was down 27%. A lot of that is driven by availability of credit, and that is a liquidity issue, and that drives costs, so costs are higher, liquidity is lower. There is only so much a manufacturer can do to generate the market. We can assist by making credit available, but if there is no liquidity to make that credit available, it can't be done.

[The Chair, Conservative, James Rajotte]

Very briefly--

[John McKay, Liberal, Scarborough—Guildwood, ON]

If the government steps in and picks up the asset-backed commercial paper market, say it's $40 billion, and the market still doesn't pick up, the government is stuck with a $40 billion problem.

[Peter Andrews]

I would say to you quickly that the paper has a maturity and customers are making payments. That's how the government gets its money back. The bet is not on the car companies, nor on the individual captive; the bet is on the Canadian consumers and their ability to repay the loans we make to them. In fact, their performance is exemplary around the world. I know, speaking for our buck, that it's fantastic.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McKay.

I'm going to take the next Conservative spot. I want to follow up on what Mr. McKay and Mr. Wallace have been talking about in terms of the credit issue.

We had the Bank of Canada in and asked the classic question that we all get asked back in our ridings about the overnight rate going from 4.5% in 2007 to 0.50% in March of 2009, and the prime rate going down, and the variable mortgage rate going down—I think Canadians see that. But in the case of individual Canadians like Mr. Wallace with his line of credit, and especially for my area, with small and medium-sized businesses.... There's an industrial park in my constituency, in Nisku, from which people are coming to me saying they've been creditworthy customers for years. They understand the increase in the cost of credit, based on what's happening in the world financial markets, but they have, they say, a group of assets in place, have never missed a payment in 10 years, and their cost of credit has gone up.

We have also heard from other witnesses saying that credit is available, at least from their institutions, but the cost of credit has gone up. They say their institutions are saying to them: you're in a sector, a market, or an area, so your costs will go up by two points. That's just the reality of the situation.

Even in their response to us, the banks said there are a couple of factors. There is obviously the cost of credit, which has gone up. But they are supposed to value individual cases and individual customers, and this is a real challenge for us to deal with.

I'd like to put the question to the Canadian Bankers Association. Is there a better way to deal with these small and medium-sized business owners?

[Nancy Hughes Anthony]

We have spoken to many members around this table, and we also hear those issues publicly. This is a tough time for particular sectors. We've certainly been hearing about the auto sector.

The banks are analyzing these things on a case-by-case basis and they are obviously taking into account, as we've mentioned, the cost of funds. They are also taking into account the risk profile.

I was cheered, because the Federation of Independent Business appeared before the Senate banking committee yesterday and talked about their membership and how, among their membership—if I can summarize the results of their information—the difficulty was not so much with existing customers. It was new businesses trying to get additional credit or additional types of loans, when there is a new reality whereby they are asked to produce further collateral and so forth.

I certainly think the banks should be able to offer an explanation to the customers about why this is happening. Very often, someone thinks perhaps there is something wrong with them, but these are general credit conditions that are deteriorating.

Terry, do you have any further comment?

[Terry Campbell]

The only thing I would say in addition—and this is really enforcing the point that Nancy has made—is that the banks will make their credit decisions on a case-by-case basis. They will look at your balance sheet, who your suppliers are, what the deals are, the level of debt you have, and they make those decisions accordingly.

They try to stand by their customers when they can. We've talked to our bankers about this. They have a lot of tools in their tool kit that they can bring out to support those customers. But again, it comes down to case-by-case circumstances.

[The Chair, Conservative, James Rajotte]

The concern resulting from this—and Mr. Pacetti raised it in a previous meeting—is that if you have a situation whereby there's a lack of liquidity in the markets.... You mentioned that the Canadian banks are stepping up, but if you have institutions leaving the market entirely, then you have sectors like the auto sector saying that the Canadian secured credit facility is a good thing but that it needs to be much larger. Then people in other sectors say the same thing.

Liquidity is a challenge in all sectors. Certainly in forestry and even in the energy sector it's a challenge. The government has been very proactive, but it's being asked to take on a bigger and bigger role through BDC, EDC, the Canadian secured credit facility. Where does it stop? Is there something else we can do whereby we're not putting the government's and taxpayer's money at so much risk?

[Nancy Hughes Anthony]

I was going to mention that. I do think, and I hope, this is temporary. I don't know what “temporary” means these days, but I certainly hope this is temporary--touch wood.

This notion of working on the BCAP, as it's called in the budget, the business credit availability program, is getting much more dovetailed with BDC and EDC.

I'm very encouraged by what I've seen so far in terms of the way our financial institutions are working with BDC and EDC. So I'm hopeful that rather than saying, well, sorry, that doesn't work for us, go see BDC, the institution will instead go with the customer and try to work something out. At the end of the day, I do think that is going to have an impact, but it obviously is going to take some time, as is this leasing facility.

As for the question, what is enough, Mr. Chair, I really can't answer that question. I don't think any of us can at this particular point.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Maloway again.

[Jim Maloway, NDP, Elmwood—Transcona, MB]

Thank you, Mr. Chairman.

I'd like to follow up on something Mr. Campbell just said.

Would it not be a fair assumption to say that three or four years ago, when there was a lot of competition in the markets, banks were falling all over themselves to approve mortgages—I think we've seen evidence of that—and that just like the insurance business there's a cycle? When you get into loose underwriting, the companies are cutting their rates and fighting for business and they don't really follow solid underwriting practices, such as with applications and stuff like this. Then all of a sudden the crunch hits, markets tighten up in the business, and then overnight they're not taking new business. Instead, they're making you fill out big applications and stuff like that.

Is that not what's happened here in the banking business as well? As a result of that, people start taking it personally and think the banks are picking on them.

[Terry Campbell]

I have a couple of observations, Mr. Maloway.

First of all, again, we have to be really, really careful not to conflate what's happening south of the border with what's happening in Canada. I do think that south of the border we saw a lot of underwriting problems and loose practices, and those have come back to haunt us.

In Canada, by contrast, we've always prided ourselves—and this has been the fact—that we are very prudent, careful lenders. And, quite frankly, Canadians are very, very careful borrowers; they pay back. Our lending standards, our credit adjudication, has not changed. As a result, we see in the Canadian marketplace a very solid, very secure set of mortgage conditions. We haven't had the problems of the United States—not even close. So when the cycle turns—and of course there is a business cycle, as you know—the strength of our system is that we remain prudent lenders. We don't change our credit standards.

Now, we have to take into account the much higher risk out there, and we have to be extra careful. But it's not a case of “slack before“ and “careful now”. I think the strength of the Canadian system going into this crisis is evidence of that.

[Jim Maloway, NDP, Elmwood—Transcona, MB]

Well, I think people, or the public, would disagree with you on that. Perhaps it is a risk factor that you're seeing in terms of the strength of the job market and so on, such that before you were optimistic, so you approved mortgage applications right away, but now things are a little bit shakier, so you might not accept an application that might only have been a little bit questionable before. Just because things are tougher now, the underwriter might look at it a little more strictly and say, “I'm not going to take a chance on that because I don't want to have to foreclose on this loan in six months.”