Finance Committee on April 2nd, 2009

[Ian Russell]

—is I think a very important one, and it often gets missed in the debate. What we're finding in Canada, really, is an inability to implement policy quickly. We cannot implement the kinds of regulatory reforms we need fast enough. The cause, in my view, is a consensus-driven approach that we have now with a multi-jurisdictional system, and that is absolutely something that has to be solved going forward. I think a single regulator would solve it.

I could give you many more reasons, but those are two.

[The Chair, Conservative, James Rajotte]

Thank you very much.

I'll go to Ms. Hall Findlay, please.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you very much.

And thank you very much, all four of you, for being here.

I'm afraid I'm going to have to go back to you, Mr. Bethlenfalvy.

There have been, of course, a number of questions already this morning. We're trying to ask specific questions about the non-bank ABCP that we started to see problems with in 2007. But the answers we're getting are not specific. The answer we're hearing is the global financial crisis.

We had a question about TD Bank in particular, about Ed Clark and Don Drummond both having said that they looked at this stuff, didn't get it, and didn't buy into it. And your answer was, “Well, the TD Bank does ABCP”. There's a difference between the non-bank ABCP...there's a difference between the products out there generally and the specific batch that caused, and I would suggest continues to cause, considerable difficulty for an awful lot of people. So I would like more specific answers on the batch of non-bank ABCP that is actually at question.

I will repeat a little bit of what my colleague Mr. Mulcair focused on, and that is the credit quality. Your answer was the principles of diversification. Then the question was, “But you can't realize it. It's all bunched in. You can't realize on the specific creditors that form part of the larger securitization.”

I don't think it's just a question of not being able to realize; it's the underlying value of what was there. And you had an answer that had to do with liquidation value. So I would say that it's not just the fact that you can't realize on the individuals, but rather that the valuation underneath was clearly much less than anything that would have warranted a triple-A rating. Liquidation value—clearly much less than anything that would warrant a triple-A rating.

I have yet to hear anything from you today that suggests you wouldn't do the same thing all over again. I haven't heard yet anything that suggests that “we actually made a mistake”. I would really like to hear from you a more specific answer, not general global crisis. What on earth possessed you to give a triple-A rating to that non-bank ABCP that so clearly did not have that underlying value?

[Peter Bethlenfalvy]

You've said a lot of things. First, we did focus on the underlying credit value, and we stand behind our ratings and continue to do so.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Let's just get this straight. Knowing what happened, you still stand behind the triple-A rating you gave to that non-bank ABCP?

[Peter Bethlenfalvy]

What we knew at the time, based on the assets and the portfolio.... First, what we'd do differently is the credit spread movements that were outlier credit spread movements. We've since changed our models to incorporate the credit spread movement that we saw, which is similar to what we saw in the early 1930s. That's one point.

Second, I talked about market disruption. We've changed our backup line requirements so that they're unconditional funds, because when the market froze, it didn't matter whether the assets were good or not underneath. What happened was that the market froze and some banks didn't fund. We've changed that to a global liquidity style.

Third, and I keep coming back to it, for this market to continue--and it continues, not the non-bank but for bank-sponsored paper or any future sponsored paper, and there is some that's non-bank--is the transparency. You've got to know what is...with more disclosure. The structured markets' evolution is 20 to 25 years. In 1934, the SEC mandated that you had to make financial statements public. Before that, you'd buy securities without knowing what companies' statements were.

We've got a longer evolution in corporate. We're evolving in the structured market. I don't think it would be wise to go to zero in the structured market.

[Martha Hall Findlay, Liberal, Willowdale, ON]

And I understand....

[The Chair, Conservative, James Rajotte]

Last 30 seconds.

[Martha Hall Findlay, Liberal, Willowdale, ON]

In prior meetings we did talk about the move to global lines, and I understand that. However, I think the market froze because of people recognizing that maybe the underlying value simply wasn't there.

You've talked about disclosure and transparency. With respect, the reason people rely on credit ratings is that you can give somebody a 50-page prospectus. You can give them all that disclosure. We all know that people will still rely on the credit-rating agencies.

I'm just interested to hear your comment, that you still would have given this group of non-bank ABCP a triple-A rating, given everything we've seen.

[Peter Bethlenfalvy]

Based on what we knew, we stood by our ratings. Now we win. We continue to write a big chunk of the notes, and they're single-A, but obviously with different characteristics through the Montreal accord. We do rate the bank-sponsored programs triple-A, R1 high, with global liquidity standards, which we initiated. No other rating has initiated that.

At the end of the day, we won't exist if our ratings aren't credible in the market. Investors and other parties are not going to use our ratings; that's our capital. We think we've made the improvements we need to make. We think we've got the proper oversight with the global securities regulators. We know we have to continue improving on our job to exist.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

We'll go to Mr. Menzies now, please.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair, and thank you to our witnesses. I also feel bad that some of our other witnesses haven't had a chance to answer questions.

Mr. Phillips, I will direct my question to you about a comment you made, and I hope you can put it in context. We've heard from the bankers and the banking associations about access to credit, and that's what this study is supposedly prefaced on; it is making sure that people have access to credit. Your comment was that you will not pull back. We heard from the banks that they're increasing their lending portfolio, and frankly that's not what we're hearing from our constituents. That's who we're here to represent, our constituents. Whether it's an issue of them being creditworthy customers or not, that's not our judgment call, but we're getting calls from our constituents about how they get access to credit. The lobster fishermen, for example, are having trouble accessing money for their very short season, which is over on Mother's Day. I'm concerned with farmers in western Canada getting enough liquidity to put a crop in this spring.

First, is your system any different from the big banking system in Canada? We appreciate that you represent a lot of our rural constituents. So maybe give us a comment on that.

[David Phillips]

Well, I think we are different. We're committed to member service, we're committed to working with our members, and we're committed to the communities in which we're active and in which we're located. The ethic or ethos is to work with the members. We know them. We're traditional lenders in that pure sense, that loans are made on character. Deposits are sourced in the community and then loaned back into the community. So there is a big difference.

What I am looking at are the aggregate numbers. When I look at the aggregate numbers, I see an increase in lending across our system in the fourth quarter of 2008; it was an increase of 1.6%. That was actually the time when the market was dropping. It was when we really hit the decline. What is interesting, when I look back at the numbers, is that it is higher than in the first quarter of 2008. The second and third quarter increases were higher than 1.6%, but there's no real evidence of a decline in the fourth quarter of 2008. Our numbers for the first quarter of 2009 aren't out, but I would be very surprised, from anything I hear anecdotally across the system, if we were to see a decline across the system.

What's notable—and I mentioned the Canadian business owners strategy—is that we've really committed to small and medium-sized business lending. Two years ago, we initiated the first national advertising campaign in the credit union system in over 25 years, directed at increasing our presence and increasing the awareness of the services that credit unions can provide to small and medium-sized business. We had done some calculations and had seen that we actually had a fair share of that market, but the level of awareness of it was very limited.

So we got the system together and said this is something we need to address. We launched the campaign, with a lot of other parts to it, including a network for small and medium-sized businesspeople to connect with each other, and training for our own credit union staff to sensitize them to the needs of small and medium-sized business. We're going to keep that going. We're not ramping it; we're going to keep it going and keep promoting our services to small and medium-sized business.

So I'm confident that our numbers will increase. We certainly haven't seen anything that suggests that, on an aggregate basis, there's been a decrease.

I would like to ask Mr. Luimes to comment, though, because he's a real on-the-ground lender and can give you that perspective.

[The Chair, Conservative, James Rajotte]

Take about 30 seconds, please.

[Ralph Luimes]

We have had increased demand. I'm just going to speak to our operation at HALD-NOR Credit Union. We are not dependent, and have not been historically dependent, on third-party paper to increase our capacity. We've been able to handle it based on our financial statements, our balance sheet.

We are at the maximum, and we are borrowing. However, we are receiving a lot of increased interest. Obviously, lending rates are down. Everybody wants it. We are in a market situation now in which we have to particularly assess the risk and we're going to be cautious.

I think that's the tension. People say, “Opportunity—go, there's innovation, it's small, agile. Here we come. Costs are down.” And we have to say, let's watch the risk here. So we pick our spots, but we're definitely in the game. We continue to plan to go forward.

We consider the small business market the most agile, the most innovative, and it's going to be the heart of carrying us through this recession.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Mulcair.

[Thomas Mulcair, NDP, Outremont, QC]

Mr. Russell, a question for you.

I will read a headline from today's Toronto Star.

YESTERDAY: How regulators have failed to crack down on stock market miscreants

--their term, not mine--

while developing an international reputation for inaction and ineffectiveness.

TODAY: How a big-budget police squad set up to take on corporate crime degenerated into a bureaucratic mess with few results.

That bureaucratic mess is IMET, the integrated market enforcement team. It is exactly as the Toronto Star describes it today, and we've been saying it for some time. It doesn't work--centralized, single, Ottawa- based, and incompetent.

What is it that makes you believe that bringing the regulation of markets to Ottawa would somehow make it work? Let's look at some facts. In Quebec there's the rather famous Vincent Lacroix case. He's in the slammer right now doing 8 to 12 years, so he's in appeal on the length of his sentence. He's been convicted on dozens of regulatory cases in Quebec under the provincial statutes. He faces several thousand criminal charges under the Criminal Code of Canada. Not the first day of the first trial on the first charge has ever been held under those criminal charges, and the only reason he's in jail is because Quebec's Autorité des marchés financiers does a very good job of enforcing its rules.

I find when I meet groups that just affirm that it would be better if we just brought everything together in Ottawa, like IMET.... I'm not the one who is saying they're incompetent, the Toronto Star is, but I happen to agree with them, because they don't get results. What is it, other than your sentiment, your feeling, and I dare say your prejudice, that says that somehow Ottawa is good at this and it would be really great if we threw more bureaucrats at it, rather than the people who are actually fighting a little bit, like Mr. Bethlenfalvy's team? If you don't do a good job of regulating your market, people won't come to you. So Quebec is doing something not only for individual investors and for the corporations involved, it's also doing something for itself, because people will come to a place that is well structured and well regulated.

I'm trying to get into your head and figure out, other than what I detect as being just a pro-Ottawa prejudice, a centralizing tendency, what makes you believe factually that they can actually do the job better.

[Ian Russell]

I'm happy to respond to that. You've covered quite a lot of ground and a lot of points, and I can appreciate where you're coming from. I'd like to parse your comments and deal with each one separately.

The first one I'll deal with is your comment about Ottawa, because I'm the last person who would think that it should be set up here and run as a federal bureaucracy. When I talk about a single regulator, when our industry talks about a single regulator, we're talking about a national regulator. So the model I'm thinking of is a model that would have federal participation, but it would have a decision-making process that essentially would integrate all of the provinces in that model. It would be a national regulator. It could be located in Montreal, and that would be a good thing. It could be located in Vancouver. So I think the first thing to say is that my vision of it is not Ottawa-based and it is not a federal bureaucracy.

[Thomas Mulcair, NDP, Outremont, QC]

Time is short, and I know you've had a long question. I'll leave the rest of the time to you, but I'll get in this last bit to you.

You talked about the failure of regulation and you said it was not so much here, but in the U.S. Leaving you with the rest of my time, I would like you to incorporate in your answer how you feel that reinforces your position. In the United States the FCC is a single, centralized regulatory agency. Especially in the Madoff case, they had all the information. Go online. It gives you shivers to realize they were given all the information on Madoff and they did nothing with it. It's there, it's centralized, they're incompetent. So I think the message is we're getting it wrong. It's not a question of centralization, but I said I'd leave you the rest of the time and I will.

[Ian Russell]

Thank you very much. I appreciate it and I do appreciate your question.

[The Chair, Conservative, James Rajotte]

Thirty seconds, please.

[Ian Russell]

The second point you mentioned was the Lacroix case, and I agree. I think the Quebec Supreme Court acted vigorously and I think the AMF did a great job on that. What concerns me is the provinces do have that jurisdiction to go after white collar crime. I would agree that with the federal model--and again we're talking about a national regulator, a little different--the provinces haven't grasped the mettle as much as they should have. I'm thinking of Ontario and I'm thinking of B.C., whereas Quebec, with the way they went after Lacroix, I think was a good example. One of the things I have said is the provinces should deal with white collar crime more vigorously because they do have the authority to do it, to take on criminal cases.

The second point you mentioned was about IMET, and you're right it hasn't worked. It's been a failure. My assessment of the reason for it is, first of all, I'm not sure it was well planned and well organized, and I think the former superintendent of OSFI had a number of reasons why it had failed. Again, it comes back to coordination at the federal-provincial level. You're right, IMET had the RCMP involved in the process, but it also was engaged with provincial securities regulators and enforcement people. My understanding is that this level of coordination and cooperation between the provincial levels and the RCMP that has the responsibility with Interpol just didn't work very effectively.

So there are two things. First, I don't think the entity itself was well organized and run well. Secondly, I think it did have this fundamental federal-provincial coordinating problem that influenced it.

[The Chair, Conservative, James Rajotte]

Very briefly, if you want to finish.

[Ian Russell]

Mr. Mulcair made a very good point about the U.S., and the SEC probably should not be held up as the best example of regulators. They certainly had failures. But my sense is that the failures are not so much because it was national but more because it just didn't do the job it was supposed to do.

The other point that's happening in the U.S. is that you are going to see an integration of regulators, which, as I said earlier, is important for Canada because we need to have good cooperation and coordination among all of the regulatory bodies. That's going to happen in the U.S. between the fed, the treasury, and the SEC, and we need it to happen in Canada.

Thank you.