The headlines read that Moody’s, one of the three major ratings agencies along with Standard & Poors and Fitch’s, have downgraded the ratings of six Canadian financial institutions, the Bank of Montreal, National Bank, Bank of Nova Scotia, CIBC, TD Bank, and Caisse Desjardins. The action is due to the concerns that the agency has about exposure to household and consumer debt and the possibility that Canadians might nor be able to repay all of the money that they’ve borrowed for mortgages or the vast sums that consumers have posted on their credit cards and through home equity loans. This is particularly interesting in the wake of finishing Michael Lewis’ tome The Big Short, in the latter stages of which the role of ratings agencies in the the meltdown of the last five or six years becomes very clear. In effect, all the big Wall Street investment houses were able to convince the ratings agencies that many of the CDS and CDO instruments that they were floating around were worthy of a triple-A rating, even though they were essentially bundles of sliced and diced sub prime loans made to people known not to qualify for traditional financing. Without spoiling the story, it seems clear enough, if you believe Lewis, that the ratings agencies failed to research the instruments, or, because of the fees they collected, were willing to overlook the essentially inherent risk built into the underlying loans that was bound to affect the worthiness of the derivatives. I just fins it mildly ironic that anyone still believes any of what these people say.
However, this does not mean that we should have limitless faith in the above institutions, or any other such group, as likely, Moody’s is covering it’s posterior and the risk factors may be far greater than the ratings agency is willing to admit. Mark Carney, governor of the Bank of Canada, has touched none too delicately on this point on several occasions over the last couple of years, which is rather a no-brainer as real estate prices have continued to climb until recently while incomes have remained fairly static, and while the push has continued for the consumer to carry the weight for growth in the economy, particularly during the months leading up to the annual Christmas spending binge. Canadians are supposed to continue consuming, to buy increasingly pricey housing, and to contribute to RRSP, TFSA, and RESP accounts in a zero-sum income situation. Something doesn’t compute, but, then, most of what comes out of our current political régimes makes little sense.
Of course, as in the sub prime maelstrom, the current round of consumer and student debt might produce a round of defaults which, in turn might jeopardize the liquidity of the banking institutions to the point where we could have massive bankruptcy. But the banks seem not to worry: the Bank of Canada will step in, the taxpayers will pick up the tab and we can go back to rebuilding a bubble. Notice that no one, in the wake of the investment fraud that brought on the crisis of 2007-08 (and ongoing), went to prison, that the TARP funds and subsequent tranches of quantitive easing have largely served to prop up the same institutions that caused the mess in the first place, meaning that Goldman Sachs, Bank of America and Morgan Stanley have largely managed to substitute the real money derived from what people produce for the thin-air funds they created out of sub-prime loans. You have to marvel at the ingeniousness of the scheme and at the dullard taxpayers who put up with this sort of result. Letting the banks fail may not be an option when the real economy is still tied up in the ability of the banking world to extend credit and where governments and pension funds are dependent on the financial community to fulfill their obligations, but surely there needs to be some personal and corporate liability for the incompetence and malfeasance that produces such disastrous outcomes, and where the public who pay to bail out the bankers get control over the assets that should have been forfeit once to extent of the bungling and fraud was clear.
