38 replies to this topic

[Caramia]

""Financial 9-1-1: Implications of the Economic Crisis -
The UVic President's Panel on the Economy"

Tuesday, November 18th, 2008
7:30 p.m.
UVic Centre Auditorium
Admission is free; but please your reserve seats
Light refreshments to follow.

How might the current economic crisis affect your house, your job, your future? Gain insight and a fresh perspective on the global financial crisis from this panel discussion featuring business, economic, and financial experts from UVic and the community.


Speakers: Graham Voss, UVic, Associate Professor, Department of Economics
Basma Majerbi, UVic, Assistant Professor, Faculty of Business
Tom Siemens, RBC, Vice President Commercial Banking
Robert Jawl, Jawl Properties, Principal
Tony Gage, Head, JEA Pension System Solutions

Please pick up your tickets from the UVic Ticket Centre, located in the University Centre B Wing Lobby by 7:00 p.m., half an hour prior to the event. There is a $2.00 flat fee for parking on campus on weekday evenings and Saturdays. Please ensure that you give yourself additional time to purchase your parking pass from a parking lot kiosk. Parking under the University Centre Building is limited, and is still $1.00 per hour.

[Caramia]

New info on getting tickets....

“Markets, Money, and the Meltdown: the President’s Panel on the Economy”
Tuesday, November 18, 2008 at 7:30 p.m. in the University Centre Farquhar Auditorium
Although this event is free of charge, advance tickets are recommended through the UVic Ticket Centre, 250-721-8480 or ticket@uvic.ca

Sponsored by the Office of the President, Faculty of Business, Faculty of Social Sciences and the Department of Economics
—30—

Media contacts:
Paul Schure (Economics) at 250-721-8535 or schure@uvic.ca
Maria Lironi (UVic Communications) at 250-721-6139 or lironim@uvic.ca

[househuntvictoria]

Tickets are all gone now. If anyone has any, preferably an extra one or two, please let me know. I'd really like to attend and "live blog" via Twitter. I'd be willing to make it worth a pint or two.

[spanky123]

Nice to see UVIC putting something like this on but I question how much useful insight you are going to get given the lack of depth of the panel.

[Caramia]

I don't have an extra ticket but I'll most definitely be taking notes and be happy to post them here afterwards.

[Ms. B. Havin]

^ If you could get Mike to let you put the Cover It Live app on the VV blog, you could ...cover it live! (I'm assuming you'll have your laptop along, that is.) (Or sign up for a Twitter account and tweet it there, also live!)

[baconnbits]

that would be great if someone blogged it
the depth is more than adequate......two profs to provide excellent theoretical insight
RBC commercial banking head, is the best you can do in the victoria community for banking
no idea about the pension solutions company, but i'd imagine they do funds management for pension money?
robert jawl, that's not the older one apparently it's the younger one who worked for four years at KKR, the biggest and best private equity firm, in real estate finance and got out just before the crash
that should provide some real insight

[househuntvictoria]

that would be great if someone blogged it
the depth is more than adequate......two profs to provide excellent theoretical insight
RBC commercial banking head, is the best you can do in the victoria community for banking
no idea about the pension solutions company, but i'd imagine they do funds management for pension money?
robert jawl, that's not the older one apparently it's the younger one who worked for four years at KKR, the biggest and best private equity firm, in real estate finance and got out just before the crash
that should provide some real insight

Dunnery Best is a local. I haven't seen him in a while, but he is far better that the RBC guy in terms of recognition. That said, I don't expect anything "revealing" to appear tomorrow, but given the "free" nature of this event, there must be something somewhere, buried as it may be, that is worth reporting to those of us on the outside/sidelines/one-foot-on-either-side-of-the-fence/down-on-our-knees-praying-this-is-just-a-blip/did-I-forget-anyone?

I will be there doing my best to get in and twittering it, just for personal learning more than anything, but if anyone has a spare ticket, please try to get in touch with me tomorrow, seek e-mail, I check it obsessively.

[Caramia]

I don't see something like this as insiders reporting out as much as getting to look at a few other pieces of a very very large puzzle. Even after we pool our puzzle pieces, the puzzle's far from solved.

Hopefully they have corner pieces, or an eye, or something else distinguishable, instead of what I've got to offer, which so far can be best characterized as "yet another piece of sky."

[Caramia]

Well it was a really interesting meeting. I got 8 pages of notes, and I will try to add them here over the next couple of days. Maybe if househuntvictoria got in he can supplement them with his own, and between us we can provide the entire picture.

[househuntvictoria]

Well it was a really interesting meeting. I got 8 pages of notes, and I will try to add them here over the next couple of days. Maybe if househuntvictoria got in he can supplement them with his own, and between us we can provide the entire picture.

I wasn't able to get in. We'll have to rely on you.

[Chris J]

Thanks for doing that Caramia. I have been curious for days.

[Caramia]

Markets, Money & Meltdown - The president's panel on the economy
The session was taped and will eventually be available on the UVic Website. UVic and Times Colonist sponsored the lecture. 1,123 people attended.

Intro - David Turpin (UVic President) & Moderator Lucinda Chodan (TC editor in chief)

Turpin: The global economic crises comes after a long period of steady economic growth and more and more connectivity between global markets. The origins of the meltdown are not a mystery, but the implications are still a matter of quite a bit of debate. Timing: The results of the G20 meeting last weekend in Washington is going to have an effect on the economy. Some trivia: G20 was a Canadian innovation. [more on why the G20 meeting will have an impact later]

Chodan: Even seasoned experts are amazed at how fast change is happening, and how fast it is spreading to the global market. A few months ago Citybank was the second largest bank in the USA today's headlines show it cutting 50,000 jobs.
In Canada, our economic growth has been fueled by high resource and commodity prices, not faulty lending practices like the USA. This has in turn caused real estate to go up. With the meltdown these resources and commodity prices are falling fast, which is affecting Canadian real estate.

First Speaker: BASMA MASERBI - Assistant Prof, Faculty of Business UVic.
Topic: Overview of the Crises

Bad financial news daily, but concern for the financial sector has now become concern for the "Real Economy."

The US Housing Bubble's collapse caused the collapse of securities, which caused the collapse of banks, followed by massive liquidity shortages, which stopped companies from being able to make payroll, buy supplies, etc

Who is to blame? This is a subject of debate - some of the culprits are:
- Interest rate policies
- Excessive bank leveraging (up to 30X equity) [this gets explained later]
- complex derivatives market, particularly default swaps [awesome powerpoint image of a bunch of fishermen with their lines all tangled together in a big knot, and some of them drowning and dragging the others down]

Impact on Financial Institutions:
- total reshaping of banking sector
- tightening of credit situation

Impact on Stock Market
- Record volatility in US stock market
- Worse than 1929 crash
- Canadian volatility is higher than US: CND 11: USA 9 on volatility index.

Impact on Real Economy
- There is a fair amount of debate if this is going to be a recession or depression.
- Global recession is defined as 2 concecutive quarters of negative GDP growth.
- Best case scenario compares this to the Japanese recession of 1990-1993 which also started with a housing bubble.


[more to come...]

[Caramia]

Speaker #2: Graham Voss, Assistant Prof, Dept of Economics, UVic
Topic: The Real Economy - How the Financial Crises affects the Real Economy, in particular the Real CANADIAN Economy.

What makes this crises unprecedented is the SPEED & SPREAD. This will forever change the way global and national economic policy is made in the future.

1) Current situation in Canada
CREDIT: The "Blood" of the economy. When it stops, companies die. Current situation like a very bad case of chloresteral in the credit veins, clogging them up.
- Credit crises is nowhere as severe as in the USA due to less risky banking policies.
- Crises started in the USA in the summer of 2007 when credit started to get harder to get in America.
- Canadian credit was still flowing until August 2008.

PROJECTIONS (disclaimer, major uncertainty, but these are the best numbers we can get)

Annual % of GDP
Country 2008 2009 2010
Canada... 0.6 .... 0.6 ..... 3.4
USA....... 1.4 .... -0.9 .... 1.6
Euro ....... 1.1 .... -0.5 .... 1.2
Japan ...... 0.5 ... -0.1 .... 0.6

So the Canadian situation looks much better than the global situation but it is still some of the lowest growth in years, comparable to the recession years of 1982, 1990-1991

So why are Canadians experiencing problems if our lending practices were solid?
a. Household Wealth
- Household savings are suddenly smaller
- Canada historically maintains a very low rate of savings, around 2-3%
So Households will start saving more, because people feel uncertain, they will save as a precaution.
b. External Issues
- Canada is a large exporting economy
- Our major trading partners are in recession so demand for our commodities is falling, and so is their price.

But we are still doing very well compared to other countries. To compare our problem with the USA's, their credit issues are 10:1 what Canada's are.

2) Economic Policies - Global & National
Everyone was very skeptical about the meeting of the G20, as well as of the central banks responses. However, policy makers are doing exactly the right things to turn this around. Response has been rapid, and imaginative.

There are three things policy makers must do:
1 - Restore credit markets
2 - Manage economic downturn
3 - Financial market reform

National Responses: Central banks were always last resort lenders, however now they have taken on the role of primary lenders in a HUGE way. Both the Bank of Canada and the US Federal Reserves have responded this way, restoring liquidity to both markets.

Global Responses: The G20 meeting surprised everyone by how effective it was. The largest economies in the world all came to the table with a commitment to an unprecedented level of cooperation, harmonization and improved transparency. This has caused a massive increase in confidence.

Why? All research shows that if policy makers decide to go protective/fortress mentality, raising tariffs and undervaluing exchange rates, then recessions are much longer and deeper overall. These protective measures basically shore up one country at the expense of the others, but as we have seen by the global spread of this US crises, no economy is an island anymore. So the good news is that the G20 all agreed not to do this.

[more to come....]

[Ms. B. Havin]

... A small visual interlude while Caramia continues to compile her notes...



SOURCE

[Caramia]

[This guy was incredibly interesting. I took 2 pages of notes and I still missed some interesting parts... sorry]

Speaker #3 - TOM SIEMENS - Vice President of Commercial Banking, Van Isl South, Royal Bank.
Topic: Banking 101 and Canadian Banks

Tom has been in banking for quite a long time, he saw the crises of 1982, 1992, so he's "seen it all" His most important point is that Canada is not the USA, especially in the banking sector.

Banking 101

Banking is a high volume, low margin business. There is approximately a 3% difference between savings interest rates and loan interest rates.
Of that 3%:
1.5% is spent on overhead - keeping the lights on and the staff paid
0.5% is write offs for bad loans.
1.0% is business profit
So banks have to be right 99% of the time just to break even.

Capital structure: Your debts are the bank's assets. Your deposits are the bank's liabilities (they owe you that money)

Canadian Banks:
75% is savings accounts - VERY stable.
25% is from large pools of global investment wholesale. Very unstable, can disappear overnight.
Banks also have a capital base, which is their equity (how much $ they actually own) Canadian banks can lend $10 for every $1 they own. So they are leveraged 1:10

Compare this to the USA/Wall Street:
Much higher percentage of wholesale (large pools of global investment), in some cases almost ALL wholesale.
Leveraged at a much higher rate, as high as 1:30.

So if 1 trillion dollars is lost, that is at least 10 trillion dollars that has disappeared from the credit market. ...> MAGNIFICATION
- Risk Allocation Models:
If a loan is considered more risky we allocate more capital to the loan. If a loan seems less risky we allocate less capital. So that magnification is reduced if the bank thinks the loan has a good chance of defaulting.

So what went wrong in the USA?

Regulation:
- In the 1990s US public policy makers decided that owning a single detached home was a right, not a privilege & started pressuring lenders to lend to risker clients, which gave rise to the NINA loans (No Income, No Assets)
- This made banks feel very uncomfortable, so Fanny Mae and Freddy Mac which are in part publicly owned, agreed to buy these risky loans.

- Then, after 9-11, the US government dropped interest rates to help bring up the economy, which was the right thing to do BUT they forgot to turn off the tap once it stabilized.

- Then, human nature kicked in within the banking industry. When you originate a loan with the intention of selling it, your risk prudence goes down. If you know you are going to own a mortgage for 25 years, and it is your own capital equity that will be lost if it defaults, you will be more cautious about lending.
- In the financial sector, pressure to provide short term profit is so intense, it encouraged people not to look too hard at who is going to pay back these loans, or question where the assets (our debts) that are being sold between financial institutions are actually coming from (toxic mortgages) Loan managers who were trying to argue that their poor short term performance would be balanced with better long term performance found their careers to be suddenly rather short.

- Finally, after ENRON and other scandals, regulation was changed to dictate that lenders MUST write off 100% of bad debts by the end of each quarter [I think this is what he said, could be wrong about it] So if they cannot sell it by the end of the quarter it has to be written off, even if the lender knows it is still worth 80-90% of the value in the long term.

All this together created the "Perfect Storm"
The US government has tried to intervene by directly capitalizing banks, which means they will now own shares of the banks instead of buying toxic assets. The implication is that now banks in the USA will be partially publicly owned.

Compare this to Canada:

Canadian banks have had a very different experience. Right now the Canadian Banking system is the soundest on the planet. But Canadian banks do not operate in a vacuum, so we are not out of the water, as long as the global banks are in trouble.

- Inter-bank market: Surplus money goes around the world overnight. Banks lend to each other globally, when business hours close in Canada the surplus gets loaned overseas, to be back in our accounts by morning.
- Banks failing resulted in a loss of confidence BETWEEN banks, which frozen global pool of money even more.
- Governments around the world responded by offering insurance policies for sale to banks, to insure banks lending to each other, largely fixing this part of the problem.
[See 3 month TED Spread power point slide. The TED spread is the difference between the interest rates on interbank loans and short-term U.S. government debt. I didn't really understand it very well so I looked it up on Wikipedia]

The Canadian Government Policy Responses:
1 - The Canadian Government is buying mortgages. This is nice but really has no impact on banks since these mortgages are CHMC insured anyhow. But it is better than the US response which has been to nationalized banks.
2 - BC Credit Unions are being insured, which has little impact except maybe to increase confidence for consumers.
- [He listed more than two, this was really interesting but he was talking so fast I didn't get all his responses and evaluations to the various different measures, this is really worth trying to get the full text on, and if I can get it I will! Sorry!]

Royal Bank Responses:

RBC has not changed the number of loans it gives out. And it still intends to grow lending over the next year.
It is also not changing the credit standards, which are solid, and have stood the test of time. What WILL change is the liberty individual loan officers have to bend these rules for individual clients.
Victoria is NOT experiencing foreclosures and commercial defaults. In fact there was only 1 RBC foreclosure in Victoria this year - a trailer in Sooke. And there are NO Victoria businesses in delinquent on commercial loans.

With this crises we seem to be going through all the stages of grief... Denial, Anger, Bargaining, Acceptance, and finally Hope. He thinks we are approaching Acceptance and heading towards hope... His hopeful prediction was that we would be back up to 3% by next year.

[Robert Jawl next on the impact on Victoria's Real Estate Market..... but first I need a break. Thanks for the dead cow Ms B lol]

[Bernard]

Comments on Cara's notes


The US problem has been on the horizon for several years now, there is no surprise here. They have had a combination of things, as mentioned above, that are all coming at once. The problem looks bad in a lot of the world, but not horrific, it is horrific for the US. Japan took more than a decade to recover from their crash in the early 1990s. The US will have to either bit the bullet or else it is going to in an economic malaise for a long time.

Blaming derivatives and such is a cop out. Derivative products were created to reduce risk and create certainty. As a tool for that it works well, the problem comes when people use the tool for other things than it was intended.

Savings in Canada are low and dropping at the moment because of the pensioners. People that retire stop saving and start spending their savings. Even though Canadians are not saving much, our per capita personal wealth is rising and not just because house prices rose. The current generation that is dieing is the first one in Canadian history that normally has significant estates to pass onto their children. In the past most people inherited only a modest sum when their parents died, now it is not uncommon for people to inherit hundreds of thousands of dollars.

The GDP growth rate for Canada as a nation does not look good for the next 18 months, anything less than 1.% means rough times. But if we look at specific regions, Alberta and BC both look like they will have 4.5% and 3.0% growth in 2009. Though this growth is not everywhere, the rural BC is hurting.

BC and Alberta are the parts of Canada least dependent on the US. Our markets in Asia are not going into recession. China will still grow at 8% next year and will need more oil than ever before.

Canada has a big advantage with credit when compared to the rest of the developing world, our governments are not borrowing money to operate and in fact have been paying off debts. This means Canada has had a rising supply of capital for the private sector – in the US the government has sucked up a lot of the money as debt. If Canada can remain deficit free, our credit supplies will be much better than almost anywhere else.

In the US your interest on your mortgage is tax deductible, in Canada it is not. This means that in the US you pay less taxes if you have more mortgage debt, this does not encourage repayment of the debts. It is becoming common for Americans to die still having a mortgage, in Canada that only happens if you die early.

Ontario and Quebec are going to suffer badly because of their dependency on the US market. Canada's single biggest export is cars and car parts. The North American industry is about have its worst year in sales since 1982 and next year looks no better. The auto industry is in one area of Canada and it will be hit really hard.

In the next year I expect to see a large number of people from Ontario and Quebec to move to BC and Alberta. I am estimating something in the order of 250 000 people in 2009. You will know it is happening when you see an increase of Ontario license plates in BC.

[Caramia]

Speaker #4 Robert Jawl - Principal & Vice President Development and Acquisitions Jawl Properties Ltd
Topic: Impact of Financial Crises on Victoria Real Estate.

Despite our relatively good situation, no city is isolated from global liquidity.
During the sustained Boom from 2003-2007 we had real estate price appreciation and record levels of home ownership, due mostly to low unemployment and higher wages. But now the broader economy is affecting Victoria Real Estate.

Residential Pricing: could be worse

- Lending tightening
- Home buyers spooked or waiting on potentially lower prices
- Unemployment increasing
- Equity markets in trouble
- Savings lost
- New product is no longer as profitable
----> Individuals are now very cautious.
- Speculators have packed up and gone home.
- Developers or legacy purchasers who are sitting on condos and homes are desperate to move them.

---> Price will go down but we are not going to see big drops of 30-40% like they saw in S. Florida or Las Vegas. Even compared to Vancouver we are in are experiencing less depreciation. Why?
- We had less speculators than Vancouver, and massively less than in the USA.
- 1% rental vacancy in Victoria means potential home buyers have less options to just get a rental while waiting.
- Victoria is still a relatively attractive place due to climate etc. and will be seen as a good option for people leaving cities that have been hit harder by this.
- Canada had nothing like the US sub-prime market so home default rates are much lower across Canada.
- less reliance on export commodity jobs in Vic so less people out of work and unable to make mortgage payments.
[he listed quite a few other differences between Canada and USA but I didn't catch them all, sorry!]

Commercial real estate is in good shape:

- During the last few years residential development was far more profitable than commercial, as a result commercial was not overbuilt in Victoria (compare to Calgary and Vancouver with massive new supply). We still have a 2% vacancy rate for commercial space (healthiest in Canada.)
- Because Victoria is not as dependent on resource offices (compared to Calgary with oil and gas industry) we have a stable demand for office space - mostly government or institutional.
----> Commercial Rates actually still rising, and vacancy rates tight, new leases are still being signed at higher rates than old.
BUT - Demand is softening too as companies are less likely to upgrade office space or expand during recession.
SO - Project delays or slowdowns are smart for commercial developers, as limiting new supply will help stabilize market, however job loss among trades is a big problem. 8,000 jobs lost in the last month, 6,100 of them in the construction industry.

Compared to the USA, Canada has never been as involved in leverage financing which is why we are not feeling the same hit. To make matters worse for the USA, their five year lending cycles will come due en mass in 2011, perpetuating the crises.

Global Problems - Local Responses:

1. The development industry should not start new projects, and should be cautious about dumping new stock which could undermine market stabilization.

2. Banks should continue to stick to their credit policies, and in particular refuse to throw good money after bad.

3. Senior levels of government must act to make sure that jobs are protected and that the huge wealth of skilled labour we have built in the last few years is not lost during recession years. To do this, he has two recommendations:

- Now is the time to start major infrastructure projects. Also wise use of taxpayers money with labour costs going down.

- Now is the time to focus on building more rentals, our rental stock is at least 30 years old and in some cases will not last another 10 years. Rental vacancy will tighten further with some home buyers choosing to rent instead of buy. However, due to financial policies of federal government rental is not economic to build, so what is needed is government incentives or policy changes to encourage rental construction.

4. Stabilize debt-asset. [? Not sure what was meant by that, sometimes my shorthand mystifies me]

[more later...]

[Caramia]

Speaker #5; TONY GAGE - Head Management Committee, JEA Pension System Solutions.

[I really didn't understand this talk as well, we went into corners of the economy I'm not familiar with, and perhaps I had a little bit of brain fatigue also, so my sincere apologies - I'll dump my notes and if anyone can make sense of the scraps of sentences, good on you!]


Our residential market is better than most but also not Spain or Ireland [not sure what this means, are Spain and Ireland doing worse? Better?]

The Sub-prime mortgages were the symptom, but not the cause
The real problem: Too much debt on questionable risk models not grounded in reality.

Self correcting: Stability becomes instability because risk becomes under-priced. But the reverse is also true: Instability becomes stability because risk assumes proper value.

Question of the day: Do I sell my assets to reduce my debt.
Should be asking: What assets and to who?
- 2005 mortgages
- reserves against assets which decline in value
- As Markets decline hedge funds HAVE to sell, Japan and US dollar have risen because these are the shores hedge funds swim to.
- If you have to sell it would be publicaly traded stocks and bonds.
- Credit spread have widened, Liquidity frenzy in the market place.
- Bond market dropping
- Stock market dropped 50%
- Investors abandoning long term investments.

- The US bailout package was reasonable value, and as a result everyone wants to be a "US financial sector company" as compared to the European bailout which was not good value so companies receiving money are experiencing falling stocks.


Big difference between now and 1929:
Assets in the federal reserve expanding 1 trillion Sept 24, 2 Trillion by Nov, 3 trillion projected... Federal reserve becoming the big lender.

This is a De-leveraging process. First signs of trouble were in the credit markets and that is where we will see the first signs of relief.

Pension funds are 30% under-funded. We need more flexibility in RRSPs & Pension Funds so people are not forced to sell at bad value.

[Sorry, that's all I've got for this speaker]

[More to come...]

[mat]

Caramia - my goodness, what an effort, and well done! Seriously!

This intrigued me somewhat - echoing the Government line in BC on infrastructure spending (good thing - we need it badly). #3 - yes we especially need in BC to keep skilled labour, and also attract it. Bernard mentioned an East West shift in population, and frankly many of the skills provincial industry and service require are within the auto industry. The demise of the Ontario auto sector, while painful, could be a boon for BC.

Global Problems - Local Responses:

1. The development industry should not start new projects, and should be cautious about dumping new stock which could undermine market stabilization.

2. Banks should continue to stick to their credit policies, and in particular refuse to throw good money after bad.

3. Senior levels of government must act to make sure that jobs are protected and that the huge wealth of skilled labour we have built in the last few years is not lost during recession years. To do this, he has two recommendations:

- Now is the time to start major infrastructure projects. Also wise use of taxpayers money with labour costs going down.

- Now is the time to focus on building more rentals, our rental stock is at least 30 years old and in some cases will not last another 10 years. Rental vacancy will tighten further with some home buyers choosing to rent instead of buy. However, due to financial policies of federal government rental is not economic to build, so what is needed is government incentives or policy changes to encourage rental construction.

4. Stabilize debt-asset. [? Not sure what was meant by that, sometimes my shorthand mystifies me]