Banks must co-operate to save everyone

Banks must co-operate to save everyone -- Dodge

Jacqueline Thorpe, National Post; CanWest News Service

Published: 2:32 am

TORONTO - All Canadians could pay a price if banks fail to come up with an agreement to save the troubled sector of the country's debt market and $300 billion worth of leverage is allowed to unwind in a worst-case scenario, says Bank of Canada governor David Dodge.

"If the whole market goes into a shambles everybody gets affected, including Mr. and Mrs. Jones on Main Street," said Dodge.

The central bank governor said "the bath" Canadians will take if the $35-billion market for non-bank asset-backed commercial paper collapses will affect all banks, if the losses balloon due to leverage, credit constricts and borrowing dries up. It is therefore in the interest of all banks to come on board.

Dodge's comments came in an interview with the National Post ahead of his retirement on Jan. 31 after 35 years.

The non-bank ABCP market seized up during the August liquidity crisis amid fears the complex derivatives were tainted by defaulting U.S. subprime mortgages. Players in the market agreed to voluntarily freeze dealings and work out a bail-out that would prevent a fire sale of the assets.

Led by chairman Purdy Crawford, the bailout -- known as the Montreal Accord -- is due to be completed by Friday. Dodge said the danger of ABCP is leverage, which can multiply losses.

"Because they're levered, the amount of global assets that would be affected if all this went down would be eight or 10 times the nominal value of the notes, so you're starting to get into the $200-billion, quarter-trillion-dollars' worth."

The bailout being proposed would still obviously involve losses, he said, but if the market does come back over time, those losses would be "cents on the dollar or nickels on the dollar and not dimes and quarters on the dollar."

The deal being considered would involve larger investors, Canadian banks and foreign banks all taking a share of a pool of risk, he said. The workout would likely produce assets in the form of notes with floating rates of interest, which would then attract a higher-quality credit rating.