Bankers Eschewed Subprime Loans, Mortgage Securities; The Result — No Bank Failures
Two more U.S. banks were taken over by the government overnight. And while a number of this country’s biggest banks reported improving conditions this week, some of their accounting methods have been questioned.
One place where none of this banking drama is taking place is Canada, as CBS Evening News weekend anchor Jeff Glor reports.
Ed Clark is a plainspoken, polite and prudent Canadian bank CEO with a few simple rules: “We should never do things for our customers and clients that we don’t actually understand. If you wouldn’t put your mother-in-law in this, don’t put our clients in it.”
You may never have heard of Clark or Toronto Dominion bank (aka TD Bank), but it’s the sixth-largest bank in North America – and, in the middle of a global banking crisis, a profitable one at that.
“We will make more money in this quarter than any bank in North America,” Clark said. “So for a little Canadian bank sitting up here, yeah that feels pretty good.”
How did that come to pass?
“Basically, because we didn’t do the things that blew other banks up,” Clark said.
And neither did TD Banks’s Canadian brethren. In the last quarter of 2008, all of Canada’s major banks were profitable, collectively making $2.5 billion during a period when U.S. banks lost more than $26 billion.
In fact, since the financial crisis began, American taxpayers have provided more than $300 billion dollars to more than 450 companies. During that same period, from their government, Canadian banks have not received one penny.
One reason: Take those infamous subprime mortgages given to risky homebuyers. They crippled banks in the U.S., where at peak, 25 percent of loans were subprime. In Canada? Three percent.
“Our U.S. subsidiaries did not do any subprime lending. Nothing. Zero,” Clark said. “We just said, ‘Stay away from this stuff. We know where this is going.'”
Another villain in the financial crisis were toxic mortgage-backed securities – risky loans that were chopped up and resold in countless different ways. Many banks gobbled up the now virtually worthless investments. Ed Clark got out 4 years ago saying they were just too complex.
Clark: “As soon as you see that complexity, you say, ‘How can I possibly think I actually can guess whether this will work or not?’ And as soon as I hear that, I say, ‘Get out of it.'”
Sherry Cooper spent years at the Fed overseeing Wall Street, before moving to Bay Street, the Canadian equivalent.
“It didn’t take long for me to discover that this is an entirely different culture,” said Cooper, chief economist at the Bank of Montreal. “Canadian banks were up to their ankles in the toxic muck whereas American banks were over there heads.”
“A lot of this is about saying, ‘Here are old banking rules, and we’re prepared to give up short term profit in order to make sure we have a balance sheet that doesn’t blow up on us,'” Clark said.
One reason why Canada is the only industrialized nation in the world without a single bank failure in the current economic downturn.