Jim Flaherty, Canada’s Finance Minister:
We were all worried at that time because, as people were saying around the table, ‘There’s too much cash sloshing around the world.’ And [we wondered] ‘Where is the problem going to come from?’ We all left, went home. It was on a Sunday afternoon [that U.S. Treasury Secretary] Hank Paulson called me at home and said ‘Well, good news and bad news. The bad news is there’s a huge credit crisis. The good news is we know what the problem is.’
Leech: That fall, I remember sitting on an airplane with Claude [Lamoureux, then the head of Ontario Teachers]. We were flying to Montreal to … explain the BCE transaction to the government of Quebec, and the Quebec institutions. And I can remember Claude having somebody’s newsletter … who was going through the math on [subprime collateralization, a complex way of packaging loans to make them look more attractive to investors], and how you could turn a low credit into high credit through these tranches and how it didn’t make any sense. It was sort of the very first time that I had seen anyone actually write something … that said this doesn’t look right, this doesn’t smell right. How you can turn subprime mortgages into triple-A credits?
Don Lindsay, Teck Resources Ltd., former investment banker at CIBC World Markets:
There’s much debate as to when people should have known that a collapse was coming. Everyone from Alan Greenspan on down didn’t see it, right? But there were clues, for sure, that if read correctly would have given an indication that the financial system was at risk.
As problems emerge, many of Canada’s top financial executives are consumed with putting out the ABCP fire. The institutions most affected by the crisis include National Bank of Canada, the Caisse de dépôt et placement du Québec and Canaccord Financial.
Louis Vachon, National Bank of Canada:
It was almost 24 hours a day for a period of time … the challenge I had, particularly with ABCP, is you have to manage a crisis, but it cannot become an obsession. My job was to run the bank.
Dodge: The Ontario Securities Commission, quite frankly, I don’t have very good words for them through this. Because they kept saying, ‘No, no, the problem is that some of this [ABCP] was sold to unqualified investors’… rather than [being concerned] about the structure of the instruments and what was actually there and the financial stability side of it.
Lindsay: I do recall quite clearly that I was glad not to be in the banking business.
By December, it becomes clear that ABCP won’t be the only crisis Canada endures. After already writing off $753-million from its exposure to U.S. subprime mortgages, Canadian Imperial Bank of Commerce admits that another $2-billion could vanish – a number that will grow. In January, 2008, the bank sells nearly $3-billion in new shares to a group of investors that includes Hong Kong billionaire Li Ka-shing.
Although other banks get caught in the same mess – Citigroup writes off $18.1-billion (U.S.), Bank of Montreal writes off $490-million (Canadian) – the problems appear contained. That is, until March, 2008, when Bear Stearns, the venerable Wall Street investment bank, flirts with bankruptcy after suffering heavy losses on mortgage securities.
Cohen: I’m walking through Reagan National Airport in Washington. I remember this: The Delta [flight] had been cancelled, so I’m walking over to USAir and I get a call from two of the directors at Bear asking if we can represent them. … That leads into the frantic search for a buyer for Bear because it’s becoming clear that the market won’t fund them.
Dean Connor, Sun Life Financial Inc.
It happened so quickly … One day it was a firm doing fine and they were saying everything was fine, and not too long after …
To save the ailing bank, JPMorgan Chase buys Bear for just $2 a share on March 17, 2008, down from $170 a year earlier. To facilitate the deal, the U.S. Federal Reserve promises to provide up to $30-billion to backstop Bear Stearns’ riskiest assets.
Dodge: Bear got saved, and that kind of sent a signal to the rest of the world that the U.S. government was willing to step in on these things. The rest of the world kind of relaxed for a period of time, I would say, really taking that as a signal that banks really were too big to fail.