At the same time, a Canadian election is under way. The financial crisis emerges as a key issue. After much delay – and much criticism from the opposition parties – the Conservative government decides to shore up Canadian banks to ensure they can continue to lend. Unlike U.S. banks, which sell off most of the mortgages they underwrite, Canadian banks keep them on their balance sheets. Mr. Flaherty instructed Canada Mortgage and Housing Corp., the federal mortgage insurer, to buy up to $25-billion in mortgages from the banks, allowing the financial institutions to swap the loans for cash that could then be lent to Canadian businesses and households.
Leech: I sat at the head table of the Canadian Club on the 7th [of October]. Stephen Harper was talking. And there was virtually no real reference to the financial crisis at that time. It was a week later that they came out and totally changed their perspective.
Flaherty: We were in the middle of an election campaign and things were getting much worse. And so I was talking to the Prime Minister almost every night, and he was campaigning of course. … We were hoping we wouldn’t have to do anything during the course of the election campaign, but we did. … Because things were getting worse and worse and credit was constricting very badly.
Leech: [The mortgage program] was a really smart move, because it really didn’t increase the government’s risk, it just slammed liquidity into the system, which was badly needed.
After announcing the deal with the banks on the morning of Oct. 10, Jim Flaherty and Mark Carney fly to Washington for a major G7 meeting where lengthy proposals to save the global financial system are drafted.
Carney: It was a very serious meeting. … There was a lot of frustration around the table. ‘Why were we in this situation?’
Flaherty: I’d suggested to my colleagues that we needed a very simple five-point plan, which we came up with. That was approved by the G7 finance ministers, and then that night we ran it by the finance ministers of the Americas. We were having a scheduled meeting, and they approved of it. And then the next morning we met with President Bush, the G7 ministers did, and then he went out in the Rose Garden and endorsed the plan at 8 a.m.
Other industries start to feel the pain. The automotive sector is one of the hardest hit as nervous consumers stop buying cars. Oil prices plummet, sending Canadian energy producers scrambling to rework ambitious projects. It is clear that a major recession is unfolding, and unemployment quickly rises as one company after another announces layoffs.
Reid Bigland, Chrysler Canada Inc.:
We were burning well in excess of $1-million a day. … So I called Dwight [Duncan], then Ontario finance minister. His riding [was] from Windsor [where Chrysler has its Canadian headquarters]. We had a meeting in my offices on a Saturday morning. … I explained the situation to Dwight that we were burning cash; couldn’t [get rid of] fixed costs fast enough; there was very little market for our products or any other products in the automotive space for that matter; financing had completely dried up … [I] basically said if we don’t receive an injection of cash in the form of a loan by Christmas, our ability to continue to keep our doors open would be in severe jeopardy. Dwight understood the gravity of it.
George: The turning point for the industry was when oil prices collapsed. You had plenty of liquidity and plenty of profitability up until that exact moment. … The discussion that was hardest among the members of the executive team was about which projects we would slow down and cancel, and how deep did you have to cut capital?
Recognizing that the crisis was becoming unmanageable, the Bank of Canada gets involved. All of the major policy makers in Ottawa are in regular contact with bank CEOs, pension fund executives and others to deal with problems and ensure co-operation.
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