[R-G] How the banking deal was done (Canada)

[Anthony Fenton]

http://www.financialpost.com/story.html?id=903697

How the banking deal was done

Paul Vieira and Eoin Callan,  Financial Post  Published: Thursday,  
October 23, 2008

Chris Wattie/Reuters

When the BlackBerrys started buzzing early yesterday morning over  
breakfast in executive dining suites on Bay Street, even the most  
senior figures in Canada's banking industry interrupted their table  
conversations to confirm the fix was in.

The announcement from the Conservatives that the federal government  
will intervene in financial markets was the culmination of weeks of  
behind-the-scenes dialogue leading to the sovereign pledge to repay  
money the country's banks borrow from other banks over the next six  
months, up to an estimated $218-billion.

The impetus to act originated primarily from events outside Canada's  
borders that put pressure on banks' own cost of capital and the  
liquidity needed for day-to-day operation of the financial system.  
While international diplomatic considerations played a role, the  
timing and substance of the government's actions were driven in large  
part by domestic political calculations, according to senior figures  
directly involved in a high-level dialogue between Ottawa and Bay  
Street.

Because of these acute political and commercial sensitivities, normal  
lobbying channels fell silent as chief executives engaged in direct  
dialogue with Ottawa, which was represented in key discussions by a  
senior, unelected, advisor to Jim Flaherty, the Finance Minister. Only  
a tiny circle of the banks' most trusted lobbyists were at the table  
and on conference calls. Other veterans of government relations were  
excluded, while regulators participated in some meetings.

Several of the people involved in the process said that even while  
pillars of Wall Street were crumbling and world leaders were invoking  
the spectre of financial armageddon, a central consideration for the  
Prime Minister's Office seemed to be Jack Layton and the New  
Democratic Party.

The Conservatives and key allies on Bay Street feared both the  
immediate and lasting consequences of giving political adversaries an  
opening to turn the banking industry and its ties with Ottawa into a  
matter of public scorn. This concern reached a peak immediately before  
the election with the meltdown in markets, co-ordinated global  
interventions and the approach of polling day.

Amid late-night phone calls to the homes of senior officials in  
Ottawa, a loose strategy emerged to split the federal government's  
response into two stages, with a decision to delay until after the  
election the explicit commitment to insure interbank lending that was  
finally unveiled yesterday.

But bank executives insisted on a long-sought move to shift mortgages  
off their books and supply them with cash before the election, because  
they feared the uncertainty of polling day and the possibility Mr.  
Flaherty might not return as finance minister, according to  
participants in the process and observers. This first stage was held  
back until the last possible moment, the eve of the Thanksgiving  
weekend, the last day of market trading before polling day, when a $25- 
billion scheme to aid banks was announced by Mr. Flaherty. "The  
strategy [was] trying to low-key it, [unveiling it] when people were  
running away to the cottage to pull the dock out of the water and  
making their pumpkin pies," said one person involved in the discussions.

This was the point when the Conservatives' concern about the political  
reaction was at a peak, according to a former member of the party now  
on Bay Street. "Managing the NDP is not easy," said another person  
involved in the joint strategizing, adding the heightened profile of  
the social democrats in the midst of election season was a worry for  
negotiators, "because you are constrained in how much you can put your  
head up and whack them."

Stéphane Dion, the lame-duck Liberal leader, was seen as onside,  
according to one person, who added: "but look where that got him."

This concern about a political backlash was still a major concern for  
the government going into yesterday's announcement, which came long  
after a dozen other countries including the United States, U.K.,  
France and Ireland had acted.

"[The backlash] only matters if it becomes a ‘grassroots issue', "  
said a person involved in the strategizing.

To head off the possibility of public outcry over assistance to banks  
that are increasingly squeezing customers, the government is thought  
to have held back the lending guarantee because it wanted to see if  
banks would pass on to customers the rate cut by the Bank of Canada  
that came earlier this week.

While these machinations almost certainly played little or no part in  
the central bank's own deliberations, it put pressure on the big five  
banks to announce they were all cutting their prime lending rate for  
consumers to 4%, which they did.

More than one bank executive said this reduction in the benchmark for  
consumer lending was not so much a normal business decision, and more  
one made with national interest in mind as Canada's economic outlook  
darkens.

This mid-week cut in the prime rate set the stage for yesterday's  
announcement of the guarantee from Mr. Flaherty, who will meet fellow  
finance ministers in two weeks before travelling to Washington for an  
international crisis summit after the U.S. presidential election.

The minister also acknowledged a key Bay Street demand to raise the  
initial $25-billion limit on mortgages they can transfer to public  
books, saying he was "prepared to extend the program if necessary."

This scheme had by yesterday already seen $12-billion snapped up by  
Bay Street, where bankers were continuing to work their BlackBerrys in  
a campaign of "quiet diplomacy" to have this limit raised closer to  
$200-billion.