Credit Crunch, Mortgage Crisis – Everything’s a Crisis

Last week you gave me the heads up on a newly release International Monetary Fund report. This IMF report claims that the “global credit crunch will cause losses of nearly $1 trillion worldwide.”

But I’ve got a question: How can a credit “crunch” cost $1 trillion? That was the headline in the USA Today report but think about it. A credit crunch is NOT lending. And NOT lending can’t create a loss; it saves lenders from potential losses.

With these types of headlines, there’s often the choice to be dramatic instead of informative, I’m afraid. What they meant to highlight is that the mortgage problems, mostly subprime, that is poor credit mortgages, will create huge financial losses. Now the IMF is a pretty political body and they’re often late to the party, because I would suggest it’s going to be well beyond $1 trillion when the dust settles. Try $1.5 or $2 trillion, but that remains to be seen and it’s only my opinion.

But there’s some good news, because not every lender was caught up in the subprime fever where financial institutions from Germany and Denmark to Asia and North America were somehow caught by surprise that the loans to bad credit customers could possibly go sour.

And both these good news stories are from right here in Canada. One is ING Direct and here’s the difference: They keep all their mortgage loans on their books. So they’re really really invested in making sure they’re good quality. They weren’t taking whatever they could get their hands on and re-selling it before it started to smell.

The other one is Canadian Western Bank. There is a great quote from CEO Larry Pollock: “We’re not smart enough to understand that stuff,” which he gave as a reason for not investing in these off-balance sheet SIVs. Oh, they’re plenty smart and it’s the reason it’s the best performing bank stock in North America!

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