As with income trusts, Flaherty and Bay Street game Canadians once again

During the election, Flaherty was adamant that he wouldn't be bailing out the banks, at which point, we now learn that he was in discussions to do that very thing immediately after the election. Again demonstrating Flaherty's inherently deceitful self.




Politics factored into bank aid deal

Dialogue between Ottawa, Bay St. behind the scenes

Eoin Callan in Toronto and Paul Vieira in Ottawa, National Post Published: Friday, October 24, 2008


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 talks 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 most apparent, 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."

Stephane 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.