Oct. 3, 2008 was an interesting day for the financial industry.

The U.S. Congress, after much negotiation and arm-twisting, passed a version of the bailout package that was originally proposed by Treasury Secretary Henry Paulson to provide liquidity to the markets. But what happened after the announced bailout was even more interesting. Markets continued their downward spiral—and nobody was surprised.

Millan Mulraine, economic strategist with TD Securities, reacted to news of the bailout with a mix of euphoria and the understanding that it was not a panacea. “It certainly is necessary, but may not necessarily be sufficient,” he says. What is important, he adds, is that the government be seen taking the initiative in order to bolster confidence, as people realize the bailout will be the first of several steps to correct the sliding markets.

Not surprisingly, some observers are critical of the government’s ability to sell the package to the American people. “The popular media didn’t understand what it was,” says Rob Vanderhooft, chief investment officer with Greystone Managed Investments. He adds that the American taxpayer would be better served if it was called an investment fund as opposed to a bailout. “It got held up because it was referred to as a bailout of bankers. The longer it took to pass, the more damage was done to credit conditions—and, ultimately, to consumer confidence.”

As the crisis continues to unfold, Canadians are suddenly finding their banking sector the envy of the industrialized world, and money managers are conservatively biding their time to feel out the bottom of the downturn. Vanderhooft says his firm, like many money managers, took a defensive position early on in the crisis and has large stocks of cash ready to be released once they sense a shift in market sentiment.

Greystone’s main goal now is to get an idea of the duration of the slowdown. It is projecting late 2009 to early 2010 as the beginning of a recovery in the U.S.

Peter Arnold, national DC practice leader with Buck Consultants, says the plunging markets present two key issues for plan sponsors. “There are many risks that can be considered, but we think that good oldfashioned approaches like portfolio rebalancing, a quality statement of investment policy and procedures, and effective risk monitoring and oversight are the core of risk management.”

On the defined contribution side, Arnold says a little assistance goes a long way when it comes to investment advice for plan members. “One of the trends that started to emerge before this credit crunch is the ready availability of advice,” he says. “Not the sponsor giving it, but clearly saying, ‘Here’s where you can go if you need help.’” He adds that many members need a qualified person to help them with investment decisions, be it plan sponsors or third-party representatives.

According to Adrian Hartshorn, a principal with Mercer’s financial strategy group, it’s too soon to guess the ramifications for pension plans in Canada and the U.S. Plan sponsors are currently facing both short- and long-term challenges: their year-end financial statements for 2008 will directly affect contribution levels for 2009, while the long-term questions will focus on risk management.

“They need to ask, Is the current level of risk acceptable? Or would they like to reduce it in case of future volatility?” says Hartshorn. “Some clients are surprised by the position they find themselves in and are concerned not only about their pension status, but about the existence of their companies.”

As in any situation, there are those who can spot an upside amid the carnage. Paul Malizia, principal with Hewitt Associates, says that Canada and the U.S. will benefit from the economic upheaval as poorly run firms fold and others consolidate. “Those entities that did not have strong balance sheets and governance practices will go by the wayside. In the end, we will end up with a more robust financial system.”



Summer 2007: U.S. subprime mortgage market starts to unravel. Canada’s third-party asset-backed commercial paper market freezes.

March 2008: JPMorgan reaches agreement to buy Bear Stearns.

Sept. 15: Lehman Brothers files for bankruptcy protection. Bank of America agrees to buy Merrill Lynch.

Sept. 16: U.S. government loans money to AI G in exchange for a 79.9% stake in the insurer.

Sept. 20 to 21: U.S. Treasury submits legislation to Congress requesting authority to purchase troubled assets up to $700 billion from financial institutions. Federal Reserve allows Goldman Sachs and Morgan Stanley to convert from investment banks to bank holding companies.

Sept. 25: Washington Mutual fails—the biggest bank failure in U.S. history.

Sept. 29 to Oct. 3: The U.S. House of Representatives votes against the bailout package. The U.S. Senate votes in favour of a revised bailout package. On its second attempt, the U.S. House votes in favour of the revised bailout. U.S. President George W. Bush signs the bill into law shortly thereafter.

Oct. 8: In a coordinated effort, six central banks cut interest rates by 50 basis points.

Oct. 14: The Treasury injects $250 billion of the $700 billion financial rescue plan to inject capital into banks by purchasing preferred shares.


The Credit Crisis Worldwide

Iceland: The country’s financial regulator took control of Kaupthing Bank, Landsbanki and Glitnir Bank after they were unable to obtain short-term funding. The stock exchange plunged 77% in one day after a three-day suspension. The country’s central bank cut interest rates by 3.5 percentage points to 12% in an attempt to keep the economy from entering a depression.

Japan: After 119 years in business, Yamato Life Insurance Company became the country’s first victim of the credit crisis when the value of its securities holdings fell rapidly. It was the first life insurance firm in Japan to fail in seven years, and the eighth since the Second World War. Separately, the Bank of Japan is offering unlimited dollar funds to lenders. While six central banks have cut interest rates by 50 basis points, the Bank of Japan kept rates steady at 0.5%.

The Netherlands: After the acquisition of part of ABN Amro depleted Fortis’s capital, the government nationalized the Dutch portion of the financial services firm. It says nationalizing these assets provides stability to the country’s financial system. Once the international economy has settled, the government plans to privatize Fortis.

U.K.: The British government announced plans to buy up to £50 billion (C$97.2 billion) worth of preferred shares in eight banks and will provide loan guarantees to encourage interbank lending. Shortly after that announcement was made, the government said it intends to buy a majority stake in The Royal Bank of Scotland and a large minority interest in the soon-to-be-merged HBOS and Lloyds TSB.



In the Top 50 DC Plans Report (September 2008), assets reported for Amex Canada Inc. were incorrect. Benefits Canada regrets the error and any inconvenience caused.


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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the November 2008 edition of BENEFITS CANADA magazine.