Obama's Visit to Canada

By Susan Bourette, Correspondent of The Christian Science Monitor, from the February 21, 2009 edition

For his first foreign visit as president, Barack Obama chose a country where no major banks have failed, home foreclosures pale by comparison with those in the United States, corporate and consumer debt is low, and citizens enjoy universal health care.

Canada often gets short shrift from its southern neighbor, despite its stature as the largest trading partner of the US and a staunch ally. But now, amid global economic turmoil, the financial moderation practiced by this nation of some 33 million people is being celebrated.

"These days, boring is beautiful. Prudency is a big hit," says Stephen Foerster, finance professor at the Ivy School of Business at the University of Western Ontario in London. "You might say Canada has suddenly become sexy, even if it's in an unsexy way."

President Obama acknowledged his affection for Canada during a six-hour visit Thursday to meet with Prime Minister Stephen Harper. The trip offered balm to a relationship rocked in recent years by differences over the Iraq war and, more recently, worries over protectionism. "I love this country," he said during a press conference after euphoric Canadians greeted his arrival in the capital, Ottawa, by singing Bob Marley's reggae classic "One Love" and chanting "Yes We Can."

Two days earlier, Mr. Obama hinted at the reason for his admiration. "One of the things that I think has been striking about Canada is that in the midst of this enormous economic crisis.... [It's] shown itself to be a pretty good manager of the financial system in the economy in ways that we haven't always been here in the United States."

Among industrialized countries, Canada is the only one not to have seen a major bank fail. The World Economic Forum ranked Canada's banking system as the healthiest in the world in 2008, while the US took the 40th spot. And while Canada's largest five banks reaped profits of $8.2 billion, the top five US banks lost a combined total of $8.3 billion last year.

Stronger federal regulations and lower leverage ratios borne by Canadian banks have allowed them to weather the global banking storm. Canadian financial institutions didn't engage in the subprime mortgage lending that sideswiped the US banking industry and forced millions of American homeowners into foreclosure.

"The difference with Canadian banks is that they never succumbed to the temptation of huge profits. It also allowed them to avoid the downside of more aggressive behavior," says David Haglund, a professor of international politics at Queen's University in Kingston. "It speaks to the more conservative nature of Canadian society in general. Canadians are simply more risk averse."

Canada has not escaped the global economic crisis. Its economy tipped into recession in the last quarter of 2008. In January alone, 129,000 jobs disappeared – the biggest one-month increase in years – pushing the unemployment rate to 7.2 percent. And this week brought more bad news: Alberta, Canada's cash cow, which has led the national economy over the past several years, is also in recession, hit by a slowdown in oil prices and sales. To combat the downturn, Prime Minister Harper's Conservative government introduced a $39 billion (about $31 billion US) stimulus package, to be rolled out over two years.

But analysts believe Canada's strong balance sheet will position it better than other embattled countries to weather this recessionary storm. For 12 consecutive years, Canada has posted budgetary surpluses, compared with the $1 trillion US federal deficit – a figure that doesn't include the $787 billion stimulus package signed into law this week.

To hear the analysts tell the story, Canada appears to have been getting a number of other things right. For example, even the most ardent proponents of big business are fans of the universal healthcare system. As Professor Haglund points out, the Big Three automakers have been able to produce cars more cheaply in their Canadian plants because the government absorbs the cost of healthcare.

And healthcare costs are lower in Canada, accounting for 9.7 percent of the GDP, compared with 15.2 percent in the US.

Higher taxes or regulation and a vibrant economy aren't necessarily mutually exclusive, Haglund says. "If Barack Obama can take away any lesson from the Canadian experience, it's that things can be changed while preserving what's best in North American life."

James Chanos on Washington Actions and Long-Short

From Jim Chanos' interview with Chrystia Freeland of FT.com on January 23 2009. Watch the full interview with Jim Chanos, of Kynikos Associates, at VIDEO ON FT.COM

James Chanos, president of Kynikos Associates, is the world's biggest short-seller. While short-sellers are rarely popular among politicians and CEOs, the current economic crisis is a salubrious business environment for professional bears like Mr Chanos. A second-generation Greek-American whose father owned a chain of dry cleaners in Milwaukee, Mr Chanos studied economics at Yale before beginning his career in finance, working first in Chicago then moving to New York.

Now 50, he is best known for his prescient shorting of Enron and the work he did to expose that company's fraudulent accounting. In a video interview earlier this week with FT.com, Mr Chanos said he is bearish on healthcare, defence and for-profit education companies. He warned that the hedge fund industry needs to get used to the idea that there will be "lean years" as well as fat ones: his own fund, he said, has shrunk from $7bn to $6bn because cash-strapped investors are treating it "like an ATM".

An ardent Democrat, Mr Chanos spoke to the Financial Times in Washington this week, where he had travelled for Barack Obama's inauguration. Edited highlights from his interview appear below.

How much worse are things going to get?

No one knows for sure.

The last few weeks has seen fear re-enter the banking system, both here and in the UK. The [Bernard] Madoff affair also did a lot of damage to confidence.

Are people right to talk about nationalising the banks?

I don't know. We almost have it de facto for our largest institutions. The real crux of the problem [is] people still don't believe the numbers.

What will it take for people to believe the numbers? There is still a bit of Pollyanna in the air. We don't really know where these banks have marked these assets, because the news is still surprising us on the downside . . . The magnitude of these writedowns is still somewhat staggering.

What do you think of [head of the Federal Deposit Insurance Corporation] Sheila Bair's idea of creating some sort of aggregator bank?

We continue to violate all of Walter Bagehot's principles on lenders of last resort . . . As long as we continue to do that we are empowering the worst decisions, we are rewarding the people that got us here.

Are we running out of people able to run these big banks?

I don't know that we could do a whole lot worse than the people who have been running them lately.

Should the banks be lending more?

Prior to this the banks would lend to anybody with a pulse, and now even JP Morgan himself probably couldn't get a loan. It is a chicken and egg problem; you have people who are completely creditworthy, who probably don't want to borrow money now, and the people who do are your lower creditworthy borrowers and the banks are terrified to expand their balance sheets.

Isn't it prudent for banks to hoard capital now?

They should be coming clean with investors and with the government on their methodology for marking these assets and their loan loss reserves, and giving the Street as much transparency as possible.

Why isn't it happening?

Because so far the surprises seem to have been on the downside. I think there is still a lot of damage on these balance sheets that has not come out. My guess is the number is going to be over the trillion [dollar] mark when all is said and done.

What effect has [the alleged Madoff fraud] had?

It was a blow to confidence exactly at the wrong moment, when things seemed to be getting better, and injected that nasty concept of fraud into the equation.

Will we see changes in taxation for hedge funds?

We already saw it very quietly. One of the most attractive aspects of hedge fund management was taken away in the Tarp legislation, which was the tax referral for offshore managers. That very quietly went away, and that was a big deal.

Are you worried about a climate of criticism over pay in financial services? [People] should be upset.

Bankers still took home, and my hypothesis is that in fact they never really made the billion dollars.

That's the problem: we are going to find out when we go through the accounting that in fact these things were never that profitable.

Is America's financial capital moving from New York to Washington?

Power is beginning to shift, clearly, because of the government investment in these firms.

And anyone who doesn't see that is kidding themselves.

Have you identified any surprising areas of weakness in the economy? The three areas we are focusing on would be healthcare, defence and the for-profit education business. All those areas are going to be under a lot of pressure under the new administration.

What is the big thing everyone is missing?

The next battleground is private equity. It is going to be very tough for the industry to look at Washington with a straight face and say "Gee, you've got to be hands-off with us", while they are laying people off who are voting. That is going to be a PR nightmare, and I wish my friends in private equity good luck with that.

This is the week Barack Obama became president. What significance does that have?

I think the world is looking to America for a new beginning; I think a lot of Americans are too, no matter what your politics. The president-elect is hosting a dinner for John McCain, his defeated opponent, which is a very class act.

Long or short?

Oil? Long
US dollar? Short
GE? I'm going to hedge
Citigroup? Long
Ford? Short
Google?Long
Blackstone stock? Short
John Thain? A tough one. Long
HSBC? Long
John McCain? Long.