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Next In Line for Implosion: Pension Plans


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Since pensions are at the forefront these days, here is a post that while alarmist has many valid points.

Next In Line for Implosion: Pension Plans (November 8, 2011)

Pension plans are based on 8% annual growth forever. What happens to these plans in a zero-interest rate world as the global economy and stock markets contract?

I'm afraid it's time for an intervention. I don't enjoy being the bearer of difficult news, but now that Europe has stumbled drunkenly into the pool and been "rescued," it's once again tearfully blubbering that this time it's all going to change, and a new prime minister in each dysfunctional, insolvent EU nation is going to make the pain and the addiction all go away.

It's time we face the reality that Europe and the U.S. are full-blown financial alcoholics, addicted to illusion and debt. And what do they turn to as "solutions"? The very sources of their pain: illusory "fixes" and more debt. Have you ever seen a global market as dependent on rumors of "magical fixes" for its "resilience" as this one?

What's truly remarkable is the psychotic distance between the facts--Europe's debts are impossible to service, its economy is free-falling into recession, the U.S. is already in recession, China's real estate bubble has popped and cannot be reinflated-- and the heady leap of global markets on every trivial rumor of a magic fix.

Since it runs in our family, I do not use the word "alcoholic" lightly. Those of you who have to deal with alcoholics know the drill: the liquor stashed behind the fridge, as if everyone doesn't know it's there; the stumbling into the pool, the humiliating rescue, the tearful promise of change which goes nowhere, and all the rest.

I seriously suspect the entire global economy is alcoholic--not about liquor, but about debt and the impossibility of paying entitlements which expand by 8% a year in an economy which grows by 2% a year at best. In all the millions of words printed about the subprime meltdown, the gutting of the U.S. financial and housing markets and now about Europe's impossible burden of debt, how often have we seen anyone in the MSM or mainstream financial press confess that "borrowing our way of out of trouble" is not just financially bankrupt but morally bankrupt as well?

Like a full-blown alcoholic, the people and governments of the U.S. and Europe stagger from debt source to debt source, weaving drunkenly between "stashes" of new debt in the Fed, Treasury and private sector markets. Despite the abject failure of the magical-thinking "fix" of becoming solvent by exponentially expanding debt, we see the same pathetic pattern repeating in Europe, where the apologists for the alcoholic debt-binge continue to claim the risk of systemic failure and collapse of asset values is low.

While everyone is focused on the drunk being pulled from the pool--Europe's sovereign debt--another drunk is teetering on the edge: public and private pension plans. Here's the reality in a nutshell: pension plans only work if they earn average returns of around 8% per year, basically forever.

Gripped by the mono-maniacal desperation of an addict who sees no other path but another hit, central banks have lowered interest rates to near-zero to "spark growth." Unfortunately the only thing being goosed is the future cost of servicing the additional debt.

How do you earn 8% on money which yields at best 3%? You can't. How do you reap a gain on bonds when interest rates have already hit bottom and can't fall any lower? You can't.

Which leaves the stock market as the only hope for pension plans. Since the bottom in March 2009, central banks engineered a "magic solution" that generated fantastic stock market returns: by constantly lowering interest rates and increasing liquidity, central banks force-fed stock markets with demand (there was no other place to get a fat return) and the see-saw of interest rates and "risk-on" equity markets: as rates decline, equities floated ever higher.

Now that rates are near-zero, then the central banks are pushing on a string: there is no "magic" left to juice equity markets.

The equity markets are in effect living on vitamin C and cocaine: rumors of new "magic fixes" and the hit of central bank infusions.

Once rumor is no longer enough to float markets higher, then the consequences of depending on stock market returns will hit pensions with a terminal case of the DTs.

The "magic" of ramping up debt to create the illusion of a healthy economy only works once. The "fix" "worked" from 2009 to 2011, but now the high is wearing off. The next round of rumor and debt expansion won't even create the illusion of growth, as the global economy is already careening back into the contraction that trillions in new debt staved off for three years.

I have covered the disconnect between the promises of 8% yields forever built into public pension plans and a slow-growth/no-growth economy many times:

Yes, There Will Be Armageddon: Government Goes Bankrupt (July 24, 2008)

How the Fed Pushed the Nation's Pension Plans--and Local Government--into Insolvency (May 24, 2010)

Public Pension and Healthcare Costs and Financial Common Sense (February 28, 2011)

Every once in a while an MSM outlet addresses the issue directly, for example:

Pension issue balloons with soaring costs (S.F. Chronicle):

Pension costs are soaring to $800 million, tripling during the last decade, as Los Angeles faces years of projected budget deficits even with deep cuts in services and staff.

The main driver of higher pension costs is the stock market crash. CalPERS (California's primary public pension plan) gets about 75 percent of its revenue from investment earnings. Its portfolio peaked at $260 billion in 2007, fell to $160 billion last year and now is about $204 billion.

Why economic growth isn't enough to fix budgets:

But under the laws now dominating government budgets, many expenditures essentially are or will be growing faster than both revenues and the rest of the economy. In fact, in many areas of the budget, automatic expenditure growth matches or outstrips revenue growth under almost any conceivable rate of economic growth.

Now, so much spending growth is built into permanent or mandatory programs that they essentially absorb much or all revenue growth. Meanwhile, we've also cut taxes, widening the gap between available revenues and growing spending levels.

Consider government retirement programs. Most are effectively "wage-indexed" insofar as a 10 percent higher growth rate of wages doesn't just raise taxes on those wages, it also raises the annual benefits of all future retirees by 10 percent. Meanwhile, in most retirement systems, employees stop working at fixed ages, even though for decades Americans have been living longer.

Today, so much of government spending is devoted to health and retirement programs that their growing costs tend to swamp gains we might achieve in holding down the ever-smaller portion of the budget devoted to discretionary spending. Still other programs add to the problem, such as tax subsidies for employee benefits, the cost of which grows automatically without any new legislation.

In other words, the entire system of state and local government is now based on the same 8% "permanent high growth" of the 1990s speculative market. Funding increases are wired in, regardless of how much tax revenues fall. That is a recipe for insolvency.

Now we get to the heart of the matter. Which institution engineered the heady stock market bubble of the 1990s that created the illusion of "permanent high returns" and growth of tax receipts? The Federal Reserve. Which institution has made the stock market the proxy for the economy? The Federal Reserve. Which institution has engineered a three-year stock market rally to put off the inevitable implosion of pension plans, entitlements and tax revenues that must grow by 8% annually while the real economy is flat-lined? The Federal Reserve.

We can ask the same questions of Europe and get the same answer there, too: the European Central Bank (ECB).

Addiction is a terrible disease, founded on the illusion that the pain of facing reality can be put off forever by dulling the pain of addiction itself with ever-higher doses of self-destruction. We are witnessing the self-destruction of economies and machines of governance that have chosen denial, illusion, rumor and magical thinking over facing reality. The drunk has been pulled from the pool once again, slobbering self-piteously and promising to really, really change tomorrow, and we believe the lie, at least until morning, because hope is so much easier than reality.

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Also of interest:

Results for Canadian Defined Benefit Pension Plans

The Towers Watson Pension Index has decreased significantly in the third quarter due to negative asset returns

coupled with a decrease in the liability discount rate. The net effect on our benchmark plan was a decrease of

13.0% in the Towers Watson Pension Index (from 66.9 to 58.2) for the quarter.

DB Pension report third quarter

Mark Carney warns of credit crunch recession

CBC news report

Will Growth solve these problems?

Will employers start making great returns and be able to make up the short fall?

Will the government bail out the pension plans (and with what money?)

At some point I am hoping we can stop kicking the can down the road and start discussing actions that could be taken to address this fiasco.

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There are those who will find all manner of justifications for this extended "theft" which was ignored by governments intoxicated with deregulation and privatization of everything that wasn't nailed down, but in the end, people in whom employees placed their trust with the governance of their pensions did not have a right to the money in those pension plans, and these people took it without permission, and spent it on things that the money wasn't intended for. They helped themselves and governments looked away.

These people should be in jail.

As I said almost ten years ago on this topic, we are creating for our children's retirement future, a generation of paupers.

Hands up, those among us who really do know how to invest and can out-do the 8% mentioned above on a consistent basis. I submit that nobody knows how to invest well and for these people the stock market is a mug's game no better than a lottery.

Because these events are now becoming known as is the future of those without pensions as they begin to retire in about thirty years, we will adjust and perhaps rescue individuals just as governments are rescuing private corporations today, as well as whole countries.

We are told over and over that we must get rid of our sense of "entitlement". I couldn't agree more. Let's begin with those who felt they were somehow entitled to someone else's money in these pension plans. Their sense of entitlement is giving business a bad name...

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Evening Don,

The money in the plans wasn't "taken" per say. It is still there minus what was lost on the stock market. What was lost, is a minute amount compared to the shortfall. The current 58.2% solvency is partially due to a drop in the market but it is mostly due to the ultra low actuary rates used in actualizing the amount required to fund the current and future pension obligations. Just as an example, a 5000$ a month pension payout for 25 years at 8% interest would cost 650,000$. The same pension at 4% would cost 1,500,000$.

The current short fall is due to a combination of government regulation restricting pension fund surplus to 10%, a central bank that has lowered the overnight lending rate to ridiculously low levels therefore punishing savers at the expense of borrowers and at the same time making the rate used in actuary calculation lower(at one percent they are practically giving the money away) and market competition (in the form of other airlines without pension plans).

As for solutions to this problem, I think Sweden and Norway have interesting models and so does Australia. Make the CPP more generous but also make the contributions into it more onerous. Maybe introduce a variable portion to the plan and a fixed portion?

The idea of having businesses compete by reducing employee benefits such as pensions will have nasty long term repercussion. Why bother letting them compete on such terms? Maybe we need a more comprehensive mandatory pension plan system? I know some swear by their DC plans but managing money is not given to all and as an investor you simply can not get access to the same investment vehicles as large organized capital does.


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From the article:

"Now we get to the heart of the matter. Which institution engineered the heady stock market bubble of the 1990s that created the illusion of "permanent high returns" and growth of tax receipts? The Federal Reserve. Which institution has made the stock market the proxy for the economy? The Federal Reserve. Which institution has engineered a three-year stock market rally to put off the inevitable implosion of pension plans, entitlements and tax revenues that must grow by 8% annually while the real economy is flat-lined? The Federal Reserve."

The 'head of the snake' needs to be removed before anything at all can be 'fixed'. Actually, the Fed does 'fix' things, but just not in a manner that we might appreciate.

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"I submit that nobody knows how to invest well and for these people the stock market is a mug's game no better than a lottery."

That 'nobody' should include all the 'pizza delivery drivers' come 'financial advisors' that 'manage' our money today.

"Because these events are now becoming known as is the future of those without pensions as they begin to retire in about thirty years, we will adjust and perhaps rescue individuals just as governments are rescuing private corporations today, as well as whole countries."

Thirty years? The magic is gone now. We employ a 'fiat' fianacial system and so, our pension plan schemes could implode in as little as the next thirty days. Never mind Geitner's next magic act, melt down certainly isn't more than thirty months away now.

"We are told over and over that we must get rid of our sense of "entitlement". I couldn't agree more. Let's begin with those who felt they were somehow entitled to someone else's money in these pension plans."

Doesn't that sound a little bit like the 'tax collection / redistribution of wealth' system of today?

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Here's how the US is doing with it's pension plans...


U.S. pension insurer's deficit hits record $26 billion

The Pension Benefit Guaranty Corp.'s finances last year were hurt by the weak economy. Its director says it eventually may need a bailout from taxpayers.

Associated Press

November 15, 2011, 5:53 p.m.

WASHINGTON — The federal agency that insures pensions for 1 in 7 Americans ran the largest deficit last year in its 37-year history.

The Pension Benefit Guaranty Corp. said it ran a $26-billion imbalance for the fiscal year that ended Sept. 30.

The agency has been battered by the weak economy, which has brought more bankruptcies and failed pension plans.

Its pension obligations rose $4.5 billion. The PBGC also earned less money in the stock market, which helps to fund pension plans. Returns were $3.6 billion, half what it earned the previous year.

The agency's director said taxpayers may have to bail out the agency eventually if Congress doesn't raise companies' insurance premiums. He didn't give a time frame.

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Why have the new plan managed by the financial institutions? We already have CPP or the Caisse des Placements et Dépots in Québec.... why would we want our financial institutions to manage our retirement funds? It will just add to the bottom line of the banks. A management fee bonanza...

Also, why not increase the mandatory payment to CPP or equivalent? Why a parallel plan? The long term problems appears to be lack of saving from Canadians and pension plan attacks by corporations. And to address this we add a voluntary plan? Pardon my skepticism but this does not appear to have the potential to address the issue.

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Wells Fargo Says 80 May Be the New 65 for Retirees

By Elizabeth Ody - Nov 16, 2011

Americans are prepared to work longer in order to save enough for retirement, according to a survey by Wells Fargo & Co. (WFC)

About 76 percent of respondents said it’s more important to reach a specific dollar amount before retiring, compared with 20 percent who said it’s more important to retire at a given age, regardless of savings, according to the survey of adults with household incomes or assets from about $25,000 to $100,000.

“Eighty is the new 65,” Joseph Ready, executive vice president of Wells Fargo Institutional Retirement & Trust, said in an interview at Bloomberg headquarters in New York before the survey was released today. “It’s a real sea change.”

About 74 percent expect to work in retirement, according to the survey, with about 39 percent working because they’ll need to and 35 percent because they want to. And 25 percent of those surveyed said they expect they’ll need to work until at least age 80 because they don’t have sufficient savings.

“People are starting to move toward understanding the different levers of what they’re going to have to do to make it in retirement,” Ready said.

About 68 percent of those surveyed said they’re not confident the stock market is a good place to invest their retirement savings. About 45 percent of respondents said if they were given $5,000 they would buy a certificate of deposit, and 50 percent said they’d invest it in stocks or mutual funds.

No Good Alternative

“Even though there’s a lack of confidence, I don’t know that they see there’s a good alternative,” to investing in stocks, said Laurie Nordquist, executive vice president of Wells Fargo Institutional Retirement & Trust.

The Standard & Poor’s 500 Index returned 1.32 percent this year through Nov. 14. One-year CDs yielded 0.35 percent and five-year CDs paid 1.19 percent on average as of Nov. 3, according to Bankrate.com, an online provider of consumer-rate information and a unit of Bankrate Inc.

Survey respondents had saved a median of $25,000 towards retirement and estimated they’d need a median of $350,000 to support themselves in retirement. About 42 percent expect to receive a pension or already receive one.

“The numbers don’t add up,” Nordquist said. “The gap is probably larger than what they self identified.”

Those surveyed expect to withdraw about 18 percent on average from their savings each year in retirement.

“We would recommend typically 4 percent or less, in terms of withdrawals,” Nordquist said.

About 57 percent of respondents said they’re confident they’ll have saved enough for retirement.

“You used to just save blindly, but I think the blinders are coming off,” Ready said.

Geographic Attitudes

Wells Fargo hired Harris Interactive Inc. (HPOL) to survey 1,500 Americans aged 25 to 75 by phone in August and September. San Francisco-based Wells Fargo is the fifth-largest administrator of 401(k) retirement assets, overseeing about $117 billion as of 2010, according to Cerulli Associates, a research firm based in Boston. Fidelity Investments is the largest administrator with about $824 billion in assets.

Residents of the San Francisco and Sacramento, California, metropolitan areas are generally the most ready for retirement, and residents of Indianapolis and New York are generally the least ready, according to a ranking of 30 major metropolitan areas by Ameriprise Financial Inc. (AMP) The ranking, released yesterday, evaluated the survey responses of almost 12,000 adults about their preparations and attitudes towards retirement.

To contact the reporter on this story: Elizabeth Ody in New York eody@bloomberg.net

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.


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Bold lettering was added by myself.

Feds launch pooled pension bill Provided by The Canadian Press

Posted on Thu, Nov 17, 2011, 6:00 pm by Julian Beltrame

The federal government’s bill to create pooled registered pension plans will likely boost savings for retirement, but not enough to fully address the needs of Canadians and may have precluded a better option, critics say.

With more than 60 per cent of Canadian workers currently without any company pension plan, the government on Thursday tabled legislation to create a new savings vehicle aimed at that large segment of the population.

The idea, hammered out with the provinces last December, is aimed at small firms that can’t afford to go it alone in offering workers a pension plan.

Soon they will be able to “pool” resources with others, along with the self-employed, to create voluntary, defined-contribution pension plans that would be managed by private sector financial institutions.

The new PRPPs are similar in approach to personalized registered retirement savings plans, but the government believes more workers will save if contributions are automatically deducted from paycheques — rather than if they have to be set aside from disposable income as in an RRSP.

As well, pooling will create large, diversified funds less prone to investment errors and with lower management fees than many RRSPs.

“Basically, Canadians will be able to buy in bulk, buying in bulk means lower prices … lower prices means Canadians will get greater returns on their savings and more money will be left in their pockets when they retire,” said Ted Menzies, minister of state for finance, in making the announcement in Toronto.

But experts doubted the new plans would make a big dent into the coverage deficit among Canadians.

“It’s a good first step, but the fact is less and less Canadians are covered by pension arrangements and this will not do much for the coverage issue,” said Ian Markham, a senior actuary with Towers Watson in Toronto.

The coverage may be greater if provinces mandate that all firms must offer the plans to employees, although it is not clear Ottawa would agree to the option.

Among the drawbacks, according to critics, are that the proposed plans will be voluntary, they do not require employers to contribute and they fail to offer defined benefits upon retirement. Instead, the size of benefits will depend on the size of individual contributions and the earnings by a particular PRPP.

The NDP and labour groups said Ottawa erred in not using the opportunity to expand the Canada Pension Plan.

A six per cent hike in premiums to the CPP phased in over seven years would result in a doubling of benefits in 35 years, according to the Canadian Labour Congress.

“CPP is a defined pension plan; people will know what they will have at the end of the day,” said NDP critic Wayne Marston.

Meanwhile, the PRPPs backed by the government promise a windfall for financial institutions, which will profit from fees for managing the new pools of money.

Liberal critic Scott Brison said his party favours the creation of the PRPP funds, but also wants to government to allow Canadians to participate in a voluntary, supplemental CPP add-on that would pay off in defined benefits.

Given the current high unemployment rate of 7.3 per cent and weakness in the economy, now is not the time to increase payroll taxes that discourage hiring, Brison said, using much the same argument as the government.

One key element of the new plans that may increase participation is that employees will automatically be enrolled in any PRPP offered by the employer unless they choose to opt out. The ease of entry will likely cause more workers to participate, said CLC chief economist Andrew Jackson.

And that is the problem, he added. Once the new savings vehicles are established, there will be less pressure on government to expand the CPP.

“I think it’s an either or choice and I think they are making the wrong choice,” he said.

In negotiations with the provinces in December, Ottawa backed away from expanding CPP after a few provinces, most vocally Alberta, rejected the proposal. Since then federal Finance Minister Jim Flaherty has suggested the option could be revived in the future.

Prime Minister Stephen Harper appeared to downplay the likelihood the government would move in that direction soon, however.

“Canadians are looking for options,” he said in response to an opposition question. “Canadians are not looking for a hike in their CPP premiums.”

The pooled pension plan was widely supported by industry groups, including the banks and businesses.

The Canadian Federation of Independent Business praised the Harper government for making the PRPPs voluntary and called on provinces to follow Ottawa’s lead.

The Canadian Bankers Association, whose members already manage hundreds of billions of dollars of investment assets for Canadians and businesses, said the PRPPs will allow self-employed individuals to participate in private sector pension plans for the first time.

The Ontario Medical Association, which represents the province’s mostly self-employed doctors, also issued a statement in support of the pooled pensions.

However, two of Canada’s largest organizations for unionized workers — the CLC and the Canadian Union of Public Employees — were critical. Both favour an expansion of the CPP.

“Polls have shown that 74 per cent of Canadians don’t make contributions to RRSP and other private pension vehicles because they can’t afford it. This new PRPP legislation does nothing to address this simple fact,” said CUPE national president Paul Moist.

Moist called on provincial and territorial finance ministers to pressure the federal government to move ahead with CPP reforms when they meet with Flaherty next month.

The Canadian Press

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If we look at the money management rates n(posted below) for the pension plans of Canada (CPP) and Alberta, it is apparent that government run pension plans have lower management fees then both Mutual Funds and ETFs. Will the government legislate low MERs for this new plan or is this just a new give away to the banking sector? And if a group RRSP can be set up for as little as 3 people, the entire raison d'être of this new pension scheme becomes questionable.

The Pooled Registered Pension Plan – Oops


Posted by Preet on Nov 18, 2011 | 1 comment

Draft legislation was tabled today for a PRPP program (Pooled Registered Pension Plan). The exact details have STILL yet to be determined, but here are the highlights:

The PRPP is aimed at small businesses and the self-employed to help them save for their own retirement

Employees will be automatically enrolled, but can opt out

Employers can also make contributions but will not automatically be enrolled

It’s expected the economies of scale will reduce costs of managing the funds

Financial institutions will be allowed to manage the funds, but the details of how this would happen are unclear

So while there is a lot of good intention to help put small businesses on par with big company pension plans and increase retirement savings for Canadians en masse, I have my reservations based on the speculated details.

The people most likely to opt out are the ones who arguably need the most help with saving for retirement

What defines low cost? The CPP is roughly 0.43% to run. Alberta’s sovereign wealth fund (The Alberta Heritage Savings Trust Fund) is about 0.13%. A retail individual portfolio might be 2.00%. A DIYer can get down below the CPP’s MER.

This affects roughly half of working Canadians, some will participate but a lot of people assume an investment portfolio = financial planning. Will they be less likely to seek financial advice?

Or more likely to seek advice because there is something else to confuse them?

It’s a defined contribution plan. Others have argued an expansion of the CPP (defined benefit) would be better.

You can already set up a group RRSP with a small business with as few as 3 people

Businesses smaller than that, or the self-employed, can currently save for retirement already.

But most importantly:

How do you mandate lower costs on a PRPP but not on mutual funds? Mutual funds were designed for smaller investors to pool their money together to get a professionally managed portfolio at lower cost.

So if the costs are limited by legislation, and these costs are below mutual fund MER averages in Canada, the government is basically acknowledging investment costs in Canada are too high. If they set the maximum fees to be anywhere near mutual fund MER averages, the PRPP switches from suspect to useless.

Here’s a short two minute piece from CBC’s Havard Gould that appeared on The National:


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The banks are going to provide their 'expert' management of the funds eh? Remember; you can't make a 'good deal' with 'bad people'.

In an earlier post, someone, DH I think, speculated as to how many people were actually capable of investing their money wisely etc in the market place.

In reality, we can't, nor can the experts. Why not and it's not a secret; because the US Federal Reserve buys and sells stocks on the side / sly to 'manipulate' the markets.

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I remember a time, the mid-eighties I believe, when Canadian Banks such as the ‘Royal’ got into big trouble because certain South American countries were about to default on their loans.

Even then, I could not appreciate the rational used to support a policy that provided a publically funded ‘bailout’ to a ‘private corporation.

Back in, I think it was 2008, Harper attended the CFR, apparently drank the Kool-Aid and came home with a new understanding and approach to the banks. You can be sure...the little people aren't going to be the winners in this game because it is an international cabal.

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While Canadian banks have been doing better in the last few years and have held up better then the US counterparts, you do have to question how they are making money. The economy is in near recession and they are still doing very well. Will it hold up? How much exposure do they have to sovereign debt? How much do they have invested in derivatives?

And whatever happened to boring old banks? Seems like they now all have an insurance sale department and an international presence.

Taken randomly from Wikipedia about a major bank in Canada.

Scotiabank has billed itself as "Canada's International Bank" due to its acquisitions primarily in Latin America and the Caribbean, but also in Europe and India as well. BNS Institution Number (or bank number) is 002.

The company ranks at number 92 on the Forbes Global 2000 listing[5] and is currently under the leadership of Richard E. Waugh who serves both in the capacity of President and CEO.

Scotiabank has been active in the third quarter of 2010 purchasing two large Latin American units in Chile and Brazil from European banks in the United Kingdom and Germany, respectively.

I reckon there might no longer be such a thing as a strictly Canadian Bank. Most are now global players and who knows what they are doing outside the borders...

And as for their integrity... well they do not seem to get caught much but that doesn't mean they are models. CIBC ended up with a huge fine in 2003 in an Enron related financial statement manipulation.

The main weakness of the northern Banks? Real estate. Not directly as most mortgage are usually insured by the CHMC but indirectly through all the wealth Canadians are taking out of their homes (lines of credit).



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