Into the cesspool

On a day when the Canadian Imperial Bank of Commerce announced it dumped $1.1 billion in shareholders’ money on crap securities based on worthless mortgages, I scooped the above chart from Mish’s Global Economic Trend Analysis. Yeah, I know it’s just a mess of numbers, but they have a stunning story to tell.

This is a chart depicting the financial performance of a pool of mortgages worth almost half a billion dollars, which is in serious trouble. The securitized mortgage-backed security, if you can believe it, is full of loans all rated AAA just months ago. It’s one year old, and in the course of that year, it’s lost $16 million. But that’s just a small early indication of future misery.

Of greater importance – 22% of the mortgages are in foreclosure; 31% are delinquent by 60 days or more; and a further 27% are delinquent by 90 days or more. As Mish points out, this is why Standard & Poors Rating Services just pulled the plug on 1,326 Alt-A residential mortgage-backed securities, slashing their ratings. This affects a stunning $34 billion in residential home loans.

It’s this kind of garbage that ‘smart’ bankers around the world, including on Bay Street, bought into. So, shame on them. Shame on the lenders and brokers who extended credit to people unfit to have it. Shame on the public greed that moved buyers to snap up assets they could not afford. Shame on those who sold them. Shame on the rating agencies who blessed this junk with triple-A ratings that led unwary investors on into the cesspool.

This, by the way, is why the world as we know it is unravelling. The one little half-billion-dollar fund gives a small example of the debt and credit crisis into whose jaws we have but started to descend.


#1 3rdman on 05.29.08 at 8:01 pm

6 month delayed demolition began at the Toronto 1 Bloor East site today. Wonder if it will come down to being a car park for the next decade or so..?

#2 moxie on 05.29.08 at 8:23 pm

probably getting investors who are now reneging on what they bought and how much they bought at….greater fools. ha!

#3 My_view on 05.29.08 at 8:40 pm

Garth, that sounds scary. This fall/winter after the US presidential election, they will finally discover the economic WMD.

#4 David on 05.29.08 at 9:19 pm

With the exception of TD Bank, the other four players in Canada’s banking system were heavily involved in the US sub prime and Alt-A mortgage rackets. Naturally enough, none of these unpleasant facts are discussed among polite company or the media.
Standard and Poors who frequently rate Government of Canada bonds and the of the 10 provinces saw absolutely nothing wrong with all the sub prime flotsam in the USA. Even if these CDO’s could not be valued at market it was all AAA prime secured debt. Mike Milken and Drexel never generated rubbish debt like this in their worst moments. Unwitting investors in Norway and Ireland and who knows where else wound up being the bag holders for crappy mortgages in the California Central Valley.

#5 SMWhite on 05.29.08 at 11:09 pm

Darn Garth and his facts and numbers again, ha ha!

My_view, you got my vote, the neo-cons south of the border are doing everything in their power to keep the ship afloat until the elections in the fall, thats when you’ll see carnage. Funny how republicans in congress are favoring democratic policy to help with home owners, more market mischief, like we haven’t had enough already!

Great chart, look at those delinquencies move up, everybody remain calm, its just your imagination that things are going to [email protected]!

Never been a better time to buy a home! I mean burn a home.

#6 Peter on 05.29.08 at 11:41 pm

I am foreseeing that after the Canadian Banks are taking care their matters down SOUTH, they will need to take care of the matter up NORTH here…I am sure after that, those banks will be bleed dry..especially the ones that are very aggressive in Canadian lending sector (dont want to say their name but they are bleeded red since last yr).

#7 Peter on 05.29.08 at 11:47 pm

TD already putting up more capital for their loan provisions and other banks are doing that do..just to keep in mind that their Tier 1 capital are lower now due to writedown…our country has a requirement of 8 % Tier 1 capital in order to maintain the bank as “BANK” status..some banks are announcing that they have 10.5% or 10% and they claim they are safe, what if next year, something hits the fan and got sucked from bad loans up here and down there ? THINK !!!

#8 Damon on 05.30.08 at 2:06 am

So…when the bank of canada starts accepting this worthless ABCP as collateral for other loans to banks, and the Canadian Pension Plan decides to invest heavily in consumer debt of all sorts, it kinda smells like a bailout to me :(

From the Edmonton Journal on May 28:

“To keep pace with its rapid growth, the fund has been on a major hiring spree — recruiting 45 new professionals and 62 specialists — and is expanding its mandate to include corporate bonds, distressed debt and private debt.”

This apparently the new strategy of the Canada Pension Plan Investment Board in their hopes to double their assets by 2016.

But what if this stuff they are investing heavily in, under the assumption that it is currently under-priced, just really turns out to be an over-valued pile of garbage just waiting to experience the true markdowns of an un-ravelling ponzi-scheme of credit? Ah well right…I’m convinced my contributions will never come back to my pocket. Ever.

Garth, I am a total novice when it comes to economics, I only have info that I read on the internet, and I always look at mainstream media sources with skepticism. But when I read articles from sources like “Mish”, Peter Schiff, and other bearish-realists, I have a hard time being the least bit positive about our future in the near-term.

I don’t have the personal wisdom of being coherent through the 70’s and 80’s (being 28 now), but I have strong feelings that we are headed down a similar path that may end up far more painful than we all expect. It seems many Boomers have forgotten those lessons as well.

Sadly, I think my generations lack of wisdom combined with greed, distortions of economic reality and an unprecedented amount of Debt will leave many financially desolate and confused as to which direction the pendulum came from when it strikes.

What Canada has morphed into today is not good for anyone. The costs of shelter, food, and energy are sapping consumers ability to survive let alone save for their future and provide productive capital. Our service sector has now surpassed the manufacturing sector.

I shake my head when people think they are wealthier because some asset they happen to live in is going up in value on paper…it isn’t equity until you’ve sold it. And if you sell to upgrade, you’ve just bought more debt. And if you pulled equity out of your home for consumer spending, then you are the most foolish of Stupids. Besides these facts…this borrowed wealth creation is just inflationary – see local grocery shelves and gas pumps…2-3% annual inflation, pffft!

Since early 2007 I have been paying down personal debt, renting and saving by choice in an attempt to go against the grain and prepare for tougher times and credit conditions ahead.

However, I am fearful that my efforts will be in vain when there could be so many who simply will abandon their responsibilities and have their mess vacuumed up by public funds and liabilities effectively spreading the pain to savers and consumers alike.

All of this market intervention crap when things go bad, but hands-off when things go good is really just tied to politics and those with the ability to make changes not wanting to be the ones to sacrifice in doing the right thing. I don’t believe any politician would volunteer to put the brakes on this runaway train.

Sigh…sometimes I wish I would have bought a TV a few years ago and just tuned into the majority.

#9 vultur on 05.30.08 at 7:31 am

Darth Mortgage,

Canadian mortgage debt sits on Canadian bank balance sheets. It doesn’t get securitized and sold off to some distant buyer who bought into the false underwriting. I don’t think you understand this basic concept.

The basic concept is that most of our banks bought it and dealt in it, as did institutions around the world. Duh. — Garth

#10 anonymous on 05.30.08 at 10:40 am

Damon, here’s a free lesson on how economies work. There are two periods… expansion and contraction.

When an economy is expanding, you need to leverage as much as you can. Buy, buy, buy. Use credit to borrow as much money as you can. And spend it on assets. This period can last as long as 5-6 years.

When the economy starts to contract (as it is now), you want to do the opposite. Sell, sell, sell. Go renting, sell your assets (second home, rental properties, cottage, boats, etc.). Pay OFF your debt… you should have made quite a bit of money during the past five years. SIT IN CASH. And wait, wait for the opportunities when you can buy your neighbours house, boat, cars, businesses, etc. because they got too greedy and can’t make the payments.

That’s how you win. Play the economic cycles. Saving and paying off debt will only keep you middle class. you can’t pay off debt ALL the time.

So, you are in a good position now, so sit in cash… don’t buy anything right now. Wait for signs that the contraction is over and a new expansion is taking place. Just heed my advice… cycles are only around 5 years long.

#11 Andrew on 05.30.08 at 10:43 am

During my sons soccer game last nite I meet another parent who during our conversation, told me he’s a portfolio manager for BMO, he did advise me of a few things which he sees coming , he did say the U.S is definitely in a recession and the housing crsis is far from over .. look for credit card defaults as well as auto loan defaults to come next.. I tried probing further and did say canada will be going into a recession as well.. and that rates will be going higher 2-3 percentage points .. due to the inflationary presures which are higher than what is being reported . For what it’s worth…

#12 anonymous on 05.30.08 at 10:49 am

We (canada) began a contraction phase in August, 2007. Start saving up! Cash is going to be KING two years from now.

BTW, I sold in April (took 6 months to sell)… moving in this weekend to a shiny new rental and a big fat check for my bank account.

#13 Andrew on 05.30.08 at 10:50 am

question to the baord and to garth ..

This has been bugging me, has of late .. regarding baby boomers .. from what I have been able to determine they make up over 30percent of population and in Ontario which account for about 3.7 milion of the population. knowing what type of impact they will have when they retire.. Will the immigrants coming to canada be able to offset the boomer tide that will be retiring .. apparently there is about 250,000 immigrants that come to canada ever year and that’s been happening for a while ,, will it be enough ?

#14 Canadian Silver Bug on 05.30.08 at 10:52 am

The way I see it Garth you’re late to the party getting on the Mortgage crisis bandwagon, we’ve followed this for more than 2 years. While we are just peaking this was easily predictable quite some time ago, even before the U.S. went FUBAR.

The next wave in the U.S. is the Alt-A paper and Commercial loans, have you checked the rising vacancy rate for office space and malls? Following that we still have the Credit default swaps/derivate mess that is teetering near the brink. Have you looked at the exposure that Bear Stearns had in this market, had they not been raided their failure would have collapsed the system. To save their asses JP Morgan had no choice but stall the crisis and add the Bear Stearns exposure to theirs. The problem is not going away it’s just getting more concentrated.

Housing is the lesser of the problems, the potential destruction of the world banking system , the Greenback and other fiat currencies is the threat you should be touting but then again you are at least 2 years behind the curve.

You should be telling people to take a small gold possition as insurance.

#15 James on 05.30.08 at 11:04 am

I just paid off all my debt this morning. I don’t have much cash on hand but that’s coming. I will be ready for anything.

#16 SMWhite on 05.30.08 at 11:20 am

“the only way to become a real estate millionaire(in this market) is to start off as a real estate billionaire”

– Peter Schiff –

#17 Mike on 05.30.08 at 3:07 pm

In spite of all this info south of the border some prices in Canada real estate are going up from last year. If we acknowledge the problem then when will it effect prices here in any dramatic way? Some are saying the worst of the credit mess is over and we should be onto smooth sail ing by years end. I am not one of these for sure. Is this all bravado for the masses??

#18 Terry on 05.30.08 at 5:31 pm

To all you negative doomsday forecasters now maybe the time to short Canadian banks. Truth is nobody including Garth knows where we are headed. The one major fact that everyone seems to miss is the huge sums of cash sitting in saving, money market accounts and RRSP in Canada. My question is where is all this money going if Canada does head into recession. As long as oil remains high it will keep Canada head above water just like it did in the 1970’s. If oil prices head into the craper for a long period of time Canada will be in for a major financial crisis.

#19 poorguy on 05.30.08 at 6:46 pm

good news

#20 Terry on 05.30.08 at 6:56 pm

From boom to gloom?

Leave it to Garth Turner to throw cold water on the notion Canada can achieve a soft real estate landing, when history and the slump south of the border show that is a rare feat indeed.

#21 David on 05.30.08 at 7:37 pm

Well, I will tell you where we are collectively headed financially. Ever hear about an extinction vortex? The overextended home mortgage market will ultimately prove to be the undoing of the Canadian financial system.
It is pretty much common knowledge now that the markets are unsustainable, that 40 year mortgages mean buying on the never never and that most of the new homes constructed are so poorly made that they will be falling apart totally in the next 5 years. Once a certain set of ideas becomes common place, nothing will reverse the downward trajectory at this point. The greater fools of real estate are now the laughingstock. Enjoy the rocky road to the bottom realtors and bubble speculators.

#22 Mike on 05.30.08 at 9:23 pm


Truth is…it doesn’t really take a rocket scientist to figure out where we are going. History is a great teacher if you let it teach you. Unfortunately this road we are on is something no one in our generation has personally witnessed… our parents perhaps.
Debt levels are too high. 40 year ams are becoming more common. Savings are down . Jobs are being lost.. manufacturers closing… all statistical facts. Not much room for interpretation or guessing. I have been looking for a house since October. Only in the last month or so have I seen a couple owned by the bank.
No …not is a small bedroom community … in the heart of Toronto central area.
We know where things are going but most are covering their ears and shutting their eyes because it is too much to think about.

#23 Jon B on 05.30.08 at 9:36 pm

There’s a basic origin to every problem. For this one, the credit problem and the associated myriad of problems it causes, is quite simply man’s universal desire to live beyond his means. When credit is extended with reckless abandon, something has got to give at some point.

#24 Stojan Ninkovic on 05.31.08 at 3:27 am

remember this one?
when your output exceeds your input
then your upkeep will be your downfall.
Why are the youth today so willing to part with their money and very often beyond their means?