Canadian Financial Risk

/ October 24th, 2011/ Posted in Social, Economic and Financial Risk / No Comments »

interview-CorbettReport-ChapmanI sent in a question on Canadian financial risk to be posed to financial commentator Bob Chapman, who is interviewed every Monday by Canadian expat James Corbett. Corbett lives in Japan, where he produces The Corbett Report on political, educational, financial and other topics. The Q/A begins just before the 31:00 mark in the podcast. I will summarize the main points of Chapman’s answer here, with the caveat that it is a paraphrase, and for the exact language, readers must go to the interview itself.

My question ran as follows:

Bob, you have referred to how speculators use the bond market to, so to speak, target an entire country and take it down, as happened in Greece. You have also said that it is too technical to try to explain. Could you please: 1. explain it in layman’s terms and 2. say whether it is possible for this to happen in Canada?

He addresses the Canadian aspect first in his answer, Part 1:

  1. For some reason, Canadian banks did very little of the purchasing, either for themselves or for clients, of the toxic waste (the bad mortgage debt securitized into bonds). Some of the Canadian brokerage firms did, but not a lot. And so, they never had that dreadful exposure.
  2. Incidentally, 60% of these bonds were placed in Europe.
  3. I [Bob] can’t to this day figure out why the attorneys and the experts in Europe – and the handful in Canada and the United States – that took on these securities never questioned their ratings. I just can’t believe it. There had to be another reason…
  4. Canada has a very solvent financial system, and has always been very conservative, compared to others.
  5. What I see is terrible problems internationally. The worst hit will be the US, England and Europe – they are going to be bad 10’s. By comparison, Canada might be a 3, a 4 or a 5. The same with Mexico, which is surprising, but they have natural resources.
  6. The main point is: Canada is going to do fine compared to everyone else.

End of summary of Part 1.

I wonder why Bob Chapman would reach the conclusion that Canada will “do fine”. That is to say,  what does a level 5 downturn, on a scale where 10 means disaster, really mean? It could still be extraordinarily severe. Can Canadian society depend, as he suggests in the case of Mexico, upon exporting natural resources? Of course, I understand that the idea of adding value to resources before they are exported; i.e., the notion of a robust and diverse manufacturing sector, part of a mixed economy underpinned by infrastructure maintained as a public utility, is a hopelessly quaint idea. For now, it seems energy products exports, on a balance of payments basis, are recovering from a 36% drop 2008-2009. (I wonder what that drop would be on Bob’s scale of economic difficulty of 1 to 10?).

In any case, I want to focus on the risk management aspect of his comments. They confirm for me my conviction that a risk assessment  methodology that is rigorous and comprehensive is appropriate and applicable to virtually any context, including the financial. Establishing context (to make explicit one’s goals, objectives and values) as well as using comprehensive risk identification techniques —  these are relevant steps, universally. For example, in the case of pension funds directors contemplating investment in CDOs (collateralized debt obligations), would this process not lead to scrutinizing the rating agencies’ pronouncements of their value?

My thoughts on his remarks about how so many experts, such as attorneys, have failed: first, a legal analysis is not the same as a risk analysis. They can be complementary, but they have fundamentally different approaches. The biggest risks can easily be missed in a predictive legal analysis, because they lie outside the scope of a review of relevant statutes and historical precedents. Second, it is evident that risk assessment focusing on fundamentals, taking a multi-disciplinary approach, has by and large been overshadowed by quantitative models. Further discussion along these lines is in the related posts below.

In the next post: Part 2 of Chapman’s response which outlines the machinations leading to the Greek debt crisis.

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