Contagion Fears Rise In Aftermath Of Home Capital Group Collapse

Tyler Durden's picture

With the bank run at Home Capital Group hitting a crescendo on Friday, when in one day 36% of the liquidity at Canada's largest non-bank lender escaped through the front door, and only an emergency rescue loan yielding over 20% has prevent a liquidation at HCG so far, suddenly some are wondering if the dreaded "C" word is applicable to what Bloomberg has dubbed "one of the world’s strongest financial systems."

The word in question is contagion, and the party casually bringing it up is Mawer Investment Management, one of HCG's largest former investors.

According to Bloomberg, Mawer CIO Jim Hall is recalculating the odds of a contagion widening across the Canadian financial system.

“The probability has gone from infinitesimal to possible -- unlikely, but possible,” said Hall, chief investment officer of the Calgary-based money manager, in an interview Saturday. “If depositors or bondholders start to lose faith in their banks, well then that becomes systemic.”

Mawer is not waiting to find out either way: the company which oversees more than C$40 billion in assets, sold about 2.8 million shares, or a 4.3 percent stake, in Home Capital in the past week, joining another Calgary-based money manager, QV Investors Inc., in exiting its investment amid the imbroglio consuming the Toronto-based lender.

Speaking to Bloomberg, Hall said that in his view, the odds that woes at Home Capital - which had C$20.5 billion in assets at the end of 2016, and whose C$15 billion home-loan book represents about 1% of Canada’s C$1.45 trillion mortgage market - spread through Canada’s financial system are low, "despite a growing chorus of voices speculating such fears in a nation gripped by an overheated housing market and runaway home prices in two of its three biggest real-estate markets: Vancouver and Toronto."

“It’s a pretty hot fire in one little corner of the forest, and it doesn’t look like it’s spreading,” Hall said. “There are firefighters standing around it right now, so if it starts to move, they’ll put it out.”

Unless, of course, the firefighters are just as capable as the rating agencies or the company's investors, the vast majority of whom never saw this coming.

As reported last week, after admitting it was the subject of a furious bank run, Home Capital secured a loan to stem dwindling deposits and said it’s weighing a sale, hiring RBC Capital Markets and BMO Capital Markets to advise on financing and “strategic options.” Canada’s banking regulator says it’s closely monitoring the situation and surveying other financial firms to assess their condition. 

"The assets look, at this point, still reasonably good,” Hall said, adding that Home Capital’s problem is a matter of confidence. “Confidence was lost in this company and the business model breaks apart. That’s the problem with banks.”

So what would a worst case scenario look like?

Canada’s financial system has lots of fire breaks, as Hall describes it, to prevent problems from spreading.

 

“Even if a bank gets itself into a confidence issue, it can be effectively bailed out by another bank or by another financial institution or by ultimately the regulator,” Hall said.

 

Bank failures in Canada’s financial system, deemed the world’s soundest by the World Economic Forum for eight straight years until 2016, are rare. Canadian banks sidestepped the worst of the 2008 financial crisis, having only a fraction of the $1.95 trillion of writedowns and losses suffered by financial firms worldwide.

Ultimately, it is the "safest" financial systems, those that have taken virtually no reserves against a downside case, that end up being most exposed to unexpected shock factors.

"In a system that’s well capitalized, there are lots of firefighters around and they’ve got lots of equipment and they’ve got lots of water - that’s kind of where we’re at right now,” Hall said. “But it doesn’t mean it can’t get out of control." As a reminder, in the US stocks surged for months after the US had its own "New Century" moment, hitting all time highs nearly half a year later, when it took months for the market to digest just what the collapse of subprime meant for the US and global economy.

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BlindMonkey's picture

Let's get this party started!!!

 

GUS100CORRINA's picture

Title: Contagion Fears Rise In Aftermath Of Home Capital Group Collapse

My response: Unintended consequences can lead to BLACK SWAN EVENTS in highly leveraged systems!

CheapBastard's picture

The Emperor is Naked!

All the dominoes start falling one by one.

It'll be fun to watch as an outsider with no horse in that gambling race of RE.

Who is holding the hot potatoes will get burnt.

Feel da Burn!

Deathrips's picture

You must work for this uncollateralized paper because i say so... (((((THEM))))

 

 

RIPS

D Nyle's picture

How many "Contagions" does it take to Kill the Patient?

JackT's picture

Does Canada still have their 40oz of Au?

robertocarlos's picture

It's stored it in the refreshing waters of Lake Minnetonka.

jeff montanye's picture

best single reason to own gold and silver?

interest rates are at a 6,000 year low.

hang on to your hats and keys.

bankerbackbacon's picture

Love it, we give away interest free loans CCB (PE Trudeau) to BIS lending, they rape us, we devolve financially and they tell us we are risky. Its like a child abuser telling you to buy better lube for use on your kids.

Pinto Currency's picture

Few know that detail about Pierre Trudeau. It is ironic that this 'hero' of Canada has contributed so strongly to its ruin.

armageddon addahere's picture

He takes after his old man. And his mother's personal philosophy was to the left of "whoopee".

JohnGaltUk's picture

They will wheel Pierre Trudeau out soon to repeat the words of Hank Paulson: Our financial institutions are strong.

 

He will look like Frank Dribbon off Police Squad, there is nothing to see here, move along.

glenlloyd's picture

Time can reveal almost anything, just give it a little time and I'm sure it will no longer be 'largely contained' as we were so often told before.

arglebargle's picture

No. I bought it from the mint to top-off my own reserves, so there is 0 left.

We are 'effed up here in the great white north. I can't beleive that our 'leaders' managed to fool the rest of the world (minus a few like ZH) into beleiving that our financial system was the best and most sound. They sure as hell fooled most of the idiots roaming around here, and the personal debt levels are the proof.

Despite planning, waiting for years, and preparing with the Mrs, I still get a little nervous thinking that this may finally be it. One can only hope that this is the kick-off to the normalisation, because I will be waiting to sift through the pieces for the good parts, and I won't bat an eye when people learn the hard way that they did in fact have to be responsible for themselves. Fuck em...

MalteseFalcon's picture

All Canada needs to do is import a few million more Somalis and everything will be alright.

Only the short sighted do not see the opportunity here.

Buck Johnson's picture

I totally agree with you.  Who would have thought that Canada could kick this thing off.  Remember Canada doesn't have a large population (25 to 30 million I believe) and they are levereaged that much if not more.  

JethroBodien's picture

35.85 million people as of 2015 census my friend,  Take off hey!

I'm not taking any chances so I'm moving my money out of eQUITable Bank on Monday morning.  TSE:EQB

It has very similar lending/banking practices as Home Capital Group.

Adullam's picture

I know one fellow who has just decided this is as good a time as any to withdraw a substantial amount of savings from a ... Credit Union in Canada.

In my relatively uneducated opinion, this news has only 2 ways to go:

(a) get buried and have little to no consequence. Note: the MSM is reporting this as little as possible.

(b) get wings and really fly with dire consequences.

I just do not think there is a middle ground on this one.

JLM's picture

Better move quick.  Stock down 50% in last couple of trading days.

JethroBodien's picture

No stocks thankfully...  Very liquid with cash only

It's not Right to hate - it's Left's picture

I don't know where you are from but in 'merika, you can't withdraw cash without filling out forms targeting you as a probable money laundering drug traffickers (I know, the pot calling the kettle black, right?).  If you take out smaller amounts of say $5000 routinely trying to accumulate a cash stock pile for safety, again the forms.  I wanted $40k in my safe for just in case money.... I had to tell the teller I was car hunting and wanted to get a better "cash" deal.  After two months, using 4 diff banks I got called in to my main bank to be warned and... More forms.  The same bank I had used for my $1.6 M revenue business.

There is a war on cash.  $100 bills beware.  I'm looking into a possible eBay - PayPal - goldmoney.com way to buy gold without such a huge drama and scrutany.  I feel so dirty just trying to touch my own money. 

JethroBodien's picture

I have accounts setup with multiple banking institutions for situations just like this.... In Canada I've never had a single problem moving my money between those accounts.  Granted I don't need to make a cash withdrawl to facilitate this.

oncefired's picture

We all know it's going to happen....might as well get Things Rolling Now!

SHEEPFUKKER's picture

Don't forget about bad news is good news

CCanuck's picture

Don't worry they have hosers standing around waiting to put out the fire!
Doomers can take off eh!

Cheers,
Ccanuck

Sages wife's picture

It's fine. It'll be fine.

edotabin's picture

The only lifeboat would be hard assets, no debt etc. Meanwhile more printing, lending and conjuring is the proposed answer. So, the question is: What lifeboats?

JethroBodien's picture

Give a man a gun, he'll rob a bank. Give a man a bank, he'll rob the world.

JethroBodien's picture

And its gone...  What?  Its gone.  What do you mean its gone?

https://www.youtube.com/watch?v=Maa0K4ycASo

 

A82EBA's picture

hell yeah, gold did pretty good after lehman

Hikikomori's picture

Just when cities across Canada decided it would be a great idea to limit Chinese money coming into the real estate markets - whoulda thunk THAT would have had an effect?!

pitz's picture

Too bad there was little to no evidence of Chinese money or Chinese participation in Canada's RE marketplace.  But Chinese participation sure would be a good idea right about now.  People will be begging for it as prices continue to fall.

bluskyes's picture

What are vacant mansions in Vancouver that sell way above asking price?

pitz's picture

Mostly not true arms-length transactions if you dig deep.  The local speculators have to keep the delusion alive at all costs. 

Deathrips's picture

Real market interest rates have nothing to do with overbalued real estate. Its duh foriders.

 

RIPS

Lore's picture

There's no question that Chinese and other foreign capital explains some of the most absurd hypervaluation. Well worth watching, IMO:

CHINA'S MILLIONAIRE MIGRATION (c/o SBS Dateline, 7-Jun-2016, 24 min)

However, foreign capital is only one among many reasons for the hot zones.  According to realtors in my family, there are bigger problems that seem to involve local corruption and ineptitude.  Apparently, government and the media are focusing deliberately on one symptom to the willful exclusion of other considerations. In that regard, check out this documentary about Toronto real estate from CBC's Doc Zone. Properties are being traded sorta like futures on the COMEX. (I wouldn't touch any of those glass towers with a 10 foot pole.)

THE CONDO GAME (c/o CBC Doc Zone, 9-Jul-2015, 1hr 10min)

Still, this matter of HCG strikes me as overblown. We're only talking ~1% of the mortgage market. 

As a matter of perspective, travel across Canada outside the nicest (and consequently hottest) bubble zones, and you don't hear the same gripes about "affordability."  If anything, inflation seems staid.  I have family moving to different cities in pursuit of work who are able to buy a house outright. Markets across most of the prairies will put you to sleep.

Sick Monkey's picture

Understood but how do folks in sleepy prairie towns make money. Sounds more like an exclusion zone. Keeping every one close to the hive works if your daddy left you the farm but the average Joe and his children have no future. If it was only the sheriff and his wife I would say good riddance but unfortunately were talking millions left out of a game created by greedy RE industry. When the poop hits the fan everyone pays a premium. Even moving closer will lock you into slavery given the prices. Not a sustainible system. One of many reasons large cities are a bad idea. Run away infrastructure cost and speculation is a fools game.  

Lore's picture

Your post seems kinda weird, so I suspect that I misunderstand. Do you perceive some kind of stark division in lifestyle between the Toronto or Vancouver bubble zones and the rest of Canada, like stepping back in time to the days of Andy Griffith and the Waltons?  That may be the case in parts of Eastern Europe (I can testify to that), but certainly not here.  Good grief.  If you've never been to Canada, than maybe you think it's hicksville, but there are a helluva lot more cities than just Toronto and Vancouver.  Some of the best universities and technical institutes are in cities on the prairies. My millennial nephews and nieces are pursuing professional careers and doing very well, thank you.  Even on the west coast, just a couple hours away from Vancouver, you can find urban centers where real estate is more-or-less in tandem with general inflation. The point is, the bubble is neither uniform nor widespread.  Vancouver is particularly bubbly and always will be due to topography, zoning constraints, unusually large foreign influx, and the fact that it's simply a nice place to live, with little of the harsh winter that punishes most of the rest of the nation, which is why it's also a magnet for the homeless.  These things won't change, which is why all the bleating about "Affordability" is really just newspeak for entitlement-acculturated demands for 'Cheap' and 'Subsidized,' usually packaged in populist "Green" bafflegab. 

Yes We Can. But Lets Not.'s picture

"Markets across most of the prairies will put you to sleep."

And that won't change, because in the prairies land is plentiful.  Land can be turned into buildable lots.  Cheaply.

What appreciates in the Vancouvers and NYCs and Washington DCs and London is not homes but the lot under the homes.

quesnay's picture

I visited friends in Vancouver recently. Within a block radius there is literally 10 newly built 'monster houses' now owned by newly arrived Chinese (new driver stickers on brand new Mercedes, BMWs and Audis with Chinese drivers). Now 'maybe' he just lives in an unusual location that Chinese are really attracted to for some reason. Maybe. Or 'maybe' the reason his house went from 800,000 in value to 2.4 million in 3 years is directly related to Chinese trying to get their money out of China into a safe haven. I'm betting it's the latter.

Also ... as soon as the Vancouver foreign buyers tax kicked in, my friend said that house sales cratered (dropped like 60%) and prices stopped rising. So if Chinese buyers are a 'myth', well explain that little correlation then.

http://i.huffpost.com/gen/4657450/thumbs/o-VANCOUVER-HOME-SALES-AUGUST-2...

bankerbackbacon's picture

This Chinese, Indian smoke screen is the first world version of Israeli settlements. According to fake news and kung fu masters, its not happening and those dozen houses on your street in Richmond are another smoke bomb, tiger penis illusion.

omi's picture

Marginal demand is what's pushing the prices hard one way or another.

bankerbackbacon's picture

How about I live in Vancouver. Chinese can buy a house here, and there aren't many (supply is small) but I cannot buy in China. The prices are inflated and if there was a contangion and selloff it would be equivalent to a money bomb.

williambanzai7's picture

Indeed, everyone knows Chinese have no hot money just firecrackers. The world real estate markets are inflated with firecrackers made in Macau.

Inzidious's picture

You again? We debunked you last time you came out of your box. Can you get it over with and disclose your clear conflict of interest? You are obviously connected to this stupidity somehow....