The economy is slowing down, the FED is cutting rate like a lumberjack with his axe and the whole market is going crazy. If we go further into our analysis, we find out that Arab countries are buying notes from American banks, that global warming will be a real pain in the future and that we are ultimately going to run out of oil. You better go to Wal Mart and buy their new nuclear shelf before it’s too late! This is just another April’s fool; Canadian banks are not going bankrupt.
However, I did not invent what I just wrote; I heard it from many clients. They are scared of the market and now, a few of them are asking what is going to happen to my money if the bank goes bankrupt? Why are you so concerned about it? I always reply. And here we go with the cataclysmic discussion about Satan coming out of the Bear Sterns’ building smoking a cigar with the CEO of JP Morgan!
So tell me why Canadians are not going bankrupt then!
First things first, in order to go bankrupt, you need to spend more than you earn and not be able to repay your financial obligations. While the financial industry took a big hit since last fall, the major six banks still made profit last trimester. They still operate viable activities and still paying back their bills.
Second, Canadian laws were made so banks would definitely not collapse. Nobody wants to see people jumping off a building anymore. The legal environment is protecting the banks from major crashes. What would happen if we all made a mistake and a Canadian bank still goes down the toilet? Most likely the government would allow a bank fusion between two entities in order to protect the population.
On the other side, if we would let a bank goes bankrupt, it would create much more damage than we think. Before losing everything, the bank would call back all its loans in order to pay back their financial obligation. Can you imagine receiving a call from a loan officer asking for the full payment of your mortgage by the end of the week? This would engage several people to declare bankruptcy as well. A huge amount of people would lose their job at the same time and the government just couldn’t pay employment insurance for everybody. This is why they would allow such fusion.
Then again, we are far away from this sad story. Does anybody remember 2002 with Worldcom and Enron declaring that they were fooling the market for years? We didn’t have time to recuperate from the Techno bubble that we were stuck with another crisis. Several companies were going bankrupt and the whole market was about to lose confidence in all financial statements they saw.
However, starting in 2003, the market went up and investors were making big bucks for a good four years.
While all this happened only six years ago, people tend to think that this time, it is different. That this time, we are really going down and the market will never come back. I bet you that it was the same people who were losing confidence in the market back in 2002…
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