11-010-XIB
Canadian Economic Observer
October 2008

Canada

Ford will eliminate 500 jobs at its Oakville assembly plant by phasing out a third shift of production and will offer buyouts and retirement incentives to workers in Oakville, Windsor and Brampton. GM will invest $290 million in plants in St. Catharines and Oshawa. Toyota will delay plans to add a second shift at its new assembly plant in Woodstock due to falling demand for its crossover-utility vehicle. The plant will open as scheduled in November.

A four-part $2.5 billion expansion of the Port of Montreal was announced, which will refurbish existing terminals and create new ones.

Enbridge revealed plans to pipe heavy crude from Alberta to refineries in Montreal. Petro-Canada’s Fort Hills initial project estimate of $33 billion was revised upwards by 50%.

World

Financial market turmoil in the US deepened and spread globally. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), both government-sponsored enterprises, back nearly half of the $12 trillion mortgages outstanding. On September 5, the Treasury placed them in a form of bankruptcy protection known as conservatorship and pledged up to $200 billion to backstop them. Investment bank Lehman Brothers declared bankruptcy on September 15. The same day, Merrill Lynch was acquired by the Bank of America for $50 billion. One money market fund fell below the $1 per share benchmark, triggering heavy redemptions of other funds. Barclays Bank agreed to buy $2 billion of Lehman’s brokerage assets and real estate holdings. On September 16, insurance giant, American International Group was given an $85 billion emergency line of credit by the Fed to cover its day-to-day operations in return for an 80% stake in the company. The yield on three-month Treasury bills fell to 0.02%.

On September 18, the Federal Reserve and five other central banks around the world injected $180 billion into global financial markets. On September 19, the US Securities and Exchange Commission temporarily banned short selling of 799 financial companies. The Treasury announced it would insure up to $50 billion in money market investments at financial companies, guaranteeing that the funds’ value would not fall below the standard $1 per share, and it would make unlimited funds available to banks to finance purchases of asset-backed commercial paper from money market funds.

On September 22, Goldman Sachs and Morgan Stanley, the two remaining independent investment banks, were converted into traditional retail banks, giving them access to cheaper and more stable funding. Japan’s Nomura Holdings bought Lehman’s Asian operations for $525 million and Mitsubishi UFJ Financial agreed to buy 20% of Morgan Stanley for $8.5 billion. On September 25, Washington Mutual declared bankruptcy, the largest US bank failure in history. The US Office of Thrift Supervision announced that it would sell these assets to JPMorgan Chase. By month end, European governments had to bail out several major banks, including Fortis in Belgium, Bradford & Bingley’s in Britain, Glitnir in Iceland and real-estate firm Hypo Real Estate Holding AG in Germany. On September 28, the banking operations of Wachovia, the fourth largest commercial bank in the US, were put up for sale. On September 30, Ireland announced it would insure $600 billion worth of debt and deposits at its six largest banks for the next two years. At month-end, the SEC issued a clarification to mark-to-market accounting rules, allowing more discretion in valuing assets when their market price is abnormal.