Inside Ottawa and Bay Street’s push to put a lid on the fallout from Home Capital
As Home Capital Group Inc.’s shares were in freefall last week, the fight to stop the bleeding at the Canadian mortgage lender had already begun.
Here’s a look at the company, its role in the Canadian mortgage landscape and how the discovery of fraud among its brokers two years ago continues to have ripple effects today. Read on
It was late Tuesday night, Ottawa time, when federal Finance Minister Bill Morneau received his first briefing from department officials just as he was boarding a plane in Beijing to head home.
Home Capital had been reeling for a week after the Ontario Securities Commission accused the company of misleading investors over fraudulent mortgages. That was sparking a run on deposits, forcing the company to take on a $2 billion emergency credit line at an effective interest rate of 22.5 per cent on funds drawn so far.
Last Wednesday, with Morneau en route home, Home Capital’s shares dropped 60 per cent by lunchtime as investors bet the onerous terms of the loan would squeeze the company. There was also contagion risk. Canada’s major banks saw their shares slump, while Equitable Group Inc., a rival of Home Capital, plunged by almost a third.
Morneau landed in Ottawa Wednesday night, calling his departmental officials as he got off the plane for the latest information, according to people familiar with the discussions. He later spoke with Jeremy Rudin, head of Canada’s Office of the Superintendent of Financial Institutions, who is responsible for regulating what the World Economic Forum has called the “soundest” banking system.
On Thursday, Morneau’s office pledged his support for Rudin’s OSFI and the banking sector. “Our government has full confidence” in OSFI to “manage the situation,” Morneau spokeswoman Annie Donolo said in an email.
The pledge wasn’t enough to calm investors. While Home Capital’s stock recovered on Thursday on speculation a buyer for the company might emerge, the deposit run continued, totaling $892 million over three days to close the week. What’s more, the onerous terms of the high-interest lifeline, later revealed by Bloomberg News to be from Healthcare of Ontario Pension Plan, resonated beyond the company.
Run on Deposits
“We looked and felt, what on earth are they doing?” Equitable Chief Executive Officer Andrew Moor said in an interview. “We thought that might cause issues of confidence in the market, frankly, and so immediately we started reaching out to our bankers.”
Equitable started to face a rash of withdrawals too, losing about $75 million daily between Wednesday and Friday — even though the Canada Deposit Insurance Corporation provides a safety net by guaranteeing deposits of up to C$100,000.