Year in review: 2007’s most newsworthy happenings

As the year comes to a close, advisors are likely breathing a (temporary) sigh of relief. The year started off well enough; markets reached record highs — the S&P/TSX Composite Index broke 14,000 points in mid-May — but, as the saying goes, what goes up must come down.

And come down it did. The Composite Index lost 600 points on August 8, while other markets around the world tumbled as well. Needless to say, 2007 was a tough year for the financial industry. In case you forget exactly why your clients were waking up in cold sweats in August, Advisor.ca is here to recap everything from the sub-prime mortgage mess to Canada’s soaring dollar.

America’s sub-prime woes

While it seems as though everyone started saying sub-prime this and sub-prime that sometime during the summer, the problems actually started in 2006 when Americans began defaulting on their mortgages.

However, it wasn’t until March 12 of this year that the financial world started paying attention. On that day, New Century Financial, one of the biggest sub-prime lenders in the States, announced that it was facing bankruptcy. Three weeks later it filed for Chapter 11 bankruptcy and laid off 3,200 employees.

As bad as that was, things really started getting precarious on June 22, when Bear Stearns began bailing out two hedge funds that placed heavy bets on the sub-prime market.

From there things just got worse. On July 13 General Electric decided to sell the sub-prime mortgage business it bought in 2004, while, a week later, Federal Reserve chairman Ben Bernanke said the sub-prime crisis could cost the industry $100 billion.

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The tipping point occurred on July 31, when the two troubled Bear Stearns funds filed for bankruptcy. By the beginning of August, markets around the world started their dramatic drop, and sub-prime woes would dominate the financial news landscape for the rest of the year.

The rising Canadian dollar

While it’s hard to believe that the loonie was just 61.79 cents US in 2002, it’s even harder to fathom that the buck reached nearly $1.10 on November 7 of this year. Today, the dollar sits around parity, or about 20% higher than where it was on January 1.

While consumers are jumping for joy at the dollar’s increase, manufacturers, investors and other members of the financial community are more apprehensive if not downright upset.

So why the sudden increase? Basically, the U.S. economy is tanking, pulling its dollar down with it. Sub-prime issues, which have devastated America’s housing market, are the main reason the Canadian dollar — along with currencies around the world — has appreciated, but interest rate cuts, the ongoing war in Iraq, the credit crunch and a lack of confidence from other countries have also weakened the U.S. greenback.

It’s unlikely any of this will change in 2008, which might be good news for those wanting to buy a cheap car stateside but bad news for the Canadians making them.

Dundee’s rumoured takeover

Will he or won’t he sell? That’s the question everyone wants David Goodman, DundeeWealth’s CEO, to answer.

The rumours of a full-scale sell-off started on September 18, when the company announced it was selling its banking unit to Scotiabank for $608 million in cash and shares.

That move sent shockwaves through the industry since David’s dad, Ned, who stepped down as CEO three months earlier, used to rally against the Big Five banks.

While that was big news, a week later, CI Financial announced that it was making an unsolicited offer to acquire all outstanding shares of DundeeWealth, as long as the financial firm cancelled its deal with Scotiabank.

Since then there’s been talk, though nothing official, that Power Corporation was going to make a play for Dundee. Other yet-to-be named companies could be planning bids of their own too.

But whether or not a takeover will happen is still very much up in the air. On December 12, Advisor.ca reported that no one was willing to pay the high price that an acquisition of Dundee would require — even Scotiabank’s deal had fallen through. Dundee’s stock prices decreased by 10% that day, while the next day saw shares trading as low as $16.46, down from $22 when takeover speculation was in high gear.

As of now, the Goodmans still maintain that Dundee’s not for sale, but if the price is right, then who knows?

Asset-backed commercial paper crisis

While Canada felt the sub-prime mortgage problems in its stock markets, it didn’t actually have a lot of mortgage lenders offering the sub-prime option, to the relief of many worried investors. However, that didn’t mean the Great White North escaped the year crisis-free.

In mid-August Toronto-based Coventree Inc., the largest third-party provider of ABCPs said it didn’t have enough money to cover the price of its maturing paper. Usually, the company would roll over its debt by issuing new ABCPs to cover the cost of maturing ones. But credit woes and sub-prime issues dried up the ABCP market, making it harder for providers to raise capital.

This bad news added to the market turmoil, but luckily financial institutions across the country tried to instill consumer confidence by buying back ABCP that was in their funds. National Bank, Desjardins and Industrial Alliance were just some of the companies that bought back their commercial paper.

By August 24 even Coventree was announcing that it was rebounding, as it had managed to place $169 million of new issuances. The company’s stock jumped 27% that day. (Though it wasn’t all good news. A few weeks later the company announced it was cutting its workforce by 30%, closing offices in Denver, Colo., and reducing the size of its Toronto operations.)

Helping stave off any serious effects to the Canadian economy was a group called the Pan-Canadian Investors Committee, led by Toronto lawyer Purdy Crawford. Along with the major players in the ABCP saga, the group developed the Montreal Accord. Essentially, most of these providers agreed to postpone the maturity of $33 billion worth of ABCP holdings until everyone could figure out how the paper could be restructured.

On December 24, the parties finally came to an agreement, which means the ABCP crisis could soon be just a distant memory in Canadian financial history.

Jim Flaherty’s two budget announcements

On October 31, 2006, Federal Finance Minister Jim Flaherty dropped a bomb on the financial industry — income trusts would start being taxed in 2011. Needless to say, no one was heaping a ton of praise on the Conservatives at the end of last year. This year, however, the critics — at least ones who represent families and business — are feeling the love.

In the March budget, Flaherty introduced a new child care credit, made improvements to the Registered Education Savings Plan and increased the age limit for converting an RRSP to a RRIF or annuity to age 71.

For businesses, the finance minister said he would gradually reduce the general income tax rate from 21% to 18.5% by 2011. He also raised the lifetime capital gains exemption from $500,000 to $750,000.

While many thought these tax relief measures were positive, on October 30, Flaherty announced even more tax cuts, the main one being a 1% reduction in the GST. While that comes into effect on January 1, 2008, other important tax measures, like a higher basic personal amount and a 0.5% reduction in the lowest personal income tax rate, are retroactive to the start of this year.

These were just a few of the important tax announcements in 2007. To learn what else the Conservatives did, check out our year-end tax package here.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(12/31/07)