Investors Scrutinizing the Regulators

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Fox Guarding the Hen House




March 05, 2008

Not really prime-time

Bank rates shrink, but you'll still be gouged on credit cards



Should we jump for joy?

While the subprime madness eats into bank profits -- today, prime lending rates fall to 5.25%, after new Bank of Canada Governor Mark Carney boldly slashed our central bank's key rate by half a percent to 3.5% in a desperate move to stop an economic meltdown in Canada.

That's the biggest single rate cut since the terrorist attacks of 9/11.

But this time it took banks five hours to respond to the bank rate cut, with TD the first to announce it would cut its prime rate, effective today.

This means consumers' loans will be cheaper. But it doesn't mean banks will give you one if you're desperately seeking to consolidate high-cost debt into a less expensive loan. Variable rate mortgages will also be cheaper.

But don't hold your breath for a break on gouging credit card rates, stuck in the stratosphere even when interest rates sank.

Rates charged on a standard card have jumped to 19.75%, up from 18.9%, while our central banker has been slashing its key rate, expected to hit as low as 2.75% by summer. Retail cards still charge 28.8%.

And if you fall for those no-money down, 0% interest deals and don't pay up by the due date, you'll still be paying 35% and higher.

Meanwhile, scuzzy payday operators continue to feast on the most vulnerable, charging 300% to 1,000% for short-term loans, when their gouging fees are added in.

Ottawa may be throwing a lifeline to overly-indebted consumers, who owe 131% of disposable income for a total $1.1 trillion in record household debt. But sadly, the most desperate won't save a cent.

Meanwhile, one economist warns our central bank is not a miracle worker.

"Even it cannot fully shield the economy in the event of a deeper-than-expected U.S. downturn," said Douglas Porter, economist with BMO.

South of the border, Federal Reserve chair Ben Bernanke yesterday urged Congress to pass another relief package.

In Canada, StatsCan shocked analysts Monday by revealing our economy shrank in December by 0.7%, after growing by a dismal 0.1% in November. A full-blown recession is two consecutive quarters of negative growth.

Meanwhile, the subprime mortgage madness continues to hurt Canada's big banks. Bank of Montreal's first-quarter earnings fell 27% to $255 million -- hit by a double whammy of writedowns over asset-backed commercial paper and the prospects of soaring loan losses.

BMO shares have been hit hardest, falling 18% so far.

Scotiabank yesterday reported a 18% drop in its profit, earning $835 million in the first quarter, just shy of market expectations, while loan loss provisions increased to $111 million.

Scotiabank CEO Rick Waugh tried to calm shareholders' frayed nerves at the annual meeting in Edmonton yesterday, saying "crises do come to an end."

But Reid Mosley, who represented 1,400 retail customers of Canaccord Capital, Cental Credit Union Group and National Bank, who invested in asset-backed commercial paper, made an impassioned plea for help.

"Scotiabank has a duty and the expertise to know it was selling a flawed savings product to unknowing retail investors like myself," said Mosley. "Now our plans are destroyed and our life's savings from our jobs and businesses -- the things we built are literally hanging on somewhere in the Internet."

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