I read that General Motors of Canada employees don't pay anything into their pension plan. What is the status of employee contributions to Ford Canada and Chrysler Canada pension plans?
The situation is the same at Ford's and Chrysler's Canadian operations. The hourly paid employees do not make contributions to their pension plans. The plans are funded entirely by the companies.
The reason GM's situation has got so much attention is that its pension plan is in much worse shape than the others and is drastically underfunded. There is a big debate over whether the federal or Ontario governments should help bail out the pension plan when employees themselves haven't made any contributions.
I was amused to see General Motors' two-wheeled vehicle touted as a possible saviour of the company. Wasn't the original Segway also subject to a lot of hype?
Back in early 2001, there was much buzz about a revolutionary new invention that was going to turn the transportation business on its head. Apple Inc. boss Steve Jobs said he thought it would even change the way cities are designed.
After the Segway was unveiled, however, many people figured it was an impractical and expensive way to get around, especially in any city that experiences winter. Sales have been far lower than the original optimistic estimates.
I was glad to see BCE raising its dividend. How consistent has the company been in boosting its payout over the years?
BCE Inc. has a solid, long-term history of regular dividend payouts - at least it did until it temporarily suspended its dividend last year during the messy takeover proposal that eventually failed.
Until that break in the streak, BCE or its predecessor companies had been paying out dividends non-stop since 1881. Only a handful of banks have a longer record.
Although there have been some long periods when the BCE dividend didn't increase (all through the 1950s it remained unchanged), during the stretch from 1973 to 1995 the company boosted it every year. Since then, increases have been rare.
Why aren't banks lending to each other ?
Banks normally lend each other cash and short-term securities to help balance out their everyday activities. But lately, banks around the world have been extraordinarily cautious about this lending - partly because they are worried about getting repaid - and this is driving up the interest rate they have to pay when they want to borrow.
This also makes the banks much more cautious about lending out the money that they receive in deposits, thus making it more difficult - and more expensive - for homeowners, small businesses or corporations to borrow.
The standard interest rate for interbank loans is Libor, an acronym for the London interbank offered rate. Libor is an average of interbank rates offered by more than a dozen banks, and is calculated every day. The difference between Libor and government bond yields has been growing recently, and that's important because corporate loans, mortgages and student loans are all based on Libor.
Don't banks usually get the money they lend from deposits?
That is usually the case, but the balance is never perfect, and that's why banks lend money to each other. Currently, there is a lot of demand for loans from corporations, which until recently haven't needed much money because they've been so profitable.
We keep hearing that Canadian banks are the most sound in the world. Who says so ?
That verdict came from the World Economic Forum - the Swiss-based organization that runs the annual conference of big thinkers in Davos - in its 2008-2009 Global Competitiveness Report released early in October. It ranked 134 countries around the world on a wide range of issues related to their ability to attract business investment. Canada was 10th over all (the United States was first, followed by Switzerland and Denmark), but we came first in some of the dozens of individual measures.
Canada was not only ranked first for the soundness of its banks, it was also top dog when it comes to the ease of starting a business, the number of personal computers per capita, and the low incidence of malaria.
We also ranked in the top 10 on investor protection, number of Internet users, quality of scientific research organizations, quality of management schools, and telephone infrastructure.
The biggest problems in doing business in Canada, according to the study, are our tax rates and regulations.
If Canada's banks are so healthy, why do they need the new program, launched by the Finance Minister last Thursday, to support their borrowing ?
Many other countries are putting in place some kind of backstop for the wholesale debt market, and that has prompted worries that Canadian banks would be uncompetitive when they tried to borrow money outside the country. It is possible that lenders will prefer to do deals with banks that are backed by their national governments, and that might mean Canadian banks would have to pay higher interest rates, which would likely be passed on to customers.
The new program is essentially a form of insurance, which the banks can opt for if they want it.
But they will have to pay - it will cost them a fee of up to 1.85 per cent of the value of the insured loan, depending on their credit rating, and even more if the loans are denominated in currencies other than the Canadian dollar. Several banks have said this is too costly and they won't be opting for the insurance.
Are companies allowed to have closed-door meetings with analysts and high net worth investors that others never get to hear about ?
A decade ago it was common for companies to hold meetings and conference calls with analysts that no one else was allowed to listen to. This practice has been curtailed, partly because regulations now explicitly say any material information must be disclosed broadly.
Securities legislation makes it crystal clear that it is illegal for companies to reveal material information unless it is "generally disclosed." But regulators have also issued "best practice" guidelines to more specifically deal with conference calls and analyst meetings. They say conference calls and investor conferences should be open to allow anyone to listen, in order to reduce the risk of selective disclosure.
Companies can hold private meetings with analysts, the guidelines say, but these can involve only non-material data, or information that has already been disclosed to the public. For instance, firms can't give new earnings forecasts in these meetings, but they can discuss long-term strategy or the business environment.
Why is AIG such an important player in the financial markets that it needs another huge U.S. government bailout ?
Not only is AIG a massive insurance player - it operates in 130 countries and has assets of about $1-trillion (U.S.) - it also built complex derivative products for banks, brokerages and hedge funds. The company sold many credit default swaps - essentially insurance that protects investors against bond defaults. Because many financial players who bought them count on AIG to pay up on these swaps, the insurer's inability to do so would be a disaster for hundreds of other firms.
What is accounts receivable insurance ?
Companies can buy insurance to protect them in case one or more customers can't - or won't - pay their bills. It is sometimes called credit insurance.
In Canada, a number of insurance companies sell this coverage, and it is also available to exporters through the government agency Export Development Canada.
The EDC policies help an exporter if one of their foreign customers fails to pay up.
It reimburses up to 90 per cent of the loss if an exporter's customer becomes insolvent or defaults, if the payment is held up by international paperwork, or if war breaks out in the customer's country.
It is usually companies that depend on a small number of customers for a large proportion of their sales that buy this kind of insurance because the collapse of one client could put them at risk.
EDC recently stopped selling new accounts receivable insurance policies to Canadian auto parts makers that export to Chrysler LLC because of the higher risk that the car giant won't be able to pay up.
No Canadian bank has shrunk its dividend since National Bank cut its payout in half in 1992, but when was the last time a big bank's dividend was completely suspended ?
The last time that happened was when National Bank eliminated its dividend in mid-1982. It reinstated the payments about a year later. That's the only time a bank has completely killed a dividend in recent decades - or centuries, actually.
The big banks have an astonishingly long record of consistently paying dividends. Bank of Montreal has been distributing them non-stop since 1829 - almost 180 years, the longest unbroken record of any Canadian company. Bank of Nova Scotia's streak goes back to 1833, TD's to 1857, CIBC's to 1868 and Royal's to 1870.
What about non-banks ?
Until recently, BCE Inc. held the top spot among non-banks, with an unbroken series of dividends starting in 1881. But it stopped its payouts in July of this year to conserve cash ahead of the privatization scheduled to be completed in December.
That puts Imperial Oil Ltd. at the top of the non-bank list. It has been paying dividends non-stop since 1891.
What does "mark-to-market" mean ?
Accounting rules require companies to calculate the value of their assets at the end of each quarter. That means they must "mark" (set the value) to "market" (the price they could get right now).
In the current volatile market, the values of some holdings - especially complex derivative instruments - can fluctuate wildly. And it is very difficult to put a value on some assets that trade very thinly or where the market has seized up completely.
What problems has mark-to-market accounting caused ?
Some companies have had to take writedowns on assets that might easily recover in value by the time the firm is ready to sell them.
This may have contributed to the collapse of some U.S. financial institutions, which had to take huge writedowns that decimated their balance sheets.
Market watchers also say the mark-to-market rules contribute to short-term thinking among corporate executives.
Recently, U.S. and Canadian regulators have tinkered with some rules to give banks and other companies more flexibility, especially where frozen markets have made valuing assets difficult.
What are the risks for holders of GMAC bonds, especially if General Motors were to file for bankruptcy protection ?
GMAC LLC is the former finance arm of General Motors Corp. (GMAC is short for General Motors Acceptance Corp.) But it is now only 49 per cent owned by the car company, with 51 per cent held by a consortium led by private equity firm Cerberus Capital Management LP.
As a result, if General Motors alone files for protection under Chapter 11 of the U.S. Bankruptcy Code, GMAC will not be directly affected. The financing firm can continue to function as a separate company.
However, a collapse of GM would generate serious indirect consequences for GMAC and its bondholders, says Kam Hon, managing director of corporate and industrial ratings at bond rating agency DBRS.
While GMAC now also sells mortgages, insurance and other financial products, a big portion of its business is still car loans and leases, mainly on GM cars.
A bankruptcy filing at GM would likely devalue those cars, creating problems for GMAC, which is already struggling with deep losses.
The value of GMAC bonds would likely drop sharply in the near term if GM filed for protection from its creditors, Mr. Hon said.
But they could recover somewhat if it becomes clear GMAC has the financial strength - or gets government support - to pay off its obligations when they come due.
What is GMAC doing to deal with its own financial problems ?
The company, which lost $2.5-billion (U.S.) in its latest quarter, has been hit particularly hard by the meltdown in the mortgage market that hurt its real estate lending arm. It sold off some assets to generate funds, but it is also trying to turn itself into a bank holding company so it can qualify for help from the massive U.S. government bailout program.
Do many people own GMAC bonds ?
Bonds in GMAC and GMAC of Canada (the Canadian subsidiary) were sold widely to retail investors, through full-service and discount brokers.
The bonds were attractive because they had a much higher yield than government bonds.
A few years ago they were also highly rated, but their ratings have now fallen to "junk" status and their value has declined sharply because of the company's exposure to risky home and car loans.
There are several bond issues outstanding, with some maturing soon but others ranging out to 2010.
Why do companies sometimes buy back their stock when the price falls ?
When a company feels that its share price is too low, it can use some of its cash to buy shares on the open market and then cancel them.
In theory, this should help push up value of the stock - and therefore its price - as it reduces the float of shares and increases the key earnings-per-share number.
Buying back stock can also reduce the dilution that would otherwise occur when executives are granted stock options.
With the car companies poised on the brink of collapse, what has been the biggest U.S. corporate bankruptcy so far ?
You don't have to look very far back. The collapse of Lehman Brothers in September was the biggest bankruptcy filing, at least as measured by its assets at the time of its failure - about $640-billion (U.S.).
The next two largest bankruptcies were WorldCom (with $126-billion in assets) in 2002, and Enron ($81-billion) in 2001.
Some U.S. auto executives say they will work for $1 a year. Who were the original dollar-a-year men ?
Dollar-a-year men were wealthy business executives - usually in the manufacturing sector - who were recruited by governments to help run crucial wartime production. They were paid insignificant salaries to do important government work.
The term was first used in reference to U.S. industrialists who went to Washington to help President Woodrow Wilson during the First World War. The law said they had to be paid for their services, so they were given a nominal salary. It was used again in the Second World War in both the United States and Canada. Who were the Canadian dollar-a-year men?
In Ottawa during the Second World War, C.D. Howe, the "minister of everything" (who was actually Minister of Munitions and Supply), recruited dozens of these "buck-a-year men." They included John Wilson McConnell, the owner and publisher of the Montreal Star; H.R. MacMillan, founder of forest company MacMillan-Bloedel; and Henry Morgan, president of Morgan's department store in Montreal.
What does the term mean now ?
It has been used recently to describe corporate executives who have taken hefty pay cuts because their companies are doing poorly. A few years ago, John Chambers, chief executive officer of U.S. telecommunications equipment firm Cisco Systems Inc., cut his pay to $1 for three years after the firm's stock price plunged. But he was given millions of stock options over that period.
The Ford, Chrysler and GM CEOs said early last week Monday that they'll work for $1 a year if the car companies have to take any government loan money.
I've already submitted my BCE stock certificates, in the hope they would be redeemed at the $42.75 takeover price. What happens now ?
If the deal does get cancelled - although that hasn't officially been decided yet - you will get your certificates back and will remain a BCE shareholder. If the deal is completed, you will be paid for your holdings at the offered price.
I was glad to see BCE raising its dividend. How consistent has the company been in boosting its payout over the years?
BCE Inc. has a solid, long-term history of regular dividend payouts - at least it did until it temporarily suspended its dividend last year during the messy takeover proposal that eventually failed.
Until that break in the streak, BCE or its predecessor companies had been paying out dividends non-stop since 1881.
Only a handful of banks have a longer record.
Although there have been some long periods when the BCE dividend didn't increase (all through the 1950s it remained unchanged), during the stretch from 1973 to 1995 the company boosted it every year. Since then, increases have been rare.
Yesterday, BCE raised its current annual dividend by 5 per cent to $1.54.
Manulife said its new share issue will help boost its capital ratios. Do insurance companies have minimum ratios set by regulators, the way the banks do ?
Canada's financial services regulator, the Office of the Superintendent of Financial Institutions, sets what are called the Minimum Continuing Capital and Surplus Requirements (MCCSR) for life insurance companies.
These rules say the ratio of a life insurance company's capital to its capital requirements (including liabilities such as future payouts on insurance policies and guarantees on segregated funds) must be a minimum of 120 per cent, although OSFI expects the firms to set a target of at least 150 per cent.
Manulife's target range is 180 to 200 per cent. With the new capital that the company is raising through a common share issue, its MCCSR will move to a very healthy 235 per cent.
I keep hearing that companies are trying to "de-lever." What does that mean ?
Leverage is a measure of how much debt has been used to buy something. So de-leverage is really just cutting debt. In order to de-lever, companies, financial institutions or investment funds usually sell off the assets that they bought with borrowed money.
In November, I surrendered my BCE shares to Computershare, ahead of the proposed privatization. Now that the deal has collapsed, what happens to my shares ?
Computershare Investor Services Inc., the company that was handling the logistics of the share purchase, said it will soon return any tendered shares to the original holders.
Mailings of preferred and common share certificates, and any ancillary documents, will begin on Thursday
The controversy over bonuses at American International Group makes me wonder why the U.S. government feels it has to bail out this company ?
The problem is that AIG is such a key player in the financial sector, with connections to many other players worldwide. If it fails, it could drag many other companies down with it.
The company has operations in about 130 countries, and it built complex derivative products for many banks, brokerages and hedge funds.
It was also an important participant in the market for credit default swaps - the complex insurance product that was invented to protect investors against bond defaults.
Because many financial players who bought these credit swaps counted on AIG to pay up, the insurer's inability to do so would be a disaster for many other firms.
If you own shares in a company that files for bankruptcy protection, do those shares remain intact as the company restructures or is bought out, or do they become worthless ?
The shares of companies under bankruptcy protection remain in existence, and keep trading as the company restructures.
They don't necessarily become worthless at the end of the process, although that is often the result.
In some cases, a company will successfully come out of bankruptcy protection and continue as a going concern. But equity holders usually get very little, if anything, under the restructuring plan.
Can you give a specific example ?
This is essentially what happened to Air Canada. It filed for bankruptcy protection under the Companies' Creditors Arrangement Act (CCAA) in April, 2003, and emerged from CCAA in September, 2004.
At that point Air Canada shares became virtually worthless. They were trading at $2.10 just before the company filed for court protection, but were valued at just fractions of a penny after the restructuring and the creation of new holding company, ACE Aviation Holdings Inc.
More and more companies seem to be taking "goodwill writedowns." What are these ?
When a company makes an acquisition, it often pays more than the book value of the target's physical assets. This "goodwill" includes the reputation of the business, the value of brands, royalty agreements and other intangibles.
But over the course of time this goodwill may lose some of its value. That has happened with many companies because of the business slump during the recession.
Consequently, a lot of companies are taking writedowns of this goodwill, essentially decreasing the value of these assets on their balance sheets.
One advantage: Writing down assets decreases shareholder equity, thus boosting return on equity. A disadvantage is that it can diminish a company's capacity to borrow money.
What Canadian companies have made this move recently ?
There have been quite a few of them, including customer loyalty firm Groupe Aeroplan Inc., nickel miner Sherritt International Corp., telecom equipment maker Aastra Technologies Ltd. and insurer Kingsway Financial Services Inc.
I read that hourly workers at General Motors of Canada make no contributions to their pension plan; the company pays all the funding costs. Is this an uncommon situation in Canada ?
It is uncommon, but certainly not unheard of. According to Robert Brown, a professor of actuarial sciences at the University of Waterloo, about 83 per cent of Canadians with traditional pension plans contribute to their pension funding. That means about 17 per cent of people with defined benefit plans don't have to contribute.
Some companies, such as General Motors, are saying they may not be able to function as a "going concern." What does this mean?
A going concern is a company that can reasonably expect to operate for at least a year without the likelihood that it might become insolvent and have to be liquidated.
Companies are supposed to warn investors, in their financial statements, if there is a possibility they may not be able to continue as a going concern, and why.
In GM's case, auditors Deloitte & Touche LLP wrote in a report that GM's "inability to generate sufficient cash flow to meet its obligations and sustain its operations raises substantial doubt about its ability to continue as a going concern."
With Japan's Nikkei index down to levels not seen since October, 1982, I wonder what the state of that country's economy was at that time.
Like other countries, Japan was hurting from the recession of the early 1980s but it was in relatively good shape.
Unemployment and inflation were fairly low, and the country was projecting economic growth of more than 3 per cent for that fiscal year.
Japan introduced a stimulus package of about $8-billion (U.S.), spending the money on things such as public works and housing construction. Sound familiar?