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Taking stock: Riding the whirlwind

By: Rick Drennan (Mississauga Business Times – November 2008)

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Almost a generation ago, I visited the Canadian Native Centre in downtown Toronto. I’m not sure why I was there or even if my remembrance of the place’s name is correct.

All I recall is that it was home to the dispossessed natives from the Toronto streets.

Many were hanging around the front door as I entered the building. All were in different forms of disrepair – hair loose and unwashed; coats open and hanging; and smoke being exhaled into the chilly afternoon air. Many stared blankly at the half-spent winter sky. No one made eye contact.

I was there to meet one of the counselors, a Metro Toronto Police detective who was using up most of his spare time in helping these poor souls find a better way of life.

The task seemed impossible. Drug and alcohol abuse was rampant. The place seemed to drip with despair.

The Centre sat in the shadows of downtown T.O., and the lofty towers of Bay Street, Canada’s financial epicentre.

Those towers were humming with commerce – basking in the rewards of a new NAFTA agreement with the U.S. The stock market was flush with investment, traders were pulling in high six-figure stipends, and all were dining in the tony downtown eateries. One broker’s monthly bonus could float the entire native centre for a year.

I remember being struck by the cruel juxtaposition of these two worlds – the enlightened selfishness of Bay St., and the cruel hopelessness of the native centre.

The thought wasn’t lost on the police detective, either.

After answering a series of questions, he talked about how hard it was to finance the centre – to get the big money people to care enough to chip in.

He looked at me squarely and said: “There’s an old native prophecy that says, ‘one day the money will die.’ I wonder what these people (his eyes drifting towards the Bay St. towers) will do then?”

We might soon find out.

In the last few weeks, much of the money on Wall St. and Bay St. has died, or vaporized into the ether. Despite a recent rally, the net worth of the TSX is down significantly.

Trillions in paper assets have gone up in flames at indices all over the world.

Meanwhile, banks are hemorrhaging.

The financial bailout package to help stave off the implosion was slow to take effect.

The cash and credit crunch was surging over the levees and promising to drown parts of the financial systems in the U.S., Canada, and the world.

If the money hasn’t died, it’s in the ICU.

Everyone, it seems, has an anecdote about the collapsing financial system, and the panic it has sparked.

A private banking friend told me of a richer than rich client ($20 million in assets) who phoned to close his account last week.

“I want you to deliver my $20 million in bags of cash to my house,” he told the banker.

Then, to calm his jittery nerves, and heighten the banker’s, he added, “AND I WANT THE MONEY NOW!”

The orgy of excess that exemplified the pre-Depression Era, and the dotcom era, has been been turned into an art form during the George W. Bush era.

The deregulation of the markets had opened the floodgates for excessive CEO compensation, and the proliferation of esoteric financial tools like swaps, hedges, derivatives, currency bets, short selling, etc. etc. The sub-prime mortgage meltdown, which seems to have turned up the heat on this meltdown, has exposed the dark underbelly of our financial institutions – the duplicity, and the vulnerability. There are fewer and fewer safe harbours in which to stash your cash.

“The magic of the marketplace” was just another sleight of hand perpetuated by the braniacs on Wall St. who always coloured any governmental intervention in pinko communist colours.

Casino capitalism has, over the years, created millions of millionaires – but little for the little people.

Canada’s John Kenneth Galbraith, the wonderful Harvard economist who lived into his 90s, but not long enough to witness our present plight, once wrote: “Even though money is plentiful, there are always many people who need more. Under these circumstances, the rate of embezzlement grows, the rate of discovery falls off.”

During George W’s reign, the hologrammed images of these embezzlers were everywhere – the products of Yankee Doodle know-it-all. The biz schools produced their fair share of immortal geniuses, who took their sheepskin and were sent forth to multiply – and stick it to the investor public.

Some point to Richard Fuld, CEO of Lehman Bros., as poster boy for the hubris that currently infests the financial institutions.

This prophet of profits oversaw the 158-year-old company’s move from boom to bust. His reward? Millions in bonuses – $22 million for his dogged work in ’07 alone.

Good governance, prudent financial management and even a smidgen of social responsibility, were the Father, Son, and Holy Ghost of yesteryear.

The composite drawings of the banker, broker or CEO was conservative garb and Sunday school manners. They would spout off steady-as-she-goes bromides like an archdeacon talking to the flock. They have been replaced by the reckless carny barkers whose business credo is simple, yet deadly: run up the stocks, cash in your options, and bail to the Caymans.

The multi-billion dollar shell games played by Enron, Nortel, Bre-X, and today’s financial bigwigs, have been encouraged in this new age of gilded deregulation.

The snakes were allowed to shed their skin (and their stock options) even if they didn’t turn a profit, or plump up  shareholder value.

Which begs the question: Why can’t we ever learn?

U.S. President Franklin Roosevelt was disgusted by the manipulation of the indices, which culminated in the Great Depression of 1929. He helped create the Securities Exchange Commission (SEC) to act as a watchdog over the stock market.

FDR then redid the wonky U.S. banking system under the Glass Steagel Act (1934), separating the commercial and investment banks.

In effect, he created a new business order.

Those rules and regs were peeled back slowly over the years, and freebooters were given their marching orders by the Ronnie Reagans and Maggie Thatchers of the world.

Smart-alecky narcissists have now usurped the “moral authority” of our former financial leaders, which has left us in a real pickle and sucking on the exhaust pipe of a lead-spewing market.

Braun Mincher, author of “The Secrets of Money: A Guide for Everyone on Practical Financial Literacy,” reports that 40 per cent of Americans now live beyond their means, while the average household with debt carries $10,000 in balances. The U.S. is trillions in debt and the average Yank has nine credit cards. Nine!

People who couldn’t afford to pay off their Blockbuster account, were getting sweetheart mortgages for homes way beyond their means.

Canadians were not immune to this orgy of excess.

Nortel boss John Roth (Times’ Man of the Year) led this paper tiger of a company to untold wealth while someone was cooking the books. While Roth sold his stock options (just before the company’s collapse) and snuck away to his palatial digs in the Caledon Hills to play with his nine cars (nine!), investors took it on the chin.

Credit card debt has left many Canadians just one missed paycheque away from insolvency.

Prudent financial planning at the government, business, and home level, has long been ignored in a rapacious grab for more stuff.

Stuff has become our intoxicant. But it’s the love of money that has become our real psychosis.

Maybe it’s time we invested in other things, like education, spending time with our kids, reading books, or working with a charity?

The Lehman Bros. might want to jump off the bald cupidity train.

Last month, I had the pleasure of moderating an economic panel at the Business Law Summit, organized by Mississauga law firm Pallett Valo LLP. Entitled, ‘Leaning into the Headwinds,’ the summit was, if nothing else, timely.

The speakers included Dawn Desjardins (RBC), Pascal Gauthier (TD), Stewart Hall (HSBC), and Fred Ketchen, the director of equity trading at Scotia McLeod.

The three bankers and broker agreed that “we’re seeing a profound change” in the markets, and in our lending institutions.

Hall said the troubling thing is “that these events are happening with more regularity.”

Those events include the market meltdown (Black Monday) of October 1987, the tech implosion (dotcom meltdown) at the turn of this century, and now this, our present circumstances – still without a catchy name.

How about ‘Bushwhacked'?

Ketchen, the oldest of the panel participants with over 50 years in the markets, has worked his way through all the up-and-down cycles.

He says there’s a general order to life that eventually weeds out the weak from the strong.

In the long term, the markets always right themselves.

He says down cycles can create panic, or great opportunity.

For those with sweaty brows (like the private banking client and his $20 million that he wants to bury in his back yard) he has a little advice: don’t.

“Hoarding money is like saving sex for your old age,” he said.

So what’s a person to do?

All the participants agreed that investors have to understand how much “risk tolerance” they can handle, and what their “time horizon” is for investing in stocks, bonds or money market instruments.

This crisis, however, isn’t about the stock market. It’s about the liquidity of our bedrock institutions, like banks.

The real evil today is greed. Narcissistic excess. A world of winners and losers.

At the 1996 Atlanta Summer Games, Nike ran a commercial that said silver is the medal they give to the first loser. That winner-take-all mentality slowly soaked into our staid old financial institutions.

Some of these new-age cowboys believe we have reached the highest stages of capitalism when the economy is  unfettered by governmental influence.

Markets are to be monkeyed with. Rules are made to be broken. Every tax has a loophole. The system is a crap game. The goal is to bet money on exotic financial dice, collect your winnings, and promptly pluck them down on another roll of the dice.

The idea is not to create wealth but to accumulate it by taking it from someone else.

Those at the wrong end of the bet are those who trusted in the stock market, or thought bankers would act like conservative bankers are supposed to act, and not tool around in hedge funds and derivatives and currency swaps or sub-prime mortgages.

We are all sickened by the greedmongers in the financial institutions who got us into this current mess.

The Wall Street bailout has all the elements of a Shakespearian tragicomedy: a corrupt King (Bush) and a bunch of investment bankers playing the role of Fool.

This meltdown has created a vast shaking of the soul in the United States – a semiunraveling of the American Dream. Owning a home isn’t a given. Once bastions of conservatism, the banks are now crap tables. Debt and fear rules the markets. The wellheeled CEOs who once exemplified this dream, now look like nightmarish caricatures – Donald Trump without the wig.

Pierre Trudeau strived to keep the government out of the bedrooms of our country; Bush tried keeping it out of the investment banks’ boardrooms.

The result: Richard Fuld was called a “villain” during his brief time before a congressional committee studying Lehman’s fall. Still, he managed to slither off with mega-millions – pieces of his skin falling off as he left the room.

Some might suggest changing the last two letters of his last name, which would aptly describe what he did to Lehman shareholders.

Canada can take solace in the fact the World Economic Forum named our banking system the soundest in the world, while the U.S. ranked 40th – right up there with Namibia.

But we’re part of the global financial community and therefore just as vulnerable.

One participant at the economic summit explained how the Canadian economy is leveraged on the U.S. one.

To many of those men and women I met at the native centre in Toronto, the money died a long time ago. There were no bailouts for them – then or now.

Some currently reside in the shadows of the gleaming towers of Bay Street, lying over the warm grates and bundled up to survive another cold winter.

The cruel divide between these two worlds has come into sharper focus these past few months.

It’s driving home the point that unless we’re more prudent with our money, unless those in charge of our financial institutions take more responsibility for their actions, it’s not such a long trip down from the 35th floor to street level.

As Shakespeare once wrote: In our haste to create great wealth we may have created “a new age of poverty.”

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