BUSINESS WATCH

Too smug to attend his own insolvency

Peter C. Newman January 18 1993
BUSINESS WATCH

Too smug to attend his own insolvency

Peter C. Newman January 18 1993

Too smug to attend his own insolvency

BUSINESS WATCH

PETER C. NEWMAN

Before 1992 mercifully fades from memory altogether, and its many year-end lists of “The best of” and “worst of” are forgotten, one retroactive nomination seems worth making.

The prize for the most smug (or most arrogant) act by a Canadian businessman in 1992 must go to Marvin Marshall, president of Bramalea Ltd. On December 23, when his real estate development company and its 37 subsidiaries filed for bankruptcy court protection, he couldn’t even be bothered to interrupt his skiing holiday in Colorado—and addressed a Toronto news conference by speaker phone. It was the second-largest bankruptcy court filing in Canadian corporate history.

Either that’s chutzpah above and beyond the call of duty, or it’s an expression of such disdain for his hundred creditors, owed $5 billion, that it certainly deserves to be recognized. (Perhaps Marshall thought that it wasn’t worth making a personal appearance, since his company’s insolvency set no new records, ranking well behind the Reichmanns’ defunct Olympia & York empire, which could boast of leaving its creditors hanging out with debts of at least a couple of billion dollars more.)

As usual, it was the Big Five Canadian banks that will take the biggest potential hits: The Toronto-Dominion, which was not hurt by the Olympia & York debacle (presumably, because unlike the other bankers, its chairman, Dick Thomson, was fussy enough to first want a look at the Reichmanns’ balance sheets) got caught in this one with a $428-million exposure, though some of that was laid off on smaller American and European banks. The Commerce was in for $375 million, with the Royal, Montreal and Nova Scotia each being exposed to the tune of about a quarter of a billion dollars.

The slaughter of the Canadian banking industry’s profitability continues unabated. It’s only because these money machines have accumulated such huge reserves in the past that they—and Canada’s capitalist system—have survived. The Royal, Canada’s largest and

Perhaps Bramalea’s Marshall thought why show up, since his bankruptcy court filing ranked well behind the Reichmann empire’s

richest, finished its latest fiscal year by writing off loans worth $2.05 billion. That’s a record. Its 1992 profits plunged to $107 million from $983 million the year before, while share earnings fell to a loss of five cents per common share, compared with a profit of $2.92 a year earlier. Even after those dramatic writedowns, the Royal’s net nonperforming loans at year-end still totaled $3.5 billion, and bank officials confirmed that loan losses would exceed $700 million in 1993.

One of the great ironies of this dismal record is that under chairman Allan Taylor’s direction, tion, the Royal has been busy making impressive gains in nearly every other branch of its business. Its retail and private banking operations have never been healthier; its investment arm (RBC Dominion Securities Ltd.) produced a 74-per-cent increase in profits.

This dichotomy in performance standards has had a serious impact on staff morale. In other years, the Royal’s 56,700 employees have received bonuses, called Quality Performance Initiative payouts, of about $50 million. Had the bank met its 1992 business plan, these bonuses would have totaled $60 million. Instead, the payments were cut off. Some Royal managers who have done well see themselves

unfairly penalized because top officials at the bank approved “character loans” to characters who didn’t deserve them. Still, there is enduring loyalty to the impressive leadership of chairman Taylor. (It is no coincidence that a business group recently named Taylor the 1992 Canadian International Executive of the Year in recognition of his dedication to the liberalization of trade and harmonization of Canadian and international business practices).

How the banks—all of them, not just the Royal—could indiscriminately shovel out almost unlimited funds to Bramalea, the Reichmanns and so many other now-grounded high fliers without following their usual safeguards is an enduring mystery. One of the rumors floating around Bay Street is that many of the Olympia & York loans were based on an internal valuation sponsored by the Reichmanns themselves, though the document is supposed to have been signed by a leading accounting firm. The document is said to have shown that the family’s corporate assets were worth $5 billion, long after that was, at best, a theoretical figure that ignored the state of the marketplace and assumed that the Canary Wharf development in London would fly.

Another mystery is why a senior vice-president approved a $200-million loan against equity in Canary Wharf. If that indeed happened, it went counter to the Royal’s own guidelines not to lend funds against common shares. According to the stories making the rounds on Bay Street, the same executive assured the Royal board that all the Reichmann loans were secured on a project-by-project basis, so that each transaction could stand on its own feet because the servicing of every building’s bank loan was supported by its underlying assets. As things turned out, that wasn’t true for any of the Reichmann buildings, some of which were tagged with third mortgages, mainly so the brothers could divert funds to their London project—which was never more than 40-percent rented and never came close to producing a positive cash flow.

Similarly, the Royal was part of an all-bank syndicate that lent the Reichmanns $300 million on the basis of their share control of Abitibi Pulp & Paper and Gulf Oil. At best, these assets have been reduced to between sixty and forty cents on the dollar, yet the shares were carried on the bank books as full-value investments. The bankers believed that they could command premium prices for selling control if they foreclosed on the two giant firms.

Given the severity of their losses, Canada’s Big Five have responded by cutting down their loans, even to credit-worthy clients, especially those in the real estate business. That kneejerk reaction is just as stupid as the banks’ original attitude of handing out mega-loans to developers who refused to show them their books.

Canada’s banks must get back to basics. No more “character loans.” No more sweet talk about belonging to “the club” which somehow exempts you from good business practices. Those who deserve loans should get them; those who don’t should be told to go ask the Reichmanns for some spare change.