COVER

YES OR NO?

All eyes are on a reluctant Paul Martin

JOHN GEDDES December 7 1998
COVER

YES OR NO?

All eyes are on a reluctant Paul Martin

JOHN GEDDES December 7 1998

YES OR NO?

JOHN GEDDES

All eyes are on a reluctant Paul Martin

It was one of those long evenings when the unofficial business of politics often gets done. Prime Minister Jean Chrétien had wrapped up his speech to a big annual Liberal fund-raising dinner, a must-attend event every fall for the party faithful in Ottawa. As the crowd flowed out, the usual clusters of politicians, their aides and hangers-on headed for the nearest bars. At a watering hole in the downtown Westin Hotel, one Liberal MP was soon deep in conversation with a cigarette industry official. Up strolled a bank lobbyist, obviously angling to join the conversation. The MP glanced around nervously—then remarked pointedly that he was not sure it was a good thing for them to be seen talking in public.

How far the bankers and their hired guns have fallen: they are now even more tainted as drinking companions than tobacco lobbyists. Bank officials trying to sell their unpopular merger plans these days often find the doors of Parliament Hill firmly closed. They complain that rankand-file Liberal groups, including the party’s rural and Toronto caucuses, have turned down their recent requests for meetings—cold. The bankers are often frozen out at the top level, too. Finance Minister Paul Martin and his staff will not meet with them—a policy meant to allay any suspicions that backroom deals to approve the mergers are in the works. Bank strategists are left pressing for some new mechanism to evaluate their proposals— one that would insulate them from the political chill. “As it stands right now, there is no process,” complains a senior bank official. “It’s all about egos.”

If the bankers are down, they may not yet be out. The new process they seek could begin to take shape over the next few weeks—a prospect that would take some of the sting out of Martin’s likely refusal to give their deals a green light as they now stand. Two parliamentary committees, the Senate banking committee and the Commons finance committee, are both expected to issue reports, as early as this week, suggesting more meticulous reviews of bank mergers in the future. A third report, the anxiously awaited findings of the federal government’s antitrust watchdog, the competition bureau, will signal more precisely how the two mergers now proposed might be fine-tuned to ease concerns that they would concentrate too much market clout in the hands of the new megabanks.

Each of the reports will aim in its own way to influence Martin, who has the final power to kill the bank mergers or let them live. He set a combative tone back in January, when he publicly vented his anger at not having been given advance warning before the Royal Bank and the Bank of Montreal announced their plan to merge. Liberal MPs took their cue from Martin. By the time the Canadian Imperial Bank of Commerce and the Toronto Dominion Bank announced their own engagement a few months later, antibank sentiment among backbenchers had hardened. In early November, 54 federal liberals signed a caucus task force report, spearheaded by Toronto MPTony Ianno, denouncing the mergers. One liberal strategist marvelling at the MPs’ boldness in openly trying to force Martin’s hand, put it this way: ‘TEe yahoos have been empowered.”

Martin can hardly be expected to issue a decision that runs counter to the merger-maligning mood he himself helped foster in his own

party. Clearly, short-term political advantage lies in turning the banks down. But if Martin wants to leave open the option of granting approval later, he will first need to direct attention away from Ianno’s caustic caucus report. The model for a different approach, as it happens, is already on the table. Back in September, a politically neutral federal task force, headed by Regina lawyer Harold MacKay, issued an exhaustively researched study on the future of Canada’s financial services sector. While MacKay did not look specifically at the two blockbuster mergers now at hand, he did say Ottawa should drop its unwritten, decades-old policy of banning mergers between big banks. His report will likely form the basis for a package of federal financial-sector reforms next year. Among MacKay’s key recommendations: a new public-interest review system to evaluate any bank merger on its own merits.

That approach may be bolstered by the House finance committee report, expected to be released as early as this week. The committee, chaired by Ontario MP Maurizio Bevilacqua, a Martin loyalist, has crossed the country this fall holding hearings on MacKay’s work. While it too had no mandate to delve into the two proposed mergers, the committee’s verdict on MacKay’s idea for a new way to assess mergers could be important There have been hints that Martin is looking to the finance committee to counterbalance the Ianno report’s call for an unequivocal thumbs-down to the mergers—with no hope of a second chance. Perhaps the most influential member of Bevilacqua’s group, Ontario MP Tony Valeri, Martin’s parliamentary secretary—and the finance minister’s eye and ears on the committee—predicts the report will cool down

THE DECISION-MAKER:

Keeping his own counsel, Martin has frozen out the lobbyists

an overheated debate. “The temperature has risen over the last little while,” Valeri told Maclean’s. “Part of our role as a committee has to be to cut through some of the rhetoric and look at some of the issues from a dispassionate perspective.”

Beyond what it recommends on merger reviews, the committee’s broader perspective on the future of the financial industry could give the banks a rare sign their arguments have not been entirely dismissed by MPs. In fact, Bevilacqua is sympathetic to the bankers’ contention that they are in danger of being badly outmuscled by U.S. banks—a few of which are moving into the superheavyweight class after their own recent blockbuster mergers—in the increasingly integrated North American market. He carefully avoids commenting directly on the two proposed Canadian mergers. But Bevilacqua leaves little doubt that he sees tough foreign competition—not domestic concerns such as branch closures—as the most pressing is« sue. “Decisions cannot be based § solely on what the financial services sector looks like today; mergers g should be judged in the context of s tomorrow’s expectations,” he told f Maclean’s. “What might be perceived * as contrary to the public good today s could be essential to tomorrow’s success in a global marketplace.”

Even that cautious wording is bound to rankle many of Bevilacqua’s Liberal colleagues. Of the eight government MPs on his committee, four signed the Ianno report.

In its first chapter, that report listed 14 reasons to turn thumbs-down on the mergers. It flatly rejected the banks’ case that incursions from much-larger U.S. and European financial corporations leave Canadian banks little choice but to combine forces. Persuading those same four MPs who endorsed the Ianno vision to also sign a finance committee report that seems to accept the notion

that Canadian banks might need to

bulk up to take on international rivals will be tough. Still, Bevilacqua may succeed in coaxing his fellow Liberals into allowing him to issue a report that echoes MacKay’s call for a new merger-review process—a distinct departure from the Ianno committee’s view that enough is known already about the negative impacts of the mergers for Martin to impose a full stop now.

The Senate banking committee also is expected to take a hard look at how any bank merger should be evaluated—again without specifically grappling with the details of the two mergers now in play. Its chair-

WILL PUBLIC VIEWS MATTER?

Do you believe the government should approve the mergers as proposed?

NO

Do you believe the government will approve the mergers?

YES

NORTHSTAR RESEARCH PARTNERS

man, Liberal Senator Michael Kirby, is seeking to extend his group’s long track record of delivering reports that influence the government’s financial-sector policy. Sources close to the committee say the senators are skeptical about the notion that Canadian banks must be bigger to hold their own internationally, but they do see the need for a new, much clearer, merger-review process. One banking industry official said he is optimistic the senators will recommend putting a precise time limit on that process—perhaps three or four months, limiting the length of any new review scheme is a key goal of the banks. The House committee, however, seems unlikely to put Martin on the spot over timing. “I don’t think there is any urgency about moving forward until there is a level of comfort that we are going to get things right,” Valeri says.

Unlike the House and Senate committees, the competition bureau is examining the two proposed mergers in painstaking detail. Headed by the formidable Konrad von Finckenstein, who once served as the top federal lawyer in free trade negotiations with the United States, the bureau is operating under strict legal guidelines—not on political instincts. One key benchmark: if either of the two merged banks would command more than 35 per cent of a local market for

a given financial service, such as credit cards or home mortgages, the bureau would consider competition to be threatened. That threshold for too much competitive clout is almost certain to be exceeded in at least some of the thousands of local markets where the bureau is analyzing merger impacts. The bureau’s conclusions are slated to be delivered to Martin by mid-December. He has promised to make those findings public almost immediately.

What will happen next? The banks argue they should be given a chance to respond to whatever concerns the bureau may raise. In some cases, for example, they might be willing to sell off parts of their empires to avoid any unacceptable lessening of competition flagged by von Finckenstein. In a merger between corporations in any other sector, the bureau would negotiate such remedies in private. In the case of the banks, though, Martin has reserved the right to forestall the bureau from continuing on to that next stage. And even if Martin did decide to let such negotiations take place, government and industry officials are not sure how the bureau’s behind-closed-doors work would be co-ordinated with a parallel public review along the new lines suggested by MacKay.

Bank officials are worried Martin might

deny them any real chance to respond to von Finckenstein’s report. They fear Martin might declare that the bureau’s findings—combined with the objections raised by the Ianno caucus group—are so serious that he has no option but to disallow the mergers without further deliberations. If Martin chooses that course, which remains a very strong possibility, senior government sources say, he could issue such a

Anti-bank feeling runs deep among Liberal MPs

verdict in late December or early in 1999.

Yet von Finckenstein seems to assume the analysis he hands over to Martin will not be the end of his work on the matter. In an interview with Maclean’s early this fall, von Finckenstein mapped out what he expects will happen after he delivers his initial report. “The minister will make it public, and he will presumably announce his concerns. Then the [banks] can decide—always assuming we have concerns and the minister has con-

cerns—do they want to address them or do they want to walk?” he said. “If they want to address them, they will then enter into negotiations with us on competition issues and with the minister of finance on public interest issues. To a large extent, the same remedies might address both sets of issues.”

That second stage of the merger debate— detailed negotiations with the bureau and some separate process involving politicians—is exactly what the banks are hoping will unfold in 1999.

But many backbench Liberal MPs are worried that prolonging the discussion could allow the issue to slip from their grasp. And Martin will have to be acutely sensitive to that anxiety. Alex Shepherd, who chairs the key Liberal economic caucus, told Maclean’s he suspects the bureau will put too much emphasis on how the mergers might improve the banks’ efficiency, and not enough on a potential narrowing of the range of competing alternatives available to Canadian consumers. He argues the banks’ extensive distribution networks, from branches to the automated bank machine system, give them too much power in the marketplace even without the mergers. “For Main Street, not Bay Street, controlling the distribution network is what this is all about,” Shepherd says.

Ontario MP Larry McCormick, who chairs the government’s rural caucus, fears branch closures and declining service in small towns if the mergers are permitted to go ahead. He represents the banks’ toughest obstacle on Parliament Hill: an MP with deeply engrained resentments against the way banks do business. The former owner of a country store in little Camden East, Ont., near Kingston, McCormick still grows agitated when he recalls the fees banks used to charge him for cashing cheques from his customers. And he shrugs off the threat that if the banks are denied, they might cut costs by closing marginally profitable small-town branches—an unsettling possibility first publicly hinted at last September in a report from Bank of Montreal chief economist Tim O’Neill. “I just don’t believe they can afford to do that,” McCormick told Maclean’s.

These days, McCormick makes a habit of slipping across Wellington Street from the Parliament Buildings at lunch to a Bank of Montreal branch. He keeps an eye on his watch to time how long he and other customers stand in line waiting for a teller. (Too long, he reports, at up to 14 minutes.) He is sure service would decline further if there were fewer banks competing for Canadians’ business. It is that sort of resolute attention to matters close to home that stands in the banks’ way as they struggle to get Ottawa to focus on their global ambitions. Business strategy in the age of free trade may be global. But politics, as Canada’s bankers are learning the hard way, has a way of remaining stubbornly local. □