Business

The politics of lending

MARY JANIGAN,KIMBERLEY NOBLE,K. N September 7 1998
Business

The politics of lending

MARY JANIGAN,KIMBERLEY NOBLE,K. N September 7 1998

The politics of lending

Business

It is tempting to imagine how that stern Prairie evangelist William (Bible Bill) Aberhart would now judge the deeds of his creation, the Alberta Treasury Branches. The former Social Credit premier founded the provincially owned bank in 1938, in the waning years of the Great Depression, to provide desperately needed credit to the struggling farmers of the dust bowl. Over the decades, the ATB evolved in puzzling directions: although it still serviced its rural clients, it also bankrolled controversial high rollers who often left the bank in the lurch—and subject to charges that it had loaned funds at the behest of its political masters. Such allegations have hounded the proud institution, which now has assets of $9.2 billion,148 branches and 350,000 customers. So it was perhaps no coincidence that the ATB marked the 60th anniversary of its founding order-in-council last week with an astounding court action against its former superintendent and some of its best-known clients, the four Ghermezian brothers, owners of the gigantic West Edmonton Mall. ‘What started for the benefit of the small farmer became an organization that put the savings of the small farmer at risk,” says University of Calgary historian David Bercuson. “I think Aberhart would say today, ‘Good on you—for trying to put this thing back where it ought to be.’ ”

The court case, with its as-yet-unproven statement of claim, which the Ghermezians have denied and vowed to fight, has rocked the Conservative government of Premier Ralph Klein. The 25-page

statement, backed by six affidavits, alleges that, in return for a sweetheart deal to refinance the mall, the four Ghermezian brothers— Nader, Raphael, Bahman and Eskander—paid bribes or secret commissions to the ATB’s former superintendent Elmer Leahy—and, perhaps, “others acting in concert with him.” Leahy, in turn, has sued the ATB for defamation. An affidavit from the ATB’s security manager, Bryan McBean, alleges that the Ghermezians also unsuccessfully offered bribes to former ATB superintendent Allan Bray and Gary Whitelaw, a former senior executive of the mall’s former principal lender, Toronto-based Gentra Inc.

In return, the statement alleges, Leahy put together an extraordinary financial package for the Ghermezians: the ATB guaranteed $353.5 million of the mall’s loans from the TD Bank, loaned $65 million on an interest-free basis for 30 years—and discharged a $310,000 mortgage against the Edmonton home of Nader Ghermezian. The ATB also guaranteed full repayment of the TD Bank loan plus all outstanding interest and fees by 2004—even though ATB now calculates that at the Ghermezians’ current rate of repayment it would have taken 190 years for them to repay the TD Bank. The ATB asked the court to appoint an interim receiver to manage the mall—which includes a Planet Hollywood restaurant, a water park with an indoor bungee jump and a roller-coaster—until the case is decided. “The wrongful, outrageous, unconscionable and inequitable conduct of the defendants ... offends the ordinary standards of morality and decent conduct,” the statement said.

Such explosive charges, complete with lurid descriptions of shop-

MARY JANIGAN

KIMBERLEY NOBLE

A provincially owned bank cleans off the tarnish

ping bags of cash changing hands in hotel parking lots, have sparked an investigation by the RCMP’s commercial crime unit in Edmonton and an inquiry by the provincial auditor general. In particular, investigators are concentrating on why a deal refinancing the mall, concluded in March, 1994, between ATB and Gentra, was abrogated and then superseded by the current arrangement between ATB and the Ghermezians.

The charges have thoroughly embarrassed Klein’s government, which has always touted its “hands-off’ approach to the ATB and its refusal to prop up faltering firms. Instead, mere days after he asserted that he had “offered no direction in any dealings” between the mall and ATB, Klein was forced to concede last week that he had asked then-Treasurer Jim Dinning and then-Economic Development Minister Ken Kowalski to work with the ATB and the mall to find “an Alberta solution” to the mail’s woes. In a Feb. 22, 1994, memo, the premier noted that a key cabinet committee had agreed that no deal between ATB and Gentra “should be finalized.” Such revelations have prompted calls from both the Liberals and the New Democratic Party for a public inquiry. As Liberal treasury critic Howard Sapers says: “The government has played a role in this and it owes a full explanation to Albertans.”

Probably the only institution that improved its image last week was the ATB itself. Two years ago, in an effort to distance itself from

the bank, the Klein government transformed the ATB from a division of the treasury department into a Crown corporation. The corporation’s new board then hired current president Paul Haggis, the former chief operating officer of Metropolitan Life Insurance Co. of Canada, to replace Leahy. As Haggis told Maclean’s, he promptly launched a full review of the quality of the bank’s assets. That investigation turned over some remarkable rocks. Ten employees have been convicted in criminal court, seven others were disciplined. “This is a business that is based on trust,” said Haggis. “People give us their money. They have an expectation they will get it back. If that ever comes into question, a financial institution is dead.”

The ATB has also moved on other fronts to polish its tarnished reputation. Last February, former Alberta treasurer Dick Johnston told an Edmonton court that the government had used the ATB to funnel money to high-flying Alberta entrepreneur Peter Pocklington in 1986 in order to evade political scrutiny. This year, in a sign of changing times, the ATB forced Pocklington to sell his Edmonton Oilers hockey team. Two months ago, after Pocklington failed to meet a loan repayment deadline, the ATB forced two of his main holding companies into receivership.

There is more than just the ATB’s reputation at stake. Last month, Alberta Treasurer Stockwell Day said he has asked CIBC Wood Gundy Securities Inc. to explore options for the ATB’s future,

The value of the world-famous mall and tourist attraction in 1993 was dropping like a stone

including privatization. If the bank continues to turn a profit—it posted firstquarter earnings of $23.5 million—and if investors believe that it has successfully cleaned house, government insiders predict it will be privatized in two years.

Based on allegations in the ATB’s statement of claim, the cleanup will centre on a tricky issue: why did the ATB scrap its refinancing deal with Gentra? In 1993, the mall was clearly in trouble. The recession ensured that the value of the world-famous mall and tourist attraction was dropping like a stone. The Ghermezians owed about $460 million— including $300 million to Gentra in a first mortgage and $76 million to the ATB through additional mortgages. The brothers were neglecting to make improvements and had stopped paying the mail’s taxes. When it became clear that Gentra was prepared to foreclose— and that it was talking to the ATB—the Ghermezians appealed to Klein.

Klein’s resulting memo seeking “an Alberta solution” was faxed from the treasury department to then-ATB superintendent Bray. The superintendent told Maclean’s that he promptly called Dinning to ask if the Alberta government was prepared to guarantee the Ghermezians’ loans. “Mr. Dinning was unable to answer the question,” he said. “When it seemed to me that there was not going to be any government bailout, there was no need not to proceed with the Gentra arrangement.” He signed an agreement with Gentra that effectively split control of the mall between Gentra and the ATB and limited the ATB’s exposure to $105 million. Then he retired—in May, 1994— and his successor, Leahy, took over.

And, suddenly, the deal with Gentra was off. Members of the Gentra negotiating team told Maclean’s they offered to explain the benefits of the deal to Leahy. “He wouldn’t even discuss the deal,” said one. The Gentra official also had an argument with Ken Kowalski, now Speaker of the provincial legislature, about the pact: “He told me that no one from Ontario was ever going to own the West Edmonton Mall. I said, ‘I have a deal with the ATB.’ He said, ‘We’ll have a cabinet meeting and overturn it.’ ” Gentra officials considered legal action—but they were not prepared to take on the province.

ATB went ahead with a new agreement

with the Ghermezians.

The statement of claim alleges that Leahy and the Ghermezians then executed three secret amendments that sweetened the deal: the ATB, for example, agreed to pay interest on mall revenues that were deposited in ATB accounts before they were dispersed in loan payments to the TD Bank and the ATB itself. (Ironically, the ATB loan was interestfree.) In return, the statement alleges, the Ghermezians secretly funnelled almost $90,000 in Canadian funds into two accounts that Leahy controlled. Another $250,000 in U.S. funds was transferred to Leahy from an Israeli bank. In declarations, two Edmonton residents—John and Letitia Burchynsky— said they converted bags of cash into money orders payable to Leahy’s personal companies.

The ATB has requested two possible remedies. In its preferred solution, the court would declare the loan agreements void and put the West Edmonton Mall—and all other Ghermezian assets—into trust until all loans and damages, totalling $450 million, are paid. As an alternative, the ATB argued that only the initial mortgage agreement is valid— and the Ghermezians are in default because they have failed to live up to their maintenance agreements and refused to open their books.

Meanwhile at the mall, it is not quite business as usual. At the Off Broadway clothing store last week, sales have suddenly jumped from $3,000 per week to $11,000. “I think it’s all the added publicity that’s reminding people about the mall,” speculated assistant manager Tara Raypold. “If this keeps up, maybe I can get a raise.”

DAVIS SHEREMATA

The Brothers Ghermezian:

FOLLOWING THE MONEY TRAIL

A chronology of West Edmonton Mall

financing deals:

In the 1980s, the Ghermezians put

together a financing package to build the

mall. It included five tiers of mortgages:

$296 million, with Gentra Inc.

as lead lender;

$50 million, with Citibank Canada Inc.

as lead lender;

• $50 million, including $10 million

from the ATB—and the remainder

from other institutions;

• $50 million from the ATB;

• $15.7 million from the ATB.

>• In late 1993, when the mall defaulted

on some of those loans, Gentra swapped

Montreal property in exchange for

Citibank’s second mortgage.

>• In March, 1994, Gentra and the ATB

signed a deal:

• Gentra would hold first and second

mortgages, totalling $350 million,

on the mall;

• The ATB would also hold a second

mortgage of $50 million, preferred shares

of $35 million and would provide a

$20-million line of credit to the mall.

>In the spring of 1994, the ATB-led

banking consortium sold its $50-million

debt, including $10 million in ATB debt,

to New York City money managers for

$12.5 million. In July, those managers

sold that debt for $15.25 million to a

company managed by West Edmonton Mall

lawyer Jack Agrios. That money was

borrowed from the ATB.

>• In October, 1994, the ATB ignored its

deal with Gentra and forged a refinancing

agreement with the TD Bank and the

Ghermezians:

• The ATB guaranteed TD loans of

$353 million and provided an interest-free,

30-year loan of $65 million.

• As the ATB alleged last week, former

superintendent Elmer Leahy and the

Ghermezians signed three additional secret

agreements that included a stipulation that

the Ghermezians could remain sole

managers of the mall to the year 2099.

>■ Gentra received about $335 million

for its syndicate.

>At the same time, with the consent of

the ATB, Agrios used the debt to initiate a

so-called friendly foreclosure against four

numbered Ghermezian companies. All

were stripped of their interest in the mall.

Under the foreclosure, the mall was then

transferred to a new Ghermezian company

for $419 million. The Ghermezians were

fully back in control.

M.J. and K.N.

K. N