Canadian life has been based, forever it seems, on the sanctity of the three pillars that sustained our individual and collective sense of well-being: the family, God and our chartered banks.
One of the pillars in this confidencesustaining tripod collapsed during 1985, and from now on Canadian bankers will be regarded as nothing more than just another bunch of professionals—like chicken pluckers who didn’t quite meet their quotas.
Yet looking back at the tumble of events that made 1985 a time when banking news moved securely onto the front pages, it is still impossible to credit how anyone in his or her right mind could have allowed the Canadian Commercial Bank fiasco to happen. I keep trying to comprehend the sequence of misjudgments that took place and nothing adds up, even if you accept the basic assumption that most of the bit players involved were really trying out for one of those Keystone Kops silent films that consisted mostly of unintentional pratfalls.
My attempt to reconstruct the tragedy of the bank’s failure began with the recollection of a meeting I had with Howard Eaton in 1981, when he was riding high as chairman of the CCB and it had just hit an asset base of $1.4 billion. Perched on the corner of his desk dressed in slacks and a flashy sports jacket, he boasted that his bank was the most profitable in the country, earning 82 cents for every $100 in assets. (The similarly calculated base for The Royal Bank of Canada, then one of the most efficient financial institutions in the country, was 60 cents.) When I asked him how that was possible, he explained that it all came down to speed: multimillion-dollar loans
could be granted at favorable terms within 12 hours of application, while the traditional banks took as much as two weeks. At the time, the Alberta bank’s asset base was growing at an astounding rate of 80 per cent per year.
Speed seemed to be the guiding principle of Eaton’s career. Having moved through a succession of West Coast financial institutions at an amazing clip, he helped manoeuvre the granting of the CCB’s charter through Parliament in only eight weeks and raised the $22 million cash needed to float the new institution in less than 12 months.
Then, in 1981, when the National Energy Program and depressed oil prices were forcing most of the companies on the CCB’s list of outstanding loans to the wall, Eaton climbed into his Porsche and moved to southern California. Instead of condemning his move, the bank’s board of directors approved an interest-reduced loan of $1 million to help him settle snugly in Santa Barbara. It was from there that he ran the bank by long-distance tele-
phone, prospering on a bank chairman’s full salary, even though most of his energy was spent in private dealings with his new partner, Leonard Rosenberg, the controversial Ontariobased financier whose trust company empire crumbled in notoriety and was taken over by the Ontario government.
Gerald McLaughlan, who eventually succeeded to the CCB’s presidency, recently told the Estey commission that the Rosenberg connection had fatally undermined the CCB’s credibility. That
relationship was anything but casual. Rosenberg and his associates eventually acquired 27 per cent of the bank’s shares. Here was an individual deemed not worthy of owning a relatively small trust company yet he was allowed to control a Schedule A bank.
On Jan. 25, 1983, the day after Eaton’s relationship with Rosenberg was revealed and he was fired from the CCB, Bank of Canada Gov. Gerald Bouey telephoned the The Globe and Mail and spoke to reporters Arthur Johnson and Peter Moon. In a move that has no precedent he stated, for publication, that despite the Rosenberg connection the CCB was at that point in time “a solvent and profitable bank.” He then went on to explain: “We don’t want this problem to snowball. We want to reassure people from far off—from other countries—that nothing terrible is happening to our banking system at all.”
In the weeks and months that followed, Bouey never once moved to contradict his optimism, though within two years he was having to pump more than $1 billion in backup liquidity into the faltering Alberta institution. Certainly, the Ontario government, which would hardly have any inside information not available to the Bank of Canada, immediately struck the CCB off its approved list of investments, as did most other capital pools. The only explanation for the Bank of Canada governor’s appeal to Globe and Mail readers, and his subsequent conduct, is that he must have been acting on grossly inadequate information. Otherwise, it is impossible to understand on what grounds Bouey mustered such a spirited defence.
Bank of Canada officials have since maintained their usual attitude of besieged circumspection. Bouey has insisted that the central bank has to lend cash to any bank the inspectorgeneral of banks considers solvent. But last week, testifying before the Estey commission, Inspector-General William Kennett said Bouey “doesn’t have to rely on my opinion of solvency. He had the same evidence I had.”
Every industry, including banking, can survive the pain of losing its weakest offspring. What the Canadian financial system cannot tolerate is for the man who acts as guardian of its credibility to issue assurances that do not stand up. That is why, as the final act in the Canadian banking crisis, Gerald Bouey should resign.
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