The feds tout Canada’s banking system to the international community, the World Economic Forum says that Canada has one of the soundest banking systems in the world, and Forbes Magazine ranks Canada the best country in the world to do business. Canada has emerged from the 2008 financial crisis relatively unscathed, and the prevailing wisdom is that Canada’s economy is performing well thanks to our banks.
Investigative journalist Bruce Livesey says otherwise in his new book, Thieves of Bay Street: How Banks, Brokerages and the Wealthy Steal Billions from Canadians ($32, Random House). He details how Canada’s capital markets operate as a Wild West for the trading of exotic financial products whose risks are hidden from investors by the brokers who peddle them.
Moreover, Canada’s weak regulatory regimes and enforcement allow white collar criminals to escape with billions of dollars worth of Canadians’ savings annually.
As an investigative journalist, Mr. Livesey has worked on CBC’s The National and The Fifth Estate, his writing has appeared in The Globe and Mail and The New York Times, and he has co-produced investigative reports for Al Jazeera English and PBS Frontline. Thieves of Bay Street is his first book. He recently attended the Ottawa International Writers’ Festival, and stopped by The Hill Times to talk about his work.
The Q&A interview was edited for length and style.
What was the catalyst for you to write a book on the dark side of Canada’s financial industry?
“I was working on CBC News Sunday in the spring of 2008 after Bear Stearns collapsed, and a lot of people could see that a big storm was coming. I had a long background of doing business writing, but I’d never done anything on finance. It’s kind of boring, and it’s just a very arcane field, but the CBC let Evan Solomon and I do what turned into three short documentaries on the credit crisis.
“That summer we got a crash course on what was happening in the States and it became clear that the crisis wasn’t isolated to the U.S. The Canadian banking industry’s involvement in the Asset Backed Commercial Paper (ABCP) fiasco, which I had never heard of before, was relegated to the business pages. It was very obscure, so part of the process was figuring out how that fiasco was connected to the crisis in the States and the emerging subprime mortgage crisis. It became clear that the Canadian financial industry was not immune to the same problems, especially in regards to lying to investors about all of this. So that was an eye opener.
“For journalists who don’t necessarily pay close attention to the financial industry, when you come at it as an outsider it’s kind of shocking what these guys do. I’ve done many investigative pieces on corporate corruption, police corruption, and organized crime, so it’s not that I haven’t seen my fair share of astonishing crimes. The financial industry steals at an immense level, and they’re arrogant about it. The consequences were destroying economies. As Evan and I began doing these stories, the response from the finance industry was so arrogant. ‘How dare you suggest we’ve done something wrong?’
“That was what spurred my interest—the fact that what they were doing was so outrageous, but also that the Canadian industry had gotten this pass. I thought this was a subject worth doing a book about.”
Canada praises itself for having such a great banking system and we’re happy to pat ourselves on the back for it. How is it that Canadian banks survived the financial crisis, at least in the public’s view?
“There are a few things that happened. One is that the federal government did force the banks to put quality assets aside, more so than the Americans had.
“Secondly, in 2008 the Harper government through the CMHC, created a program allowing the banks to move some of their toxic assets off the books for a period of time in order to free up liquidity. It wasn’t a TARP bailout specifically, but it was a kind of a bailout.
“One of the problems in the States was that you had these big trading houses like Lehman Brothers, Bear Stearns and Merrill Lynch that were stand-alone, so when they got into trouble for being terribly over-leveraged, they didn’t have a bank standing behind them to rescue them. The Canadian banking industry had been deregulated back in the 80s, which allowed the brokerage industry to essentially be bought up by the banks, so the brokerage industry had the banks’ assets sitting behind them.
“Finally, and this is a crucial issue, the Canadian banking industry is an uncompetitive oligopoly. Consequently, they can charge some of the highest fees and commissions to their clients, whether they be investors or just people who put money in the bank. As an uncompetitive oligopoly, whenever they make bad decisions they just jack up fees and commissions, and that rescues them.”
What are some of the creative bookkeeping methods that have allowed executives to defund shareholders?
“Vendor financing is one of the most insane examples. Shareholders look for companies that have customers and are growing. Nortel was lending money to customers to buy their own product. Their customers were often uncreditworthy, but Nortel would lend the money to these customers in order to buy Nortel products, and then Nortel could record a sale without telling people that the money that was being used was Nortel’s own money.”
What is it about Canada’s capital markets that makes it an ideal spot for money laundering for international organized crime?
“It’s very porous. It’s easy to set up shell companies in our markets. Once you’ve got a listed company on the markets, you can do all sorts of things. You can do pump and dumps, you can attract investors with the sole intention of stealing their money.
“The other thing is that the markets are so poorly policed. One of areas that the RCMP is tremendously inept at handling is white-collar finance crime. They’ve gotten better on organized crime, but on the finance side of it they’re very weak.”
Despite all this, the World Economic Forum says Canada has got the best banking system in the world, and Forbes says we’re the best country in the world to do business. So why is that?
“On the solvency side, the Canadian banks are doing better. What’s not taken into consideration is that our banks and brokerage houses lose a lot of Canadians’ money.
“Sino-Forest is a great example—it’s really a Chinese company that’s been using our capital markets to raise money. It was listed in the mid-90s, so for about 15 years or so it was raising money from Canadians. When it blew up, it had a market capitalization of about $6-billion and debt of something like $1-billion dollars. [Sino-Forest] declared bankruptcy a few [months] ago.
“The reputation for being such a great banking industry is simply because they’re more solvent, and that’s not because of their prudence—it’s because the federal government actually had some wise people in it. The banks are an uncompetitive oligopoly. When they’re losing money in one area they raise the rates in another area. In the States, they don’t have that ability.”
Why is Canada’s regulatory enforcement so lax compared to the U.S.?
“One reason is that we have these 13 provincial and territorial securities regulators. Canada is a country of city states. You’ve got Halifax, Montreal, Toronto, Winnipeg, Calgary, Vancouver, where the political-legal-financial establishments run those cities. They all send their kids to the same schools, they all live in the same neighbourhoods, and belong to the same clubs. When you have the mandarins of the local securities commission as part of the club, they’re not going to put their friends, neighbours, or golf partners in jail. They watch each others’ back. That’s a big part of it.
“There’s also a cultural element to it. We have a special reverence for our rich, for some fucked up reason. We are loath to put them in jail the way the Americans are. I don’t know if this goes back to the Family Compact, but the notion that we’d put someone like Conrad Black in a Canadian jail just doesn’t sit well with us, and that’s helped the establishment enormously.”
The prevailing view is that Canada’s manufacturing sector has declined largely because of free trade, but how is it that the manufacturing sector is a casualty of the investment banking sector?
“As Canada has de-industrialized, a couple of things have happened. The investment industry has a problem, because there are fewer companies to invest in. That has driven them to create more of these exotic, bogus investment products, which is one of the reasons why we’re in the crisis we’re in now.
“The other thing is the emergence of private equity firms and hedge funds. These are essentially very large pools of wealthy people’s money, and a lot of pension money too. This is part of the unregulated so-called ‘shadow banking’ industry. One of the things they’re very good at doing is swooping in on ailing manufacturing companies, buying them up or taking a significant stake in them, and then trying to suck the profits out of them.
“Economist William Lazonic writes a lot about the fact that finance capital has turned into a destructive force in our economy. This has a great deal to do with the fact that they no longer have companies to invest in like they used to. It’s become easier to destroy a company than to build it.”
Why does CIBC come up so frequently in your book?
“There was a culture that emerged in the 1990s and early 2000s where CIBC decided they were going to get into the big boys’ club of international finance. The problem was that CIBC is a speck of dust in the international banking world, but they figured that they had to be out there doing big deals with big companies in Asia, the U.S., and elsewhere. It blinded them, and in this lust to become a big player they got stupid. When they got into bed with people like Enron, Global Crossing, and a few others, they were happy to go along with it because they thought that was what you did in this arena.
It was a culture of wanting to take greater risks than the other banks that led them to some really disastrous decisions.”
The federal government is making a push for greater financial literacy, and it’s got an awareness campaign on elder financial abuse. Is that not just the most roundabout, ineffective way of dealing with these problems?
“Yes and no. There’s no question that the industry takes tremendous advantage of our ignorance, especially seniors’ ignorance and gullibility. If people can in any way become more financially literate and more skeptical about the advice they’re getting and what these guys are offering, then it’s clearly for the better. There’s no question.
“The industry is very good at blaming the victim. They’re very good at persuading people to give them the money. They have their ad campaigns, they have the credit rating agencies to slap triple-A ratings on products that are basically shit. When you do lose the money, it’s all your fault.
“People who have money to invest are usually educated, middle class professionals. When they lose their money they’re embarrassed that they managed to lose it to someone who took a three-month correspondence course to be able to sell them investment products. That embarrassment works to the industry’s advantage because they’re never held to account.”
“Educating people can only help. I think the Harper government has to be given some credit. [Finance Minister Jim] Flaherty gets that we need a national securities regulator. It’s a national embarrassment that we don’t have a national securities regulator. It’s bad for business and it’s not drawing investment into Canada the way it should be.
“There are the sane elements of Bay Street who understand that this could be beneficial to Canada, but getting that realized has become a really difficult thing, as we saw with the Supreme Court decision in December.”
What policies do you think Ottawa needs to take to reign in this problem, beyond the establishment of a national securities regulator?
“Among lawyers who practise securities law, there’s a lot of debate about whether throwing white-collar criminals in jail is a good remedy or not. One of the reasons that the drug cartels in Mexico are so powerful, is because the police and army are easily corrupted. You have no rule of law, no police who aren’t affected. If you get robbed or lose a relative to local drug dealers, no one gets arrested. When that goes on, you end up with failed states and rampant corruption and criminality. The same analogy applies to our capital markets.
“They will ban people from the industry, but they don’t charge them criminally. That’s very significant, because once you get criminally charged, there are a lot of things you can’t do anymore. You can’t travel as freely, and your ability to set up operations, criminal or otherwise, becomes much more hindered. The securities laws are really weak because these guys know how to get through the loopholes and they rewrite the laws. The laws aren’t strong, they don’t throw enough white collar criminals in jail, and they don’t lay enough criminal charges. If they did a lot of that, I think that would help enormously.”
Original article on Hill Times website (subscription required)