The truth about Canwest’s collapse

By Steve Maich - Wednesday, October 14, 2009 at 12:40 PM - 1 Comment

There are certain archetypical characters that come up again and again as we rush to scribble out the first draft of history. In business, the roles are particularly well-worn: the iconoclastic entrepreneur, the maverick gambler, the sage manager, the disruptive outsider, the establishment man, and, of course, the dilettante heir. We organize these characters into familiar storylines—the heroic rise, the humiliating fall, the tragic miscalculation—again and again, not just to elevate the mundane details of commerce into dramatic narratives, but because these storylines serve a purpose. People are good or bad, smart or stupid, and everything makes sense.

We never tire of these familiar fables because they impose a tidy order on the chaotic events of life. They reinforce certain ideas that make the world seem less arbitrary, less random, and less frightening. Triumphs are always the result of human genius, and failures are generally flaws of character written in our DNA. Everybody deserves their fate. Continue…

Ending the myth of the frugal Canadian

By Steve Maich - Monday, February 16, 2009 at 1:40 PM - 2 Comments

One of the most comforting and oft-repeated truisms of this financial crisis is that, as bad as things are, we Canadians are far better off than our neighbours in the United States. This is generally and unquestioningly attributed to the fact that Canadians are more responsible and modest than Americans. Most importantly, we never ran up the massive debt loads that are typical south of the border. And so, we smugly shake our heads at the mess in America and congratulate ourselves on our culture of restraint.

Well, so much for all that.

Turns out that while we were happily soaking in the myth of the frugal Canadian, we were celebrating at the malls and treating ourselves to new home theatre systems and a few extra fancy restaurant meals. The global consulting giant Deloitte issued a report on Canada’s debt levels last week, and though it received only passing attention, it should have been more than enough to blow up our smug self-image for good. According to the report, Canada’s household debt-to-disposable-income ratio now exceeds that of the U.S. As of the middle of last year, the typical Canadian household now owes a little more than 1.3 times its annual disposable income, whereas the average American household owes a little over 1.2 times its income. That’s all debt, including mortgages, when compared to our income after taxes and interest costs.

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Are labour unions a blessing or a curse?

By Steve Maich - Wednesday, February 11, 2009 at 11:10 AM - 25 Comments

Depending upon who you choose to believe, labour unions are either a central cause of North America’s current economic troubles, or the only viable escape from them.

Robert Reich took up the pro-union banner last week. In a column in the Los Angeles Times, the professor of public policy at UC Berkeley and former labour secretary under Bill Clinton argued that unions formed the bedrock of America’s economic emergence, and that their decline over the past two decades has coincided with the collapse of the typical American’s standard of living. Harkening back to the good ol’ days of poodle skirts and drive-ins, Reich explained that “good pay meant more purchases and more purchases meant more jobs. At the centre of this virtuous circle were unions.”

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Take a pay cut to save jobs? No thanks.

By Steve Maich - Monday, February 2, 2009 at 1:28 PM - 21 Comments

When President Barack Obama made his inaugural address to the world last week, he included an explicit appeal to the virtue of generosity and sacrifice to help restore the economy to health. It is “the selflessness of workers who would rather cut their hours than see a friend lose their job which sees us through our darkest hours,” he said.

The message was particularly potent in light of our current economic doldrums. The awful toll of layoff notices continues to mount across North America and around the world. Over two million Americans have lost their jobs since this recession began and last week, within 48 hours of Obama’s stirring address, Microsoft, Intel and IBM revealed plans to cut thousands more. In Canada, layoffs topped 100,000 in November and December alone.

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The four faces of Nortel’s descent

By Steve Maich - Friday, January 23, 2009 at 8:01 PM - 2 Comments

It’s over. Yes, there are court hearings, and restructuring negotiations and yet more layoffs ahead, but all of that is epilogue. Nortel Networks is in bankruptcy, and for the millions of Canadians who went along for the nauseating ride, it’s over.

When the news landed last week, it didn’t exactly qualify as a shock. Recessions cull the weakest from the herd first, and it’s been clear for some time that Nortel was sickly and lame. For the past five years, the company has made news for only three reasons: management turmoil (four CEOs in eight years); firing workers (approximately 65,000 jobs cut since 2001); and accounting scandals (five plus nine equals . . . what again?). But for the thousands who’ve already lost their jobs, the many more who surely will, the shareholders whose savings were vaporized bit-by-bit, and the universities that rely on research funding from the company, the anticipation did little to cushion the blow.

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Why it’s time to set Conrad Black free

By Steve Maich - Thursday, January 8, 2009 at 2:10 PM - 80 Comments

Conrad Black just spent his first Christmas in a U.S. federal prison, and if the thought of that gives you pleasure, then you’re not going to have much use for the next 900 words. This is an argument in favour of Black, but not exactly in his defence. This is an appeal to pragmatism, and perhaps to mercy, because sometimes pragmatism and mercy are essential elements of justice. This is an argument for why Conrad Black should be released from prison, if not now, then soon. Not because he’s innocent, but because there is nothing more to be achieved from his incarceration. It is a waste—of money, of potential—and it’s time to wrap it up.

The U.S. president is entitled to pardon or commute the sentence of any federal prisoner. The last days of any administration often see a bonanza of executive leniency, and Black has applied to have his penalty reduced. Most Canadians are hostile to the idea—a recent poll showed more than 70 per cent are glad to see Black languish in the joint for the full term of his sentence—and it’s easy to understand why. Black is not a terribly sympathetic figure and presidential pardons seem arbitrary and undemocratic. But P.S. Ruckman, an associate professor at Rock Valley College in Illinois, is a leading expert on the pardon power, and he believes it is “an essential part of the U.S. justice system.” First, because it provides a check on the power of the judiciary, but also because it allows justice to be more “precise.” In a system dominated by procedure, strict rules of evidence and rigid sentencing grids, justice is often a blunt force. The pardon system allows for a more subjective test of fairness.

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What you don’t know can hurt a lot

By Steve Maich - Monday, December 29, 2008 at 9:00 AM - 2 Comments

As is so often the case in the complicated and opaque world of hedge funds, it is not yet entirely clear what happened at Sextant Capital Management. But if the allegations levelled by the Ontario Securities Commission are accurate, it went something like the plot of a Dan Ackroyd movie from the ’80s.

According to the OSC, a former dentist by the name of Otto Spork set up a private investment vehicle back in 2006 called the Sextant Strategic Opportunities Hedge Fund. About 240 Canadian investors, most of them in Ontario, handed about $22 million to Mr. Spork and his associates at Sextant. And for the most part, they have been very, very happy. At the end of November, Sextant was boasting of a 170 per cent return in the past 12 months, and a stunning 730 per cent return since the fund’s inception a few years ago.

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Guts, foresight and Edward ‘Ted’ Rogers

By Steve Maich - Monday, December 15, 2008 at 9:00 AM - 1 Comment

In business circles, calling somebody “a shooter” used to be a mark of high regard. Shooters were gutsy, bold and willing to take risks that others would not. The term has fallen out of popular use in Canada, perhaps in part because we have so few true shooters anymore. These days our Titans tend, for the most part, to be low-key strategists adept at protecting the franchise and building brands, but not overly concerned with conquering new ground or placing themselves at the forefront of emerging industries.

Ted Rogers, CEO of Rogers Communications—the company that owns this magazine—died last week after a long struggle with heart problems. It would be tempting to say that Rogers was a shooter, but that wouldn’t take the full measure of the man. To put his achievements into perspective, it’s best to turn to the words of an anonymous industry analyst who spoke about Rogers’ amazing career in a profile for the Financial Post, back in 1989—when his greatest successes hadn’t even yet been realized. “He pioneered FM radio, cable and cellular telephone in this country. That’s not just an accident,” the analyst said. “Someone once said to me that Ted Rogers is a real shooter. He’s not a shooter; he’s a marksman.”

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Feeling queasy on the oil & gas express

By Steve Maich - Monday, December 1, 2008 at 9:00 AM - 1 Comment

This summer, when global oil prices surged to an apocalyptic US$150 a barrel and filling up the gas tank began to feel like making a mortgage payment, radio call-in shows were in an uproar. My voice mail fielded almost-daily invitations to answer questions on “the oil crisis” for one station or another. That invariably meant coming ear-to-face with the public’s visceral fury. In three months, the oil price had shot up by 50 per cent and had more than doubled in less than a year. Anybody with a car and a furnace was ready to lash out—at “greedy speculators,” at Alberta, at billionaire oil barons, even at innocent journalists cheerfully answering their questions out of the goodness of their heart.

How, they asked, could prices change so fast? And why? Why!? Why dammit!!

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Is this the future? Don’t bet on it.

By Steve Maich - Monday, November 24, 2008 at 9:00 AM - 10 Comments

There has been much said and written lately about the “millennial generation,” the latest group of kids who are about to revolutionize the workplace and the economy. Don Tapscott, the futurist and business professor who’s been rhapsodizing about the potential of technology for decades, is out with his latest book, Grown Up Digital: How the Net Generation is Changing Your World—a 300-page valentine to the teens about to enter the workforce, a group he has branded the “Net geners.”

“The kids are more than alright,” he writes. “As the first global generation ever, they are smarter, quicker, and more tolerant of diversity.” Look at them surf the Internet! Watch them multi-task! They are truly a wonder to behold! Etcetera, etcetera, on and on.

A slightly more nuanced appraisal of this generation comes from Wall Street Journal writer Ron Alsop, in his new book The Trophy Kids Grow Up: How the Millennial Generation is Shaking Up the Workplace. Like Tapscott, Alsop sees the millennials (defined as all those born between 1980 and 2001) as more dynamic, ambitious and tech savvy than any previous generation. He at least nods to their less savoury aspects—their rampant narcissism and poor attention span, for example. But ultimately he figures that it’s incumbent on employers and managers to bend to the whims of this new crop of employees, not the other way around. And that’s convenient, because that’s just what the kids think too! Continue…

How the loonie caught China’s flu

By Steve Maich - Thursday, October 30, 2008 at 12:00 AM - 0 Comments

The good people in China’s ruling Communist party would like to assure everyone that everything is perfectly fine with their economy, thank you very much. They’d also like you to know that they have a deep and abiding respect for human rights; they share your concerns about the atrocities in Darfur, and all that stuff about Tibet is just a misunderstanding. But all that can wait. There are scurrilous rumours about that China’s vaunted economic awakening is coming off the rails, and Beijing is determined to stamp them out.

Under the headline “China’s economy has ability to recover from slowdown,” the state-owned news agency last week rounded up experts from such renowned institutions as the Center for Strategic and International Studies of Indonesia and the Vietnam Cooperative Alliance to express their undiminished confidence in China’s continued prosperity. It was an unfailingly upbeat assessment of China’s latest economic data: “Nothing to see here. Please move along.”

It’s another recent article that’s garnering more attention of late, however. This one appeared in the Far Eastern Economic Review, titled “The Great Crash of China.” In it, Brian Klein of the Council on Foreign Relations takes readers on a whirlwind tour through China’s emptying manufacturing districts, its plunging stock markets (the Shanghai index is down 67 per cent since January), and the rising anxiety among suddenly unemployed consumers. “Guangdong province alone, the heart of China’s low-cost manufacturing base, has seen half of the shoe manufacturing industry close shop (over 2,200 factories) this year,” Klein reported.

As it turns out, that’s not even the hardest-hit industry. According to recent report in Singapore’s Straits Times, more than 67,000 small and mid-sized companies have gone out of business in the first nine months of this year, including over half of China’s 7,000-plus toy makers. GDP growth has slowed for five consecutive quarters, and the economy is now expanding at its slowest pace since the 2003 SARS crisis. Official estimates (which tend to present the most optimistic view of the situation) now peg the annual growth rate at nine per cent, which sounds huge until you consider that the economy grew 12 per cent last year, and must grow by at least eight per cent in order to provide enough new jobs to China’s burgeoning class of young urbanites pouring into the job market each month. Unemployment is edging higher, and industrial output has slowed to a six-year low.

Japan, and the end of ‘buy and hold’

By Steve Maich - Friday, October 24, 2008 at 12:00 AM - 0 Comments

At the time, few people bothered to listen to what Yoshimi Watanabe had to say about the deepening U.S. credit crisis. In retrospect, that’s a shame.

“If there is a big hole in the bottom of a bathtub, no matter how much water you keep adding, you will never have enough hot water,” he explained to an Associated Press reporter in Tokyo. Fixing that big hole, he said, would require drastic action, primarily from the U.S. government and Federal Reserve, but also from lawmakers and central banks around the world—sharp interest rate cuts, flooding the market with liquidity, and hundreds of billions of dollars in public money to clear bad debts from major banks.

Now, of course, all this sounds obvious. But what makes Watanabe’s prescription impressive is that he delivered it last April, five months before Henry Paulson and Ben Bernanke realized that they were sitting—cold, naked and wet—in a rapidly draining tub. Their unprecedented effort to plug the leak has pretty much followed Watanabe’s recipe word for word.

How did he see this coming? And how could he have so accurately predicted the scope of the rescue plan that would be needed? Because Watanabe is the financial services minister for the government of Japan, meaning he’s the politician largely responsible for trying to manage an economy that is still rebuilding from its own disastrous credit bubble, which exploded almost 20 years ago. He’s been watching this particular horror movie for a long time now, and while he doesn’t know how it ends, he’s in a good position to fill us in on all the plot points we might have missed while the U.S. was merrily inflating its own market bubbles.

Back in the 1980s, Japan was the undisputed rising star of the world markets. Between 1985 and 1989 the Nikkei stock index almost quadrupled in value, driven by the astonishing success of its international exporters like Sony, Toyota, Nikon and Hitachi. And as wealth flooded into the country, the value of real estate soared. In the late 1980s, apartments in Tokyo’s exclusive Ginza district ran for 50 million yen per square metre. As British market analyst Mark Shipman once noted, that meant that if you put a dollar bill on the floor in a Ginza apartment, the space that it covered was worth around US$10,000. Put another way, a 600-sq.-foot apartment would run you close to US$80 million.

The Japanese people and their corporations went right on investing in their own economic miracle, and they did so by piling on astonishing levels of debt. When the bubble popped in 1989, the government repeatedly insisted that it was only a minor correction, that everything would soon return to normal. It didn’t, and the Japanese wasted years trimming interest rates down to zero, and offering one useless stimulus package after another. Meanwhile, the economy stagnated for a decade. Japanese companies were stuck with debts that they could never hope to repay, but the banks just kept rolling over their old loans into new ones, because if they admitted that the companies were essentially bankrupt, then the banks themselves would have to admit that they too were insolvent.

“Japan’s property and stock market bubbles burst. That implosion was worsened by a banking crisis and excess corporate debt. Nearly 20 years later, Japan is still struggling,” Stephen Roach, chairman of Morgan Stanley Asia, warned last March in another prescient appraisal of America’s economic woes. “An equally lethal interplay between the bursting of housing and credit bubbles is now at work in the United States.”

Facts and fairy tales of Paulson’s bailout

By Steve Maich - Thursday, October 9, 2008 at 12:00 AM - 0 Comments

Politics and business are full of convenient myths and useful fictions—that democratic government is driven primarily by the will of the people, for instance. Deep down we suspect these things aren’t exactly true, but they help keep the system moving.

These little delusions have their uses, but there are times when it’s important to focus on cold, hard truths. And when public officials decide they are going to spend close to a trillion dollars of taxpayer money to rescue a slew of private financial institutions from their own foolhardy misadventures, it’s time to cut the bull. Last week, the U.S. Congress approved Henry Paulson’s controversial US$700-billion bailout plan, after the House initially rejected it just four days earlier. How did they manage that abrupt about-face? In part, they did it by offering a handful of handy myths, designed to make Main Street feel better about funding a gargantuan economic do-over for the titans of Wall Street.

The first of these myths revolves around the idea that the plan will save the economy from the deep and painful recession lurking around the corner. For the average person on the street, this is the whole point of the Paulson plan, but even a cursory glance at the most recent economic data blows this hopeful idea sky-high. On the very day that the House of Representatives was ratifying the bailout, the U.S. Labour Department reported that 159,000 Americans lost their jobs in September—the worst one-month plunge in more than five years. That brought total job losses in the U.S. to 760,000 so far this year. The “official” unemployment rate is holding steady at 6.1 per cent, but that doesn’t really tell the whole sad story. When you include people who have given up actively looking for a job (known in government jargon as “discouraged workers”), unemployment now stands at 11 per cent—the highest since 1994. U.S. manufacturing activity slipped in September to its lowest level since the month after the 9/11 terrorist attacks. Josh Shapiro, an economist for MFR Inc. in New York, broke the bad news in a note to clients on Friday: “A consumer-led recession is upon us, and it promises to be a serious one.”

Pulling out of this funk won’t begin until people get confident enough to start buying houses again. Even if Paulson’s bailout can clear the decks for banks to restart lending, there will be precious few people eager to make a big investment when the economy is in the tank. The more people lose their jobs, the more foreclosures we will see, and the more prices are likely to fall. As of July, house prices in 20 major U.S. markets had fallen 16.3 per cent in a year and are still dropping, amid a record number of foreclosures.

Well, even if it can’t save America from a recession that’s already begun, proponents of the rescue say at least it will strike a major blow against the greed and excesses of Wall Street. They point to the bill’s prohibition on fat executive severance deals as proof. This too is a fantasy. The bill only prevents new golden parachutes for executives at companies taking part in the bailout. Washington can’t go back and abrogate existing employment contracts, so executives who already have their deals inked (which they all do) will still walk away with millions whenever they choose to quit, retire or get fired.

It's going to get worse

By Steve Maich - Thursday, October 2, 2008 at 12:00 AM - 0 Comments

It may have been the oddest coalition of dissenters you’ll ever see: hard-core southern conservatives allied with ultra-liberal members of the Congressional Black Caucus, blue-collar Republicans from the Rust Belt, and a couple of dozen conservative Democrats known as the “Blue Dogs.” As a group they likely never agreed on anything before in their lives, and may never again. But they agreed on this—Treasury Secretary Henry Paulson’s US$700-billion plan to rescue Wall Street from a rising tide of toxic debts was a no go. And on Monday afternoon, 228 of them rejected the biggest private sector bailout in history and triggered the sharpest one-day plunge in world stock markets since the 1987 Black Monday crash.

Some said it was morally indefensible that ordinary taxpayers, many of them worried for their jobs, should have to foot the bill to support rich bankers whose idea of hardship is having to sell one of their vacation homes. Others complained the plan failed to address the root of the problem: millions of ordinary people declaring bankruptcy and facing foreclosure. With public opinion firmly against the deal, many simply opted to side with the voters and let the chips fall where they may. On his way out of the House of Representatives after the fateful vote, Rep. Steve Kagen, a Democrat from Wisconsin in the midst of a tough re-election fight, curtly explained his vote against the deal: “The bill does nothing for my constituents.”

The deal itself is not quite dead. Congressional leaders are meeting this week in hopes of reviving Paulson’s rescue plan, and many insist that some kind of bailout will get done, somehow. But with each passing day a more sobering reality is settling in: Washington’s intervention, whenever and however it might come, is already too late. Early Monday morning, Wachovia, the sixth-largest U.S. bank by assets, wilting under the strain of an estimated US$42 billion in bad loans, agreed to an emergency takeover by Citigroup. It is the sixth major American financial institution to crumple under its debt load in two weeks, and this week officials in Britain, Ireland, Iceland, France and Belgium all stepped in to shore up their own crumbling lenders.

Bailout or no bailout, America’s financial system is bucking under stresses that have been building for years, if not decades. The world’s biggest and most dynamic economy has been erected on a mountain of debt from the national government on down to the millions of ordinary families with hefty mortgages and wallets full of maxed-out plastic. America bought its vaunted standard of living on credit, and trading partners around the world profited wildly from its free-spending culture. Now the bill is coming due. Central banks around the world, led by the U.S. Federal Reserve, are pumping hundreds of billions into the system in hopes of keeping it moving. But that, even if it were combined with Paulson’s massive transfer of tax dollars to Wall Street, only buys a temporary deferral, not a solution.

“Everybody keeps saying if we do nothing, there’s going to be a severe recession. Yes. There is. There’s no way around it,” says Peter Schiff, president of Euro Pacific Capital in Connecticut. “We have to take our lumps. We’ve got to pay the price for all our reckless borrowing and spending.”

How painful will that bruising be? Worse than anything we’ve faced in our lifetimes, he says. He describes a depression that would forge a new world economic order, with sharply higher interest rates, a weaker American dollar, surging prices and shortages of consumer basics. These are the strains that can pull a society apart, and while not everyone believes it needs to get that bad, such warnings are fast gaining currency all over the world. There is no easy way out of the economic vice tightening around America, and all the many countries, like Canada, which rely on it for their own prosperity. Last week, with major banks failing, home foreclosures running at a rate of 10,000 a day and unemployment climbing steadily higher, it was clear that something big was happening. Something that is going to change the way we live for decades to come.

For a US$700-billion behemoth, there was a certain elegance to Henry Paulson’s financial rescue plan. A new federal agency called the Office of Financial Stability would buy hundreds of billions in distressed assets (mostly toxic mortgages) from ailing banks and hedge funds in hopes of defusing the spread of panic around the world. In return, taxpayers would receive an ownership stake in the bailed-out companies, along with provisions to discourage excessive executive pay at rescued firms and a promise that, if the program was still losing money after five years, the president would take steps to recover losses through new fees and taxes.

What ‘socialism for the rich’ looks like

By Steve Maich - Thursday, September 25, 2008 at 12:00 AM - 0 Comments

Forest fires are extremely unpleasant, especially when viewed from up close. They’re scary and destructive and can be deadly for those caught in their path. But they’re also essential to the long-term health of any forest ecosystem. They clear out deadwood, control pests and disease, and return nutrients to the ground so that a new generation of growth can take hold.

The same is true of market crashes. They’re painful, frightening, and sometimes essential to purge the excesses and distortions created by long periods of growth and prosperity.

But accepting that idea in principle is easy. Embracing it in reality can be terrifying. Last week, the U.S. government and the titans of American finance looked out at the flames enveloping Wall Street and panicked.

Coming hot on the heels of a US$200-billion bailout of giant mortgage guarantors Fannie Mae and Freddie Mac, and a US$29-billion lifeline for distressed brokerage Bear Stearns, Treasury Secretary Henry Paulson launched a US$85-billion de facto nationalization of insurance giant AIG, followed by a temporary ban on short selling financial stocks (a method used by sophisticated investors to profit on market declines), and a US$180-billion credit line to shore up money market mutual funds. But Paulson’s audacious tax-payer-funded intervention wasn’t finished there. He also put together a plan to have the government clear bad debts from the balance sheets of America’s major financial institutions just as it did during the savings and loan crisis of the late 1980s. No exact price tag yet, but Paulson acknowledged the cost would run into the hundreds of billions of dollars. Taken all together this represents a sweeping redefinition of the relationship between private enterprise and public finance.

Paulson’s rescue of AIG was particularly shocking because it came just 48 hours after he refused a similar lifeline to the venerable brokerage Lehman Bros. In fact, Paulson said he never even considered bailing out Lehman, because it was not the role of government to backstop private companies that get into trouble all on their own. He reversed himself in AIG’s case because to fail to do so, experts said, would have triggered a massive global market panic, and almost certainly a stock market crash. Paulson’s actions, in other words, are based entirely on the cold calculus of pragmatism, rather than principle. Lehman was allowed to fail because it was too small to matter. AIG was saved because it was too big to abandon.

You might think that people would have a problem with this—that some might think principles and guiding philosophies are important, because they allow the world to anticipate and evaluate the ways that public officials will use public funds. But, by and large, the reaction to Paulson’s moves has ranged from laudatory to resigned acceptance. There are a few outraged voices—über-investor Jim Rogers decried the Fannie/Freddie bailouts as madness, insanity and “socialism for the rich,” pointing out that they have massively increased the American national debt to help “a bunch of crooks and incompetents.” But generally, even hard-core conservatives have fallen back on the “desperate times call for desperate measures” rationale.