A schooling in America’s finances

By Tamsin McMahon - Tuesday, February 19, 2013 at 10:25 AM - 0 Comments

Andre Jenny/Newscom

As the hometown of Penn State University, the municipality of State College, Penn., is no stranger to bad publicity. But its announcement last month that it was paying a Canadian bank $9 million as part of a failed plan to raise money to build a new school has placed the town at the centre of a national debate over a type of high-risk debt that critics claim has helped tip hundreds of American cities, schools and transit systems into financial ruin.

In 2006, State College’s school board planned to issue bonds to raise $58 million to replace its aging high school. The board’s financial adviser suggested it hire the Royal Bank of Canada to do the deal, and protect against the prospect of rising interest rates on its bonds by locking into a complex deal known as an interest-rate swap with the bank.

The school board would pay RBC a fixed interest rate and RBC would pay the board a floating rate, which the board would then use to pay its bond investors. If rates rose, the board would pocket the difference. If they fell, the school would owe the bank. But in a twist, the community voted not to build a school and the board never issued the bonds. After interest rates plunged in the wake of the 2008 financial crisis, the board missed its first interest payment of nearly $1 million to RBC. It launched a lawsuit to try and back out of the agreement but lost the court case and last month announced it had reached a settlement to pay RBC $9 million of a termination fee between $10 and $11 million.

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Canadians missing fewer loan payments, paying off debts faster

By Linda Nguyen - Thursday, January 24, 2013 at 11:00 AM - 0 Comments

TORONTO – Canadians are paying off their debts faster, with the number of those more than three months behind on loan payments dropping to a record low, according to a report Thursday from Equifax Canada.

The latest National Credits Trends study by the credit monitoring firm found that the percentage of unpaid non-mortgage debt past-due more than 90 days was 1.19 per cent in the fourth quarter of 2012, a slight decrease from 1.22 per cent in the third quarter.

Nadim Abdo, Equifax’s vice-president of consulting solutions, says these rates have been declining since the pre-recession level in 2007 when it was at 1.75 per cent.

“Part of it I would attribute to people looking after their credit and not taking on too much credit,” he said. “Credit has become very important for consumers in general. There is more awareness, I would say, then there was before.”

The study, which is released each quarter, also found that average credit card balances have dropped by 3.7 per cent compared with the July-September quarter — a sign that people may be trying to pay these off quicker than before.

Despite this, the study also saw an increase of 3.2 per cent on non-mortgage loans, including bank loans, lines of credit, car leases and credit cards in the October-December period, up from a 1.8 per cent increase in the previous quarter.

Equifax said that suggested that Canadian non-mortgage debt totalled $497.4 billion in the fourth quarter, up from $489 billion in the third quarter.

The firm says it found that fewer consumers applied for new loans in the latest quarter, but rather made do with the loans they already had.

And it found an 11 per cent decline in new credit applications, compared with pre-recession levels.

This shows that consumers are learning more control over their credit and debt levels, Abdo said.

“People are (being) financially responsible,” he said. “They have the facilities and they’re just using them, versus just going crazy and getting those 25 credit cards like we used to back in the heyday.”

Abdo also said he expected the drop in loan balances and loan defaults to continue if the economy remains stable.

In previous years, he says Equifax studies have shown that consumers tend to take out more loans, and do not pay them back as quickly, during a volatile economy or periods of high unemployment.

Meanwhile, the Bank of Canada on Tuesday downgraded its economic growth outlook for the country to 1.9 per cent for 2012 and to two per cent for 2013, both three-tenths of a point lower than previously forecast.

The central bank says as a result, interest rates will be kept lower for longer due to the weak economy.

When banks are too big to behave

By Tamsin McMahon - Friday, July 13, 2012 at 10:15 AM - 0 Comments

Olivia Harris/Reuters

As long as there have been banks, there have been banking scandals. The treasurers of Athena burned the Acropolis in an attempted cover-up after secretly lending money to speculative bankers. Wall Street’s first banking scandal—a familiar tale of banks lending too heavily to property speculators who lost it all when the real estate bubble burst—happened in 1837. Banking that breaks the rules “in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous and frequently fatal to the banking company which attempts it,” economist Adam Smith warned in The Wealth of Nations nearly 250 years ago.

With that history, it’s understandable that economists don’t quite believe promises by U.K. regulators that the latest scandal to rock the global financial industry—revelations that banks were manipulating a key interest rate affecting more than $300 trillion in worldwide investments—will usher in a new era of ethical banking. “It’s guaranteed to be a losing battle,” says Richard Grossman, an economist at Wesleyan University and author of Unsettled Account: The Evolution of Banking in the Industrialized World since 1800. “The incentives in banking are so strong and the money is so big. As soon as you close off one area, someone is going to think of a new way to do things.”

Related: 

• The LIBOR scandal: Why manipulating prices is easier in the financial industry

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The LIBOR scandal: It can’t just be bad apples

By Leah McLaren - Monday, July 9, 2012 at 2:51 PM - 0 Comments

Dylan Martinez/Reuters

Earlier this week, when American-born Barclays chief executive Bob Diamond finally stepped down in the wake of his bank’s interest-rate-rigging scandal, it was with characteristic defiance. “I am deeply disappointed that the impression created by the events announced last week about what Barclays and its people stand for could not be further from the truth,” he said. Not entirely surprising, given Diamond’s reputation for partisan toughness, though it’s interesting to wonder exactly which incongruous “truth” and “impression” he was referring to.

Here’s another truth: between the fall of 2007 and spring 2009, Barclays, one of Britain’s largest banks, found itself, like many other financial institutions, in dire straits. It was struggling to raise funds. Had it revealed it was paying higher-than-average interest rates, Barclays risked “reputational” damage and could have ended up being bailed out like the Royal Bank of Scotland or Lloyds Banking Group. Instead, its investment banking staff began subtly rigging the London interbank offered rate (LIBOR), an average interest rate estimated by the city’s leading banks of what they would be charged if borrowing from other banks. As the rate is calculated daily and underpins trillions of dollars of financial transactions, the habitual rigging had untold reverberations on the British economy as a whole. Last week, the scandal exploded as Barclays was fined $460 million by British and U.S. authorities for attempting to manipulate rates.

As for the impression? Here in the U.K., the Barclays scandal has been taken as a clear indication that the bank, and by extension the culture of finance in the city of London as a whole, is unacceptably corrupt. As governor of the Bank of England, Sir Mervyn King told media last week after yet another financial scandal came to light (this one involving improper selling of complex financial products to small businesses), “From excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates, and now news of yet another mis-selling scandal, we can see we need a real change in the culture of the industry.”

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‘Increasing the adjustment for risk’

By Aaron Wherry - Tuesday, November 8, 2011 at 3:13 PM - 32 Comments

In March, the Harper government announced that it would return the federal books to balance in the 2015-2016 fiscal year. Seventeen days later, the Conservatives changed their minds and promised instead to return to balance in 2014-2015. Seven months to the day after that, the Harper government has decided it can’t fulfill April’s promise and is going back to March’s projection (at the earliest).

Depending on how you count these things, this is either the third or fifth return-to-balance projection the government has offered in the last three years (first 2013-2014, then 2014-2015, then 2015-2016, then back to 2014-2015 and now back to 2015-2016).

Including Mr. Harper’s vow in 2008 that a government led by him would “never” go into deficit, this is the second time in three years that the Conservatives have made a balanced-budget promise during an election campaign only to abandon it after being reelected.

In conversation: Kevin O’Leary

By Colin Campbell - Wednesday, October 5, 2011 at 10:50 AM - 2 Comments

Jessica Darmanin/Maclean's

Before becoming one of the star investors on CBC’s Dragons’ Den and ABC’s Shark Tank, Kevin O’Leary founded the software firm SoftKey, which later became The Learning Company and merged with Mattel in a deal worth nearly $4 billion. He now heads the investment firm O’Leary Funds and also co-hosts CBC’s The Lang & O’Leary Exchange. His new memoir Cold Hard Truth hit shelves last week.

Q: You offer a lot of lessons in your book about how to succeed in business. Can entrepreneurialism be taught?

A: I actually think being an entrepreneur is a state of mind. If you’re going to be an entrepreneur, my thesis is that you have to sacrifice everything for some period in your life to be successful. You have to be myopic and completely focused and unbalanced in every way. Once you achieve success, you’re free to do whatever you like.

Q: You write about being steered into business by your stepfather and mother.

A: Well, my mom’s attitude was, you’re going to find your own path, and life is serendipitous. She wasn’t as rigorous and hardcore as my dad, who looked at me one day and said, “You’re going to amount to nothing. All you do is party and you want to be a photographer. That’s the most competitive industry on Earth. You’re not that good.” The guy was giving me the truth: you should go back to school and at least get some tools.

Q: There are professional photographers. You could have pursued that.

A: I wanted to do that. I wanted to go to Ryerson. His thesis was: what’s your competitive advantage? What’s your difference? I’ve met with and worked with many photographers now, and I realize that it’s a brutally competitive market and they are really, really good. I honestly don’t think that I have that.

Q: This was your stepdad. Your biological father you describe as being a real salesman. Do you think you inherited that from him?

A: I do. I noticed the other day in a photo of him with his arms stretched in a position I do a lot; it looks just like I do. He died when I was seven. But I remember him. He was a classic Irish partier. A very kind man but also a real renegade.

Q: He lived hard?

A: Very hard. It’s what those Irish guys did. My mother divorced him right before he died and I think he died with a broken heart.

Q: What do you think he would have made of Dragons’ Den?

A: He would have been proud of me. He really missed a lot of life. I think he drank himself to death. It’s something I’m very cognizant of.

I was driving a couple of years ago and Peter Munk, the chairman of Barrick Gold, calls me and says, “Did you know that I came over on a boat with your father from Ireland? He was my roommate.”

Q: Get out of here.

A: No I’m serious. He said, “I just wanted to call you and let you know that he was a great guy.” It was a remarkable moment.

Q: What about your mother? Did she have a chance to see any early episodes of you on television?

A: She did and she was always fascinated by television. She actually enjoyed Lang & O’Leary more than anything. She really respected Amanda.

Q: Your mom factors heavily in your book . . .

A: She was an amazing woman and went through a lot of hardship, but also gave me tremendous guidance and support. She had an investment philosophy that I didn’t appreciate then but I do now. She said, never invest in anything that doesn’t have yield. When she died three years ago, I was executor of her estate and I realized she had every single dime she’d ever made.

Q: That’s still your investment philosophy today.

A: And it works! It really works.

Q: She was a working mom too, right?

A: A working mom. Her father owned [a clothing factory] but his philosophy was that the daughters all had to work on the sewing line. She was the boss’s daughter but not treated differently than anybody else. That’s how I treat my kids, too. When I fly over to see my dad in Geneva, my son has to sit in the back of the bus because I say to him, you have no money. You can’t afford to sit in first class. It’s a good lesson. He gets it. It makes him mad.

Q: Your mom later became the CEO of the family company.

A: It was tough. I had a German nanny. My dad was gone. I had dyslexia.

Q: You write in your book, “Money is the lifeblood of family.” Explain that.

A: Unfortunately it’s the truth. You can say family can be held together by love, but the truth is if there’s no capital there you get into a very bad place. Money puts tremendous pressures on relationships if you don’t have any.

Q: But your parents would have loved you if they were broke and living in a shack, right?

A: Yeah, but you know . . . money tears families apart for lack of, and for too much. It’s a very powerful force and you have to understand it and respect it.

Q: People would probably be surprised to hear about your whirlwind childhood—living in Cambodia, where your stepdad worked for the UN, going to military college in Quebec. Was that hard?

A: It was hard. I think back and think I missed something. But at the same time it gave me an appreciation of the world. I own real estate in Cambodia because I know it’s a great place for real estate. No one else knows—but I lived there for two years and I’ve been back.

Q: What did you learn at military college?

A: The discipline of getting up at 4:30 in the morning.

Q: Do you still do that?

A: I do. I get up between 4:30 and 6:30 every day.

Q: Were you a popular kid?

A: I had good friends. What’s happened to me over time is my best friends are the ones I’ve been to war with in business. I make friends inside a company and I stay friends with them the rest of my life.

Q: In one of your early endeavours you worked in TV production, including on Don Cherry’s Grapevine, a half-hour interview show. What was that like?

A: I owned that format. I owned Special Event Television with two partners. The first time I made money was selling Don Cherry’s Grapevine to his son.

Q: Do you channel Don Cherry when you’re on TV now?

A: I really respect Don. When you go on television it’s because you’re trying to create something people watch. He’s very flamboyant, entertaining and I think he taught me a lot about that.

Q: On TV you have a reputation as being the mean guy. You have a story about one man who came up to you in an airport washroom after seeing you on Dragons’ Den and called you an asshole. You’ve said this kind of stuff doesn’t bother you.

A: It doesn’t bother me at all.

Q: It’s hard to believe. Everybody wants to be liked.

A: Here’s why I know I’m right about this. The reason he said that is that I’m simply telling the truth. The one thing about money is you have to tell the truth about it. It’s the only metric in life where there’s no grey. You either make money or you lose money.

Q: I think you’ve described telling someone their idea stinks as “exhilarating.”

A: Because we’ve gone through this journey together; we’ve explored an idea and we’ve come to the right conclusion: it’s stupid. That’s a good outcome. I’m not trying to make friends, I’m trying to make money. My whole theme is just tell the truth.

Q: Let’s talk about The Learning Company, which you sold to Mattel in what turned out to be an epically bad merger.

A: You know, what’s interesting is the company is back [under new ownership] with all the same brands and doing very well. I think Mattel squandered a fantastic asset. One of the big motivations in writing this book was to set right what actually happened after they acquired the company. In my mind I’ve cleared the record.

Q: Obviously you’ve heard all the criticism: that TLC wasn’t profitable, that Mattel was somehow deceived.

A: Of course, if any of that were true it would have come out in the litigation. None of it was. They had forensic accountants tear our books apart for two years.

Q: You talk about how a culture clash between your software firm and a big bureaucratic toy maker ruined what could have been a good deal. The failure must have really bothered you.

A: It made me crazy. I was out of my mind unhappy.

Q: You and the CEO of Mattel, Jill Barad, both lost your jobs.

A: Well, I mean, I wasn’t happy being an employee anyway. I had a three-year non-compete. It was the most miserable time of my life. I was making the largest salary I had ever made and I wasn’t allowed to work.

Q: You once managed to get a meeting with Steve Jobs, where you asked him to pay TLC to keep carrying Mac-compatible software. What was he like?

A: He was so abusive! Toughest guy I ever met. We were in the boardroom at Apple and he went into a diatribe like I had never heard before. But we eventually did a lot of business with Apple. He’s a tough guy. Maybe that’s why it works. And hey, there’s an asshole!

What’s the use of saving money?

By Jason Kirby and Chris Sorensen - Tuesday, September 27, 2011 at 9:30 AM - 40 Comments

Getty Images; Photo Illustration by Taylor Shute

Steven Patterson and his family moved to Vancouver from Cambridge, Ont., in mid-2008, just as the financial crisis hit. After years of scrimping and saving to pay off their first mortgage, they had earned a tidy profit when they sold the Cambridge house and put the proceeds into GICs, where the money would be safe and easily accessible should they decide to buy another home in B.C. Three years later, Patterson, a 42-year-old IT manager, is still sitting on the sidelines, renting, while real estate prices march ever upward in a city where a three-bedroom bungalow covered in warped siding can fetch $1 million.

That might seem like a prudent move in an uncertain economy, but Patterson says his cautious approach has come at a steep price: all his money is steadily being eaten away by inflation, which the meagre interest income from his GICs can’t cover—particularly after the taxman takes a cut. Meanwhile, several of Patterson’s friends have taken advantage of those same low interest rates, loaded up on debt, and bought into Vancouver’s frothy housing market in recent years. And they have enjoyed a windfall—at least on paper—as the value of their homes continues to climb. As for Patterson, “I’m only a few thousand dollars ahead—minus inflation,” he says, clearly frustrated. “So actually, I’m way behind, and I don’t have a house.”

Welcome to the world of ultra-low interest rates, where profligacy is richly rewarded and saving is, well, for suckers. Those who’ve opted to be austere with their personal finances have found themselves on the losing end as governments and central bankers have worked to get people to borrow and spend in the wake of the global recession. While emergency interest rate cuts were to be expected after the financial crisis seized up lending markets, it’s been nearly four years since central banks started slashing rates to the lowest levels in history. For that matter, over the last 10-year period, following the 9/11 terrorist attacks, the Bank of Canada’s benchmark interest rate stayed above four per cent for just six quarters (in 2006 and 2007), while the average headline rate of inflation over that time was 2.1 per cent.

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Really bad investment advice

By Jason Kirby - Tuesday, September 13, 2011 at 10:35 AM - 5 Comments

These days, Richard Kelertas, a financial analyst at Dundee Securities, isn’t saying much about Sino-Forest, the beleaguered Chinese forestry company at the centre of a fraud investigation by regulators. “I’m not speaking with the press or anyone, unfortunately,” he says. That is unfortunate, because a lot of investors who followed Kelertas’s advice to buy Sino-Forest’s shares—either before the company got into trouble, when he insisted Sino-Forest was a “class act in timberland management in China,” or after, when he called the fraud allegations a “pile of crap”—no doubt have a few choice words for him.

The Sino-Forest debacle has the potential to be the biggest stock market scandal to hit Canada since the Bre-X gold-mining fraud in the mid-1990s. Until June, Sino-Forest was the most valuable forestry company on the Toronto Stock Exchange, with a market capitalization of $6 billion. Then Muddy Waters Research, a U.S. investment firm, issued a damning report that claimed Sino-Forest “massively exaggerated its assets” and is nothing more than a Ponzi scheme. Muddy Waters said it was short selling Sino-Forest, or betting that the company’s share price would plunge. It did. By the time the Ontario Securities Commission suspended trading in the stock on Aug. 26 and raised its own concerns about fraud, Sino-Forest had shed three-quarters of its value.

At this point none of the allegations have been proven. The OSC’s accusations of fraud at the company could ultimately prove unfounded. This still may turn out not to be “Tree-X.” Even so, investors would be right to wonder why a company with the potential to completely collapse on the basis of a single critical report was regarded so highly by analysts in the first place. Kelertas wasn’t alone in his effusive praise of the company in recent years. Of the 10 analysts covering Sino-Forest before the Muddy Waters report hit the street, nine rated the stock a “buy” or “outperform,” while just one considered it a “hold,” according to Reuters.

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In conversation: David Chilton

By Chris Sorensen - Wednesday, September 7, 2011 at 11:10 AM - 0 Comments

Andrew Tolson/Maclean's

In 1989, David Chilton published The Wealthy Barber, a seminal book on money, focusing on three people in their 20s who visit Roy, a barber, for lessons on financial planning. It went on to sell more than two million copies, making it one of the bestselling Canadian books of all time. Now, more than 20 years later, and in the wake of the 2008 financial crisis, the 49-year-old has released the long-awaited follow-up: The Wealthy Barber Returns, which hits bookshelves this week.

Q: How old were you when you first published The Wealthy Barber?

A: I was 25 when I started writing it and 27 when it came out. I was very lucky. I really was. Interest rates had just started heading on a steady path downward and that was really important because it made people realize they couldn’t just rely on GICs [guaranteed investment certificates], they had to start looking for other investments. And that meant they needed some knowledge. Also, there was almost no competition. When The Wealthy Barber came out, there were only two other Canadian personal finance books in the marketplace. Now there are hundreds.

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‘I think it’s better that we stick to the facts’

By Aaron Wherry - Tuesday, August 16, 2011 at 4:42 PM - 19 Comments

Conservative MPs on the finance committee move to ensure you are not frightened by this week’s hearings.

At a planning meeting Monday evening, NDP finance critic Peggy Nash put forward a motion requesting that a panel of economists be included as witnesses Friday, but the Conservatives used their majority to limit the invite list to Mr. Flaherty and Bank of Canada officials.

“It’s imperative, in my opinion, that we not do anything that might worry Canadians. And I think that hearing from the Minister of Finance and the Bank of Canada will help to reassure them, as they should be, that there is concern, but that we are proceeding, as parliamentarians, in their interests,” explained Conservative MP Shelly Glover, who is Mr. Flaherty’s parliamentary secretary.

If you dare look, here are some of those economists now.

A stranger in Deutsche land

By Erica Alini - Tuesday, August 9, 2011 at 9:00 AM - 0 Comments

Deutsche Bank, that most treasured of German national institutions, has picked an Indian executive to be its new CEO. Last week, the bank revealed that Anshu Jain, currently working for Deutsche Bank in London, will be filling the shoes of outgoing chief executive Josef Ackermann, who is scheduled to step down in May. Jain currently heads the bank’s investment banking operations, which accounted for nearly 90 per cent of its pre-tax first-quarter profits this year. But the 48-year-old Indian native speaks little German and doesn’t know his way around the corridors of corporate and political power in Frankfurt and Berlin. That’s why the bank also appointed Jürgen Fitschen, a German who currently oversees Deutsche Bank’s national operation, as a co-CEO. In addition, the duo might get some tips from current CEO Ackermann, who is slated to head the bank’s supervisory board.

The complex succession scheme has received mixed reviews from investors, many of whom fear a triumvirate at the top will lead to leadership struggles and slow down decision-making. But, as others suggested, an Indian alone at the helm of Germany’s financial crown jewel might have been too much of a cultural shock for many Germans.

Fish stick empire

By Chris Sorensen - Thursday, January 27, 2011 at 11:40 AM - 1 Comment

Terry G. Conrad

On the surface, it would seem like a bad time for Nova Scotia’s High Liner Foods Inc., which makes frozen fish sticks and other prepared seafoods, to go fishing for an acquisition in Iceland. In recent months, local pop star Björk has mustered a remarkably successful campaign aimed at overturning another Canadian-led takeover effort: Magma Energy Corp.’s recently completed purchase of geothermal power producer HS Orka. Just last week, Björk held a three-day karaoke marathon that helped to boost signatories of a local petition against the Magma deal to more than 46,000, or about 15 per cent of Iceland’s population, causing Iceland’s prime minister to hint that a public referendum on the deal could yet be forthcoming.

But that hasn’t stopped High Liner, headquartered in picturesque Lunenburg, N.S., and known for its salty, grey-bearded fisherman logo, from steaming ahead with its plans to buy Icelandic Group, which controls a network of independent seafood processing companies in Europe, North America and Asia. If successful, High Liner, already a leader in Canada, would become a major force in the huge U.S. market supplying seafood to supermarkets and restaurants. There’s just one problem: Icelandic’s owners, a consortium of public pension funds called Framtakssjóður Íslands, aren’t interested in selling—at least not to High Liner.

Kelly Nelson, High Liner’s chief financial officer, says the company has been eyeing Icelandic for years and was assured that if the company’s foreign processing businesses ever went on the block, High Liner would have an opportunity to bid in an open auction (producers located in Iceland itself aren’t believed to be for sale). “We found out that they have entered into exclusive discussions with a German private equity firm called Triton,” Nelson says, noting that Icelandic has been in a difficult financial position for a few years, having been previously owned by a state-run bank set up after the 2008 financial crisis. “We also found out through different sources in Iceland that maybe this was an inside deal being cooked up, and we didn’t think this was fair to the Icelandic pension plans that own these assets, or other bidders.”

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'The stock market is for suckers'

By Jason Kirby - Monday, January 24, 2011 at 9:00 AM - 52 Comments

Justin Sullivan/GETTY IMAGES

Were it not for the source and recipients of the email—From: Goldman Sachs, To: Our most outrageously rich clients—it would have read like one of those Nigerian investment scams that slip through spam filters now and then. “When you have a chance I wanted to find a time to discuss a highly confidential and time-sensitive investment opportunity,” the secretive missive began. But this was clearly no shady dispatch from Lagos. What investment bank Goldman Sachs offered by way of the emails, sent out to thousands of its most valuable high-net-worth clients in early January, was the chance for them to buy a piece of the hottest company in America: Facebook.

Since the social networking site infused itself into every facet of our lives, investors have anticipated the day when the company would take its place in capitalist folklore beside Microsoft, Netscape, Apple and Google. Everything seemed to be in place—the phenomenal growth, chief geek Mark Zuckerberg’s rapid ascent to Bill Gates-ian prominence, The Movie!! It all suggested we were about to witness one of those rare moments when the spark of innovation meets the greatest wealth-creation machine the world has ever known: the American stock market.

Only that’s not how things have unfolded. In its email to clients, Goldman wasn’t talking about a public stock offering for Facebook. Instead, the bank, along with a Russian investment firm, injected US$500 million into Facebook’s coffers by way of a purely private transaction. Goldman, in turn, set up a fund through which wealthy clients could own those Facebook shares themselves, for a minimum of US$2 million. Based on that valuation, Facebook emerged a colossus worth more than US$50 billion.

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Blaming banks for Madoff

By Erica Alini - Thursday, January 13, 2011 at 1:20 PM - 2 Comments

Getty Images

The last few weeks of 2010 brought a flurry of new lawsuits against Wall Street’s heavy hitters, as lawyers for the victims of Bernard Madoff’s Ponzi scheme raced against a Dec. 11 legal deadline marking two years since the financier’s arrest. Among the big names targeted in the fresh batch of lawsuits are JPMorgan Chase, UBS, HSBC, Citigroup and Merrill Lynch-Bank of America.

The banks have called the lawsuits “unfounded” and “utterly baseless.” But Irving Picard, the court-appointed trustee who’s spearheading the effort to recoup defrauded investors’ money, says it’s Madoff’s financial activity that bore little resemblance to reality—and big banks should have known. The lawsuit against HSBC alleges the bank failed to notice that some of Madoff’s trades had been settled on a Saturday, when stock markets are closed, and that for three years his investor statements misnamed a fund in which he claimed to have put client money. HSBC did hire an independent auditor to look at Madoff’s deals, and the probes warned of possible shams and fraud. But the bank is accused of turning a deaf ear.

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Insurance orange alert

By Josh Dehaas - Thursday, December 16, 2010 at 4:20 PM - 1 Comment

Getty Images

Canada has one of the lowest risks of terrorism in the Western world, according to the recently published 2010 Terrorism Risk Index. Yet this year was also one of the busiest on record for those offering insurance against terrorism, according to Marsh Canada, the country’s largest insurance broker offering terror coverage.

Canada’s terrorism insurance industry dates back to 2001, when the Sept. 11 attacks on the World Trade Center cost insurers $40 billion. After that, most insurance companies in the Western world excluded acts of terrorism from their coverage. The U.S. and the U.K. responded by promising to back companies that continued to offer terrorism coverage as part of their regular policies. Canada (with the exception of a temporary reprieve for the airline industry) did not follow their lead. That meant worried companies had to find their own stand-alone insurance. Following Sept. 11, just over a quarter of Marsh’s clients bought the insurance.

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A bunch of bad (stock) tippers

By Chris Sorensen - Thursday, December 2, 2010 at 11:00 AM - 0 Comments

Getty Images

A U.S. investigation into illegal insider trading continues to gather steam amid reports this week that the FBI raided the offices of three hedge funds, one of which has links to an ongoing probe of Galleon Group, described as the largest hedge fund insider trading case ever. In Canada, meanwhile, the Ontario Securities Commission levelled its own stock- tipping allegations against Mitchell Finkelstein, a lawyer formerly at Davies Ward Phillips & Vineberg LLP, as well as several traders and brokers who allegedly profited from inside information about corporate deals.

But while white-collar crime investigations in the U.S. have often led to criminal charges, experts say that, if past history is any indication, the Canadian case is unlikely to result in jail time. Richard Powers, associate dean of the Rotman School of Management, says proving stock tipping in the criminal courts is extremely difficult in Canada, and that the OSC may be inclined to seek administrative penalties such as fines and trading sanctions because they require a much lower burden of proof. “My sense is that’s what is happening here—lots of phone calls, innuendo and timing points to tipping, but does it meet the criminal standard required for more severe penalties? Only the OSC knows at this point.”

Microfinance meltdown

By Erica Alini - Thursday, November 25, 2010 at 1:40 PM - 1 Comment

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The global economic downturn destroyed the image of big finance, but did nothing to tarnish that of microfinance, the altruistic business of making tiny loans to small entrepreneurs in developing countries. Recently, though, even microlending appears to be headed toward its own mini financial crisis.

Once hailed as a magic bullet against poverty, the practice has come under attack in India and Bangladesh where it is being accused of increasingly adopting the same loansharking methods that it is meant to rescue small borrowers from, like punishing interest rates. The backlash first originated in India, where a wave of suicides by farmers with outstanding microloans led local authorities to rein in financiers. Similarly, in neighbouring Bangladesh—the birthplace of the global microlending movement—regulators are planning measures that include an interest rate cap.

Microfinance firms deny wrongdoing, saying that charging hefty interest rates (usually around 30 per cent) is necessary to cover servicing costs in remote villages. But microfinance founder and Nobel Peace Prize winner Muhammad Yunus has been warning that high growth and high profits have been corrupting the industry. The concept of microcredit, he told the Wall Street Journal, “is being blatantly abused.”

The crushing recession that’s brought Ireland to its knees

By Nancy Macdonald - Wednesday, November 17, 2010 at 10:00 AM - 1 Comment

One in three Irish under 30 are out of work | Cathal McNaughton/Reuters

Two years ago, Mick Doherty was tooling around Dublin in a brand new, cherry-red Audi A4. “A six-speed,” the young Irishman adds, with a rueful smile. Today, Doherty drives around his adopted Vancouver in a 1990 Chrysler Daytona—automatic transmission. “And I’m grateful for it,” declares the 32-year-old construction worker who, last year, emigrated to Canada to escape a crushing recession that’s brought his native Ireland to its knees. It’s shrunk the economy by a tenth—the textbook definition of a depression.

What a difference a few years can make. As recently as 2006, the roaring Celtic Tiger was held up as a model economy. Doherty was making money hand over fist, holidaying three times a year, in Bulgaria, Las Vegas, Spain. Ireland famously boasted more BMWs per capita than Germany, and its lawyers and managers were earning bigger bucks than their counterparts in the U.S. But in late September 2008, Irish banks, overexposed to the property market, came under severe pressure as the credit crunch bit in. “More or less overnight,” says Doherty, “everything came crashing to a halt.” Ireland led Europe into recession.

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Generation spend

By Erica Alini - Monday, November 8, 2010 at 9:00 AM - 9 Comments

Jemal Countess/ Spencer Platt/Getty Images

“If I want something I want it, no matter what,” says Kezia, one of the protagonists of a new Slice TV series Princess, where Til Debt Do Us Part host Gail Vaz-Oxlade tries to put young, female serial shoppers through personal finance rehab. A makeup artist who normally makes “probably” around $30,000 a year, Kezia would shed up to $355 a month on her hairdo, and eat out “probably” four times a week. “I don’t ever look at my credit card statements,” the pretty (dyed) blond says, gazing dreamingly at the camera. “As soon as they come, I throw them away.”

Twenty-five-year-old Kezia belongs to a new species of consumer whose capacity to spend will surpass that of the boomers sometime in the next decade. Variously referred to as Generation Y or Generation Next, they are loosely defined as the age group going from kids in their early teens to young adults. In the U.S., eight- to 24-year-olds are expected to spend $224 billion of their projected $348 billion annual income, according to Harris Interactive, a market research and consulting firm. Yet the percentage of those who have no savings at all is over 50 per cent. The stats in Canada are equally troubling. For young adults, the proportion between the ages of 25 and 34 who say they are impulsive spenders and can’t save is 30 per cent, a figure very similar to the 31 per cent found among the so-called Generation X (or 35- to 49-year-olds), according to a recent study by the Royal Bank of Canada.

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Insurers strike back

By Chris Sorensen - Thursday, September 16, 2010 at 1:20 PM - 0 Comments

Heath Korvola

There are few sights more spectacular than a lightning strike—unless you happen to be an insurance company. With some 40,000 lightning-related claims filed each year in Canada, totalling between $500 million and $1 billion, adjusters often find themselves trying to recreate events that literally happened in the blink of an eye.

Now help has finally arrived. A new database maintained by the Weather Network includes strike data collected since 2007 by a network of 71 sensors located across Canada and the northern United States. While firefighters and utility companies already rely on the real-time data for monitoring purposes, Bruce Caven, the Weather Network’s vice-president, says there was a need for an archival service so past strikes could be verified by insurance companies and other businesses. “They want to go back and reaffirm where the strike was struck, so to speak,” he says.

It’s not a perfect system. Information about strike locations is only considered accurate to within 250 m 18 times out of 20. But that is likely enough to help adjusters determine whether a claim is truly an act of God, or the work of an unscrupulous property owner trying to cash in on his policy.

Law School: what will it cost?

By macleans.ca - Thursday, September 16, 2010 at 9:00 AM - 0 Comments

Listed below are the 2010 tuition figures for first-year students, shown from the least expensive to the most. The numbers do not include other compulsory fees, which at some institutions can add well over $1,000 to the bill.

*Two figures are listed for law schools in Quebec and Nova Scotia: the higher figure is charged for students from outside the province.

Harper is on to something in cutting aid

By Andrew Potter - Wednesday, August 11, 2010 at 9:00 AM - 0 Comments

DADANG TRI/REUTERS

Fresh off defending Canadians from the tyranny of the mandatory long-form census, the Conservative government has set its sights on the gang of internationalist do-gooders that make up Canada’s foreign aid community.

Ottawa recently cut $1.8 million in annual funding from the Canadian International Development Agency (CIDA) to the Canadian Council for International Co-operation (CCIC), an aid-industry organization that represents as many as 100 NGOs. The money represents more than two-thirds of the CCIC budget, and the organization is now in the process of laying off over half its staff. Its head, Gerry Barr, described the defunding as “partisan brush-clearing.”

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Learning Islamic finance

By Julia Belluz - Thursday, July 22, 2010 at 12:40 PM - 0 Comments

MOSAB OMAR/REUTERS

Starting in September, students can enrol in Canada’s first university course in Islamic finance. Walid Hejazi, the professor at the University of Toronto’s Rotman School of Management who is developing the three-day program to begin in January 2011, says it will cater to executives who “want to get an edge to differentiate themselves.” Participants will study sharia-compliant financial instruments (Islamic law prohibits usury), as well as the legal and tax implications of Islamic finance.

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The end of the great stimulus experiment

By Andrew Coyne - Monday, June 14, 2010 at 11:02 AM - 69 Comments

Tomohiro Ohsumi/Bloomberg/Getty

“Finance ministers of the world’s leading economies have been so spooked by the sovereign debt crisis that they have decided they can no longer wait until economies are growing strongly before they remove fiscal stimulus . . . The communiqué of the meeting made clear the G20 no longer thought expansionary fiscal policy was sustainable or effective in fostering recovery because investors were no longer confident about some countries’ public finances.”
—Financial Times, June 5

So the great Policy Panic is over: born of the financial crisis of 2008, expired in the fiscal crisis of 2010. Let Lord Keynes’s body be returned to its grave at last.

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