News from The Globe and Mail
Building Bay St.
Friday, October 31, 2003
The financial hub of the nation has always been a blend of myth and substance, both to its denizens and its detractors. Ambition and greed still propel it, and scandals still tarnish it, but the real threat is that much of the action now takes place beyond it
Those beady-eyed floor traders in their actionable jackets, bellowing to be heard, are only a distant echo of times past. Yet Bay Street still suffers from that raucous image, even if its current inhabitants have turned green from the eerie glow of the computer screens that illuminate their lives as they roam the globe, dialling for dollars.
Bay Street has always been more of a metaphor than a reality, but never more so than now. Take the Street itself. Fewer than 20 investment dealers still boast a Bay Street address; the Toronto Stock Exchange moved away 20 years ago, and in 1997, eliminated its physical trading floor altogether. Most of the Street resembles any other urban avenue, occupied by Starbucks, Rogers Plus, Tim Hortons, a Flight Centre, a women's clothing boutique and a men's wear shop called Fabio. There is little to evoke the emotionally charged Bay Street of Canadian history, which, to farmers, trade unionists, stake-hungry prospectors, hard-shell Baptists and frustrated oil-patch explorers, became the symbol of greed and damnation.
Since the cost of money and the value of currencies are now set in more imposing venues, Bay Street's clout and function have diminished, and these days, most of the stock traders who populate the area, the honest ones, admit they're just as baffled about the future as their clients. If there is a conspiracy here, it lacks much bite beyond survival of the most adaptable.
But historically, much of the country's economic development was financed from these concrete canyons, and if Bay Street isn't what it was, it's because Canada isn't what it was, much of its evolution now taking place through intellectual leaps instead of the megaprojects that have conquered the frontier.
Canada's original fortunes flowed from the fur trade, land speculation, shipping and construction of the Canadian Pacific Railway. They were minted and spent in Montreal. The country's most impressive concentration of wealth was The Square Mile, that golden enclave of graceful stone mansions on the slopes of Mount Royal that was forever England, its legitimacy bestowed by British titles and "old country" nannies. Its leaders behaved with an imperviousness to the world around them that Dickens would have found entirely contemporary. They were judged on how they disposed of their cherry pits, and how many Robert Adam tables they could stuff into their foyers.
Montreal looked inward and dreamed of the past, facing east, across the Atlantic, modelling itself on London and Paris; Toronto looked outward and dreamed of the future, facing south, replicating New York and Chicago. By the 1920s, much of Montreal's wealth had moved into third-generation hands and had ceased taking risks, being mainly invested in yachts and mistresses. The city's business exodus was set off in the early '20s, when Sir Henry Thornton chose Toronto's Canadian Bank of Commerce to finance the formation of the CNR, forged from the Canadian Northern, the Grand Trunk and the Grand Trunk Pacific. The Ontario government had meanwhile been financing rail construction into its own northland, which triggered the Cobalt, Porcupine and Kirkland Lake mining rushes.
The immense mineral wealth of the Canadian Shield thus came under Toronto's dominance. Montreal's money men sniffed that the mining market was "a bit undignified," and relegated mining stocks to the lesser Montreal Curb Market. Speculative wealth poured into Toronto. By the late 1950s, Toronto had bypassed Montreal as Canada's reigning financial centre, and the floor of the Montreal Stock Exchange near St. James Street, which once had more millionaires per block than Monaco, was later converted into a theatre.
The Toronto Stock Exchange was established in 1861, with 24 members (who paid $5 each to belong), trading 18 securities during half-hour daily sessions held at a local Masonic hall. But much of the action shifted to the cross-town Standard Stock and Mining Exchange, which was formed in 1901 and became the North American capital for mining shares and stock swindles. The Financial Post estimated that 400,000 investors were bilked out of $100 million, before the S&M was merged into the slightly more respectable TSE in 1934.
One of Bay Street's first major reforms was a crackdown on wash trading (a practice that created the appearance of activity through the manipulation of fictitious accounts) following the 1964 Windfall Scandal. Viola MacMillan, a doughty prospector, used the technique for fraudulent promotion of Consolidated Golden Arrow Mines. But it was Windfall Mines, another MacMillan company, that triggered the uproar after she drove up the price of its shares from 65 cents to $5.60 without any underlying value in the summer of 1964. She was later sentenced to nine months in jail in connection with Golden Arrow, but served just eight weeks. Windfall wasn't that much of a scandal because so many mine promoters followed her example, but the royal commission formed to investigate the case nevertheless recommended trading reforms. MacMillan died in 1993 at 90, fully pardoned and the holder of an Order of Canada. (Lenny Gaudet, please copy.)
Until the 1960s, Bay Street was run like a fusty boys' club, with Wood Gundy, Dominion Securities and A.E. Ames (the only broker with carpeted washrooms) forming the holy trinity. They recruited by pedigree, instinct and fellowship. There was an apostolic progression from Upper Canada College to a pew at one of this privileged trio of investment houses, and from there to membership in the Toronto Club and, beyond that, permission to while away one's days nursing a terminal case of affluenza: the tendency not to do very much except preserve the status quo of the firm and one's exalted position in its ranks. Anyone who questioned such a cozy arrangement was accused of having "blotted his copy book."
All this changed radically with Bill Wilder, who became Wood Gundy's executive vice-president in 1961, and president six years later. He had attended UCC and belonged to the Toronto Club, but he also graduated from the Harvard Business School. He called in consultants McKinsey & Co. to help introduce modern management techniques. "What Harvard did for me," he once told me, "was to point up that you've got to choose options even when you don't have all the facts. I found that Bay Street executives were frightened at the very thought of taking decisions. All of the major firms at that time were run by salesmen, not administrators, and they weren't good managers."
Wilder and his team worked harder than what had been Wood Gundy's acceptable maximum. His decade-long tenure introduced bottom-line efficiency and genuine competition to Toronto's financial district. This was observable in the tombstone ads that appear in newspapers' business pages to announce new corporate issues. Instead of passively falling into line, investment houses jockeyed harder for top left spot in the ads, like Hollywood stars vying for billing on movie-house marquees.
With spiralling inflation in the 1970s, more and more individual Canadians and institutional investors plunged into equities. This was accompanied by a phenomenal growth in the value of private and public pension funds, as well as new departures such as the rise of derivatives and options trading. Among the newly revived giants were Midland Doherty (David Weldon and Phil Holtby) and Burns Fry. The latter, the outgrowth of Burns Brothers (founded with a $500 bank loan by the innovative Charles F.W. Burns in 1932) and Fry Mills Spence (which opened for business on Jan. 3, 1925), was rejuvenated under the leadership of Latham Burns (Charles's nephew), Peter Eby and Jack Lawrence. McLeod Young Weir became powerful under the controversial stewardships of the Street's one-man brain trust, Tom Kierans, and Austin (Firp) Taylor, the heavyweight from Vancouver who attended the University of British Columbia and Princeton, and graduated from neither.
Simultaneously, the investment business was fragmenting itself into imaginative boutiques, with such creative contenders as Connor, Clark (John Clark); First Marathon (Larry Bloomberg); Loewen, Ondaatje, McCutcheon (Chuck Loewen and Christopher Ondaatje); McCarthy Securities (Robin Cornwell and Leighton McCarthy); Pope & Co. (Joe Pope); Beutel, Goodman (Austin Beutel, Ned Goodman and Seymour Schulich); Guardian Capital (Norman Short and Gurston Rosenfeld); Mackenzie Financial (Alexander Christ); and Trimark Investment Management (Arthur Labatt, Bob Krembil and Michael Axford).
The next big shakeup was Jimmy Connacher's arrival on the scene in the 1970s. His Gordon, Eberts Securities (later Gordon Capital) quickly became Canada's biggest options trading operation. He trumped the established syndicates as a formidable early player in block trades, his firm's capitalization of more than $30 million allowing him to take major positions on its own account. Those trades entitled firms to collect commissions at both ends of most transactions. Next, he pioneered bought deals, which meant that new issues, instead of having to pay out fixed commissions, were guaranteed by Gordon. By 1981, his firm--with a capital base that eventually rivalled the dollar facilities of the major houses--was doing massive block trades that placed it first in dollar volume on the TSE.
Connacher was one of the few independents left after the pivotal rule change in 1987, which followed the so-called Big Bang in London, that threw open securities markets to all comers. Four of Canada's Big Five banks promptly acquired Bay Street's Big Four investment houses (Woody Gundy, Dominion Securities, Nesbitt Thomson and McLeod Young Weir), while the TD went its own way by buying up discount brokerages.
The betting at the time was that the immovable corporate culture of the banks would triumph over the entrepreneurial bent of the investment houses. It hasn't. The appointments of John Hunkin (of Wood Gundy) to chair the Commerce, Gord Nixon (of Dominion Securities) to run Royal, and Ed Clark (who had put in stints at Merrill Lynch and Morgan Financial) to head TD Bank, attest to that. Instead of fighting it, most bankers delight in the trend. "Don Fullerton, who was chairman of the CIBC when we took over Wood Gundy, instructed me to decide on the basis of my due diligence of Gundy's people, because we're looking for future leaders of the bank," Hunkin recalls. "The investment house experience brings a much better appreciation of the capital markets, and it's getting to the point now where loans are being traded and becoming more of a security than a traditional banking instrument."
This upheaval put even more fire in Jimmy Connacher's belly, pushing him into ever more daring fiscal adventures. His 55th-floor office in the TD Centre, which featured red-and-white venetian blinds, an ornate naval chest, and a roomy, comfortable desk firmly planted near a blue-wash Tanabe painting, signalled his individuality. (There was an unsubstantiated rumour on the Street that the firm's top producers were granted the nocturnal privilege of making love to their paramours on Jimmy's desk.) Connacher possessed a remarkable inner gyroscope that kept him and his crew on course, allowing him to exercise his uncanny sense of timing--when exactly (not to the day, but to the hour) to move in and out of situations.
But Gordon grew too fast, and in 1993, the OSC suspended Connacher for 90 days following an investigation into a bond-lending scheme hatched by subordinates that circumvented collateral requirements. Two years later, his role was cut back when Hong Kong investors acquired control of the firm, and he retired in 1999. But for a time, nearly every big block of shares that changed hands on Bay Street was traceable to the canny traders at Gordon: whether it was Conrad Black buying control of Norcen, Peter Bronfman tying up Brascan, Trevor Eyton pecking away at Noranda, Jack Cockwell swallowing more Labatt A's, or the Reichmanns pursuing their monthly takeover.
Or, of course, Andy Sarlos buying anything that moved. The Buddha-in-residence of a closed-end investment fund called HCI Holdings Ltd., Sarlos had the touch, and pioneered a new and daring approach to maximizing gain. In four short years, the ex-Hungarian freedom fighter had minted a profit of $40 million from a company that, when he took it over in June, 1977, was an idle manufacturer of fireworks. There was such a run of buyers on Sarlos companies that trading had to be suspended for hours on end and, by 1980, his trades accounted for 10% of the TSE's daily volume. Seven banks extended HCI permanent credit lines of $100 million for the privilege of being able to finance his deals. Brokers on Wall Street, bankers on Lombard Street and hedge fund operators on Zurich's Bahnhofstrasse began their calls by asking, "What's Andy up to?"
What Andy was up to was tuning his sensitive antennas, picking up the early opportunities and distant warnings that his colleagues either didn't hear or chose to disbelieve. Sarlos was convinced that, because of temperament and geography, most of his competitors operated from secondary vibrations, not according to the primary pulses and the voltages that really mattered. He would fly to Calgary at least once a month, for example, inspecting rigs out in the field instead of merely visiting boardrooms, studying geological maps and listening with a sensitive ear to the oil patch's beefs and prognostications. "I don't mind giving Andy my chequebook any time," I was told by Gus Van Wielingen, one of Alberta's best-informed oil millionaires. "I'll even show him how to sign my name."
Sarlos stayed ahead of the pack, earning three fortunes and losing two. "A good trader relies on what he hears," he lectured me, "but a great trader assimilates all the available facts and makes his final go/no-go decision on gut instinct and his nerve." When I complained that the stock market was just another form of gambling, he objected, reverting to his Hungarian English. "Dat's not true," he said. "Casinos got rules." There was one Bay Street rule he followed diligently until his death in 1997: "If during a bull market, you get taxi on Bay Street and de driver offers you de latest stock tip, stop de car, give him $20, den run like hell to office and sell everyding." An early case of irrational exuberance, no doubt.
The corporate equivalent of Sarlos, at least in terms of making intuitive decisions and validating his instincts by moving around the country, was Anthony Smithson Fell. From the spring of 1980 until he stepped aside as CEO in 2000, Fell ran Dominion Securities, and became the competitor to beat in any big-ticket Bay Street deal that was in play. A secretive workaholic, he had no small talk, and was obsessed about cost-cutting to the point of outlawing free office coffee. He rarely does interviews, but I saw him two or three times, and he always spoke in the third person, as if he were dictating a memo about himself to a secretary.
He worked out of a tree-house office--perched over his firm's trading floor--that looked as if it had been furnished with rejects from a building-wrecker's auction. His chair cushion appeared to have moth holes (he took it with him when he left) and his carpet was so worn that its original colour had faded beyond recognition. His sparse surroundings didn't stop him from dominating Bay Street by absorbing nine major competitors. The firm was itself acquired in 1988 by the Royal Bank, which paid $385 million for a controlling interest. "The only reason we did the deal," Fell said somewhat incautiously at the time, "was to get a firsthand look at how to nickel-and-dime our customers."
Fell's strength was his mobility. He ranged the country seeking out deals, becoming an economy section regular on redeye flights, which wasted the least working time. He was constantly calling on accounts, new and old, drumming up merger and acquisition schemes and new IPOs, the two areas that yielded the highest fees. "My phone doesn't ring much any more," he once told me in his mid-Atlantic accent. "I never wait for clients to come calling. I'm always on the road, and I never see customers without bringing them new ideas."
He was the rigid field marshal under whose swagger stick Dominion Securities became almost obscenely profitable. During his last few years as CEO, annual return on equity regularly exceeded 32%, with the firm's happy, if constantly rotating, 100-plus vice-presidents dividing up nearly $900 million in dividends and bonuses over seven years. Fell himself made twice as much as his boss, then Royal Bank chairman John Cleghorn: In 1997 alone, Fell took home $6.3 million. That year, at a dinner held to celebrate the splitting up of the firm's profits, Fell dealt with the internal criticism of his mega-earnings. "If we ever have a return on equity of more than 40%, I will immediately retire," he told his partners. "Which is good news for you and gives everyone lots of incentive to work like hell. The bad news is that with my salary and bonuses, you'll never make it." His wit was drier than any martini ever shaken. "The more analysts, researchers and economists you have on staff," he once observed, "the higher the chance that one of them will be right."
Bay Street's analysts and researchers crossed the line in 1998, when they unquestioningly supported David Walsh and his crew of pirates whose Bre-X swindle wiped out $6 billion in equity values. When Walsh died shortly afterward, at his Bahamas sanctuary, Dr. Eugene Newry, who attended him, reported that, "apart from his aneurysm, Walsh was in excellent health." That was an appropriate diagnosis, since apart from the fact that its 200-million-ounce ore body turned out to be salted mud, Bre-X was a great gold mine. Yet, strangely, no one has yet been brought to justice for Canada's largest and most audacious stock swindle.
Analysts had been so high on the Indonesian-based prospect that they drove the stock up to more than $285 a share, even though the company had yet to dig a single shovelful of ore from its "mountain of gold." In March, 1997, just hours before Bre-X shares went into the dumpster, Nesbitt Burns's Egizio Bianchini, touted as the Street's leading mining analyst, reaffirmed his "buy" recommendation. "The gold is there," he declared.
Bre-X took the shine off Bay Street, but what really exploded its mythology was Traders, the weekly Global TV drama (with Connacher acting as a consultant), which was on the air during most of the dot-com market bubble. It proved that the first casualty of a bull market is innocence. This was a typical exchange, between head trader Marty Stephens (Patrick McKenna) and his idealistic assistant, Ann Krywarik (Kim Huffman):
Ann: "Shouldn't we care if people's lives are out of balance?"
Marty: "As it affects the price of commodities? Yes. The way it moves the line in New York? Absolutely. On the little guy who drives his donkey to work? Not a pico. We scrape the silver lining off every dark cloud. Start scraping, or get off my floor. If you want to help Colombia, sponsor a foster child."
Ann: "I already have a foster child."
Marty: "Then make money shorting Colombia, and sponsor a whole village."
What was troubling about the show was not its depiction of the gutter ethics of the "Big Swinging Dicks," the red-suspendered traders, but how dangerously close it came to being a documentary.
The great dot-com bubble faithfully followed Mae West's gospel--"Too much of a good thing can be wonderful"--until the bubble burst, just after the turn of the century, and Bay Street took on a life of its own. Its Klondike psychology demanded that internet and computer stocks increase their profits by 40% per quarter. Anything less sent them into a free fall. Initial public offerings, which once implied an established revenue stream, were floated on a spit and a promise, with fancy buzzwords substituting for solid earnings and realistic prospects. This created a hedonistic generation of traders who lived for the fun as much as for the money, and pursued both to the ends of the universe. They believed implicitly that it was never too late to have a happy childhood, and behaved to make it so.
In one way, Bay Street hasn't changed at all. It's still one huge whispering gallery with tips and gossip wafting through the air like summer butterflies. "What do you hear?" is the standard greeting, sounding suspiciously like an invitation to insider trading. The most productive rumour factories are the favoured lunching and drinking venues. That used to be Winston's, the legendary adult daycare centre on Adelaide, where top-ranking brokerage executives went to read each other's entrails by noting who was hitting on whom in Johnny Arena's plush-red booths.
Now, they lunch more frequently at the Cambridge Club, where they can flex tired muscles at the same time. The most popular watering holes are Jump, a walnut-panelled restaurant that occupies an enclosed Commerce Court corridor; Acqua at BCE Place (where there are empty tables these days, maybe partly because of the Himalayan trek required to reach its men's room, where standing at the urinal grants its user a partial-window view of BCE Place's Atrium and, one assumes, vice versa); Bymark, a windowless pit in the bowels of the TD Centre, where hamburgers cost $33.95; and Canoe, on top of that tower that has more big players per white-linen tablecloth than the other venues combined. If Canoe waiters look like cashiered mutual fund salesmen, it's because they are.
Today's Bay Street has calmed down considerably. The exchange decisively changed its character when it became a for-profit corporation on April 3, 2000, a month after trading values exceeded $100 billion for the first time. The transformation has just begun. Much more revolutionary changes are overdue. Although the full impact has yet to be realized, Bay Street lies naked to the skies that are filling up with metal birds, the communications satellites that are threatening to displace conventional money markets.
Big money flees regulation, taxation and disclosure. Going offshore, where it acquires anonymity, no longer requires having to sweat through a session in the tropical office of some lawyer with a suspicious moustache and slowly rotating ceiling fan, trying to incorporate a Cayman Islands holding company, controlled by a Liechtenstein nominee trust. A palmtop computer and phone jack is all you need; cyberspace takes care of the rest.
That's only one of the long-term trends threatening Bay Street's future. Another is more immediate: Some 173 of Canadian stocks are now interlisted with Wall Street's exchanges, and that's where much of the action has moved. At the same time, many of Canada's iconic multinationals have been broken up or swallowed in foreign takeovers, including Seagram, Canadian Pacific, BioChem Pharma, Imasco, Gulf Canada Resources and dozens of others.
Still, Toronto's stock traders will continue to prosper, just so long as Canadian investors keep equating their self-worth with their net worth. That has always been Bay Street's ticket to ride.
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