Tony Fell explains the entirely avoidable global financial meltdown.
How we wish Tony Fell had been in charge of Wall Street when the financial exotica was concocted that in 2008 would tip us into the worst global financial crisis since the Depression. Fell always was a fair dealer, as we said of him in praise of Fell's record on his retirement after turning an under-capitalized Dominion Securities into today's RBC Capital Markets juggernaut (see below). The sort of operator, Warren Buffett once said, you could spend futile hours on Wall Street in search of.
In Friday's Report on Business Magazine, distributed with that day's Globe and Mail, Fell succinctly lays out how global financiers and co-conspirator clients got us into the current mess. His observations, as told to Globe business reporter Gord Pitts, should be mandatory reading at every MBA mill in the land:
"The major lesson from the current crisis is there is too much debt in the world. Over time, the chief financial officers of companies morphed into investment bankers. They tried to find ways to build more leverage into their balance sheets, and to build around the Income Tax Act to save taxes.
"Balance sheets became far more complicated. At the end of the day, a lot of companies would have been far better off if they had spent more time running their basic businesses and less time trying to engineer their balance sheets.
"And our industry has a constant desire to create ever-more complex products. It's unfortunate, because in retrospect we have done huge damage. Financial innovation has gone way to far, far past regulatory surveillance, far past common sense.
"A good example are these collateralized debt obligations (CDOs) and collateralized loan obligations. The people who developed them had no idea what they were making; the people who rated them had no idea what they were rating; the people who sold them had no idea what they were selling; and the people who bought them had no idea what they were buying. That's what the record shows."
Fact: Uncle Sam, to the dismay of most Americans, is spending about $100 billion (U.S.) to bail out GM and Chrysler, which represent a fair chunk of America's manufacturing sector. Those firms spent decades digging the hole they're in.
Fact: Uncle Sam is spending far more, $173 billion (U.S.), to bail out New York-based American International Group Inc. (AIG), a firm most Americans have never heard of. But it was the #1 global insurer before it was brought to its knees in the space of just two years by an unsupervised rogue credit-default-swap operation in faraway London. Had the giant AIG collapsed, so would the global economy, since AIG's small get-quick-rich crew in London had committed the firm to guaranteeing most of those soon-to-sour CDOs. That's leverage.
Also see Nick Leeson, one-man destroyer of a two-century-old Barings Brothers, a cautionary tale later ignorned by the C-suite savants at AIG, Citigroup, Switzerland's UBS, Bank of America, Bear Stearns, Lehman Brothers, Merrill Lynch and so on.
Bagehot said it best: When bankers are busy, trouble is brewing. Thanks for the update, Mr. Fell. And if there's a reincarnation in your future, we hope it's as...an investment banker.
Here's the Toronto Star tribute to Fell we wrote Oct, 28, 2007 (sorry, no URL available):
With Tony Fell, the finance gods broke the mould
We were amused at Anthony (Tony) Fell's recollection that during his remarkable five-decade career on Bay Street, the dean of Canadian investment bankers regretted missing opportunities to acquire rivals Wood Gundy and Midland Walwyn. Sort of like Glen Sather in the glory days of the Edmonton Oilers, wishing he could add Doug Gilmour and Mario Lemieux to a line-up already anchored by Wayne Gretzky and Mark Messier.
We'll be lucky ever again to see the likes of Tony Fell, 68, one of North America's greatest consolidators of securities firms, who this week announced his retirement effective Dec. 31.
Dominion Securities was a relatively minor and money-losing outfit when Fell became its president at the tender age of 34 in the mid-1970s, a time when the entire industry was woefully undercapitalized compared with its U.S. counterpart.
Nonetheless, a newly robust "DS" began nabbing more than its share of lucrative underwritings against stiff foreign and domestic competition. And during Fell's stewardship, DS became Bay Street's undisputed powerhouse with its acquisitions of storied rivals Harris & Partners Ltd., A.E. Ames & Co. Ltd., Pitfield Mackay Ross Ltd., all of Toronto; leading Vancouver securities house Pemberton Securities; Montreal's McNeil Mantha Inc.; and, in 1996, Richardson Greenshields of Canada Inc., the nation's largest remaining independent securities dealer.
During Fell's leadership at DS, later RBC Dominion and currently RBC Capital Markets, the firm went from a loss of about $2 million in 1974 to a profit of $1.4 billion last year.
But this is a case where numbers don't tell the story.
Fell smoothly integrated his many prized acquisitions, no mean feat in an industry where the principal asset is human talent that can easily defect. Obviously as DS grew so did its capital base, making bigger deals possible. But that's not why DS's dealmakers loved working there.
Sure, Tony Fell knew every corporate titan worth knowing, and as a Conservative fundraiser, boasted a wide range of political contacts as well. But you worked for Tony because he deflected praise for every DS coup to subordinates. He took the blame when things went wrong. His word was his bond. Simple things that add up to one word: character.
Fell was fiercely competitive, but having lost out on leading a lucrative underwriting, he turned on a dime and zealously took on the grunt work of helping distribute the shares. A member of the dwindling generation of gentlemen dealmakers (he was a graduate of the old money St. Andrew's prep school in Aurora), Fell knew enough to leave some money on the table in negotiations with folks he'd be dealing with again.
By now you're thinking Fell doesn't much care for the current era of Bay Street and Wall Street, in which celebrity dealmakers think it's all about them. And you'd be right.
Fell's career should have been marked by culture clashes. Instead, he managed to create a team spirit at DS, and later made DS a team player within Royal Bank, adding immensely to the bank's bench strength and profitability.
Fell now plans to continue, if not ramp up, his extraordinary philanthropic activities, by which he has helped build this city. What some of us crave is a Fell memoir about his role in leaving an industry in better competitive shape than he found it, and how to become a go-to guy in raising capital without developing a swelled head or surrendering a reputation for unshakeable integrity.
If he could only overcome his aversion to drawing attention to himself, Fell could author a guidebook on managing for the ages. We're keeping our fingers crossed.
For the purposes of this blog, the inception of the Great Recession in the U.S., the epicentre of the crisis, is taken as the start date for the global slump. The U.S. has been in recession since December 2007.