By Tom Bradley
When I was an analyst on the brokerage side of the business (1980’s ... I was a teenager), there were a few iconic people that we all looked up to. Hugh Brown, who was with Burns Fry (now part of BMO), was one such person. He was the guy on the bank stocks. Everyone else was playing for second.
The Report on Business magazine (April issue) did an ‘Exit Interview’ with Hugh upon his retirement. In it he was asked to comment on his most traumatic time during his 42 year career.
"In 1982, Third World debt collapsed. The Big Five Canadian banks had 2½ times their equity invested in Third World loans, and those loans plunged to 50 cents on the dollar. On a mark-to-market basis, the banks were insolvent. Canada was also in the worst recession in 40 years. But it was another testimony to the banks’ core franchise – give them time and they can earn their way out of trouble. It took seven years to absorb the Third World writedowns."
It would be interesting (not fun, but interesting) to think about what would have happened in the 1980’s if the banks had been forced to mark their assets to market value (mark-to-market) as they do now. Can you say bailout?
Today, our banks are more diversified and don’t have any exposures that comes close to the Third World loans. And post-crisis, regulators have increased capital requirements. But Hugh’s story reminds us that we should have little sympathy for bankers who grumble about more restrictions. We should be hard on them in the good times (i.e. capital requirements, conflict rules, regulatory scrutiny, consumer protection), because as history has proven, we’ll need to be there for them in the bad times.
In the meantime, when my wife Lori grumbles about bank charges and billion dollar profits (Hugh calls it a franchise, I prefer oligopoly.), I remind her that it beats the alternative.