Monday, December 21, 1998

Martin's ruling means no cake for bank brats

Finance minister flashes some spine — and wisdom


The death of the bank mergers at this point in time is good news not only for small businessmen. All Canadians, including the CEOs of large corporations and of the banks themselves, should applaud Finance Minister Paul Martin's decision.

Most rational people agree with Martin that the financial services sector must be reformed to allow more competition and greater choice for borrowers before consideration can be given to permitting the Bix Six to merge.

Martin's thinking is logical. You don't tear down the old house and shiver in the cold before you've built the foundations of your new one. Only after you've constructed a new lodging do you move out of the old one.

Opposition politicians who criticized the finance minister's actions as self-serving got it wrong. By showing wisdom and courage, Martin has set the groundwork for the McKay task force recommendations to serve as the basis of solid economic growth for Canada in the 21st century. Martin's thinking is akin to that of Prof. Michael Porter of the Harvard Business School, who says that the competitive advantage in international markets is predicated on strong domestic competition.

Martin also recognizes that in a market-driven economy the greatest single engine for job growth is small- and medium-sized businesses. He's aware that Canada's smaller entrepreneurs do not currently have access to the kind of capital they need to grow their businesses.

Most new businesses in Canada are self-employed people working out of their homes because they don't have access to start-up capital. Statistics show that almost 48 percent of small business people use their personal credit cards to finance their business because they can't get a line of credit from their banks.

Martin, a shrewd businessman himself, understands that the financial services industry has to be revamped - which is why he appointed a federal task force two years ago to make recommendations for change by September 1998.

The media got it wrong last week with their headlines about "angry bankers" who lost their "battle" with the finance minister. To begin with, it wasn't a battle. It was a "gamble" by Royal Bank CEO John Cleghorn and Bank of Montreal CEO Matthew Barrett who tried to circumvent the due process of the federal task force led by Regina lawyer Harold McKay.

Everyone in the industry was aware that the McKay report was due out in September, 1998, and that it was to serve as the basis of major changes to financial service regulation. In November, 1997, the federal Competition Bureau submitted proposals on the financial sector and bank mergers to the task force indicating that it would look at each merger on a "first-in, first-out" individual basis - rather than on an industry-wide basis.

Cleghorn and Barrett saw the proposals as a window of opportunity for the Royal Bank and the B of M to force the hand of the government and the Competition Bureau by being the first to announce they would merge. They also figured that if they were the first to win merger approval, any other banks trying to merge later would get the thumbs-down because by that point in time the Competition Bureau would rule there was too much industry concentration. Cleghorn and Barrett never really believed it was in the bag. It was a shot in the dark. But they figured they might pull it off if they threw enough money into public relations and wrapped the issue in jingoistic slogans about the survival of Canadian banks.

Okay, so Barrett went a little off the deep end by making an analogy between the Bank of Montreal facing the big, bad American banks and a corner mom and pop hardware store facing the powerful Home Depot chain. A little Irish blarney can go a long ways - even in banking circles. You have to admit that his 30-second sound bytes were a lot more entertaining than those of former footballer Cleghorn, whose mantra was: "The status quo is not an option."

Which, of course, is precisely what Martin has been saying all along. Which is why Cleghorn and Barrett really never had a "battle" with Martin over objectives. It was all about timing and process. Everyone is travelling the same highway - towards financial service reform which might eventually allow mergers. The only difference is that the two bank chairmen wanted to get on the road before it was built.

Let's face it, none of the bank CEOs issued any harsh statements after Martin made his decision. They used words like "disappointed" and "different visions." Last Thursday (December 17), Cleghorn issued a full-page statement in newspapers across Canada reiterating his bank's commitment to serving Canadians, while at the same time looking forward to changes in this country's financial service sector.

You didn't hear one word of complaint from TD chairman Charles Baillie about Martin's decision. In fact, the TD was so eager to see the bank mergers fail that it publicly pronounced the deal dead eleven days before the finance minister made known his decision at a news conference.

Baillie was relieved - and rightly so. The death knell means he won't have to face a Godzilla-like competitor in the guise of a merged Royal Bank/Bank of Montreal. It also means the TD won't get stuck in a partnership with a flailing CIBC.

Anyone who ever listened to Baillie's speeches knew he vehemently opposed bank mergers. In fact, that was the theme of his speech to shareholders at the TD's annual meeting in 1997. The only reason the TD and CIBC announced last April their intention to merge was to block the deal between the Royal Bank and the Bank of Montreal. Neither bank chairman ever went on the stump like Cleghorn and Barrett to sing the praises of mergers - because they didn't want them to go through.

Baillie, the driving force behind the TD-CIBC merger strategy, knew that he would complicate the decision-making process of the Competition Bureau by asking permission to merge in the same time frame as the two bigger banks.

He also knew it would be almost impossible for the Competition Bureau to approve a Royal Bank/B of M merger while turning down a TD/CIBC merger which represented far less concentration. And, for sure, the Competition Bureau couldn't approve both mergers - given the current lack of competition in the Canadian banking industry.

The situation is analogous to sons No. 1 and No. 2 asking Dad whether they can buy one slice of cake each to eat just before supper. Dad gives it some consideration, wondering whether it will spoil their appetites. Then along come sons No. 3 and No. 4, telling Dad that they too want some sweets, meaning he'll have to go out and buy a mighty big cake - which will definitely spoil the family supper.

Three cheers for Martin who played the role of Dad to the hilt in telling his errant bank brats that they couldn't have their cake and eat it too.

Warren Perley is a former Gazette journalist who is president of Ponctuation Grafix, a graphic design and marketing company.