The herd mentality of Canadian Bank CEOs

One shouldn’t automatically and naively assume that Canadian Bank CEOs are in a better position to judge what is best for Canada any more so that the average person on the street. In fact the case can easily be made that Canadian Bank CEOs are in a much worse position, in making such judgments, since their judgments are completely clouded by how they are compensated, largely by stock option gains. Their goal therefore is to maximize share price gains for the banks they are employed to run and not maximize the welfare of Canada and Canadians. To think that one objective align perfectly with the other is to adopt the mindset of Pollyanna. As such, Bank CEOs are among the last people that politicians should be taking advice from, unless the politicians think it is their duty in life to also maximize the share trading price of the banks, and perhaps that share price of one bank more so than the other.

There are many good examples of what banks preached to be good, that were anything but for Canadians at large or the Canadian economy, such as the banks acquiescence and in some cases outright support for the immensely damaging income trust tax, the banks role in creating that massive house of cards called ABCP that required taxpayer funded bailout, and the banks eagerness to concentrate more risk in fewer hands by allowing bank mergers on the premise that it would have allowed these larger banks to enter the international markets, where they likely would have blown their brains out competing for all the marginal business that the RBS’s and Citibanks of this world weren’t prepared to touch, and both of whom were shaken to the ground by the subprime meltdown as it was.

Knowing who was supportive of bank mergers at the time, both on Bay Street and in Ottawa at the time, provides a good litmus test in determining who is good at making policy judgments and who is not. I am pleased to say that I was decidedly on the side of the position that Paul Martin ultimately took, which was to oppose banl mergers. I do know that several Liberals, who shall remain nameless, who are prominent in the decision making that goes on within that party today, were big outspoken cheerleaders of bank mergers making them no different than every person who is a CEO of a bank today, and therefore they have the distinction of all being collectively wrong and members of the same Bank CEO herd mentality.

Bank mergers would have been an unmitigated disaster had they been allowed to occur for all the reasons that should have been obvious then, and which have become abundantly obvious now. I remember attending a meeting of the Corporate Finance Committee of the Investment Dealers’ Association (IDA) that I was a member of at the time that Royal Bank had made its bid to acquire the Bank of Montreal, where I worked at the time. Even though such a merger would have meant a huge windfall profit for me as a Bank of Montreal shareholder, I made the case against bank mergers at this IDA meeting and gave my reasoning for why bank mergers were bad and what the adverse consequences were sure to be. After I got back from that meeting to my office, I was somewhat surprised to receive a call from Gordon Nixon, who was also a member of that IDA committee and at the time was Head of Investment Banking at Royal Bank (today the CEO of Royal bank) and he was attempting to put pressure on me to suppress my views that were negative on bank mergers, arguing something to the effect: “Now that we are soon to be partners. I think it would be best if we both spoke from the same position on the matter of bank mergers, etc. etc.”.

Not wanting to be openly confrontational with someone who was about to become my new boss if the merger that was then being proposed had gone ahead, I allowed him to say his piece, as I listened in disbelief, at the end of which I said, “Are you finished” to which he replied in the affirmative and I said “Well, thank you” hung up the phone and in complete disbelief said to myself “Yeah right, get stuffed. I'll think for myself, thank you very much. I have no interest joining the herd mentality of Bank CEOs, because after that entreaty from Gord Nixon, I opposed the idea of bank mergers more than ever. On two fronts now, instead of just one.

The lesson in all of this, if there is one, is that any thinking Canadians is as well qualified as any CEO or Bank CEO or politician to know what is best for Canada when it comes to policy making. No one person innately more or less so than the other. Meanwhile those in positions of authority are often the ones least qualified to make judgments about what is best for Canada, as they are often in positions of conflict. You can’t have your day job being the obligation to maximize shareholder value for say, the TD Bank or Power Corporation, and then be expected to completely divorce yourself from that role, and then be in a position to be the one to best judge what is best for Canada, as that is an absurdity, and only leads to the pursuit of self interests that are completely contradictory to what is best for Canada, and only leads to pathetic episodes like this and the litany of negatives outcome that arise from this kind of utterly self interested lobbying designed to screw the average Canadian:

“High-profile directors and CEOs, meanwhile, had approached Mr. Flaherty personally to express their concerns: Many felt they were being pressed into trusts because of their duty to maximize shareholder value, despite their misgivings about the structure. Paul Desmarais Jr., the well-connected chairman of Power Corp. of Canada, even railed against trusts in a conversation with Prime Minister Stephen Harper during a trip to Mexico,” (Globe and Mail, November 2, 2006


One shouldn’t automatically and naively assume that Canadian Bank CEOs are in a better position to judge what is best for Canada any more so that the average person on the street. In fact the case can easily be made that Canadian Bank CEOs are in a much worse position, in making such judgments, since their judgments are completely clouded by how they are compensated, largely by stock option gains. Their goal therefore is to maximize share price gains for the banks they are employed to run and not maximize the welfare of Canada and Canadians. To think that one objective align perfectly with the other is to adopt the mindset of Pollyanna. As such, Bank CEOs are among the last people that politicians should be taking advice from, unless the politicians think it is their duty in life to also maximize the share trading price of the banks, and perhaps that share price of one bank more so than the other.

There are many good examples of what banks preached to be good, that were anything but for Canadians at large or the Canadian economy, such as the banks acquiescence and in some cases outright support for the immensely damaging income trust tax, the banks role in creating that massive house of cards called ABCP that required taxpayer funded bailout, and the banks eagerness to concentrate more risk in fewer hands by allowing bank mergers on the premise that it would have allowed these larger banks to enter the international markets, where they likely would have blown their brains out competing for all the marginal business that the RBS’s and Citibanks of this world weren’t prepared to touch, and both of whom were shaken to the ground by the subprime meltdown as it was.

Knowing who was supportive of bank mergers at the time, both on Bay Street and in Ottawa at the time, provides a good litmus test in determining who is good at making policy judgments and who is not. I am pleased to say that I was decidedly on the side of the position that Paul Martin ultimately took, which was to oppose banl mergers. I do know that several Liberals, who shall remain nameless, who are prominent in the decision making that goes on within that party today, were big outspoken cheerleaders of bank mergers making them no different than every person who is a CEO of a bank today, and therefore they have the distinction of all being collectively wrong and members of the same Bank CEO herd mentality.

Bank mergers would have been an unmitigated disaster had they been allowed to occur for all the reasons that should have been obvious then, and which have become abundantly obvious now. I remember attending a meeting of the Corporate Finance Committee of the Investment Dealers’ Association (IDA) that I was a member of at the time that Royal Bank had made its bid to acquire the Bank of Montreal, where I worked at the time. Even though such a merger would have meant a huge windfall profit for me as a Bank of Montreal shareholder, I made the case against bank mergers at this IDA meeting and gave my reasoning for why bank mergers were bad and what the adverse consequences were sure to be. After I got back from that meeting to my office, I was somewhat surprised to receive a call from Gordon Nixon, who was also a member of that IDA committee and at the time was Head of Investment Banking at Royal Bank (today the CEO of Royal bank) and he was attempting to put pressure on me to suppress my views that were negative on bank mergers, arguing something to the effect: “Now that we are soon to be partners. I think it would be best if we both spoke from the same position on the matter of bank mergers, etc. etc.”. Not wanting to be openly confrontational with someone who was about to become my new boss if the merger that was then being proposed had gone ahead, I allowed him to say his piece, as I listened in disbelief, at the end of which I said, “Are you finished” to which he replied in the affirmative and I said “Well than you very much” hung up the phone and in complete disbelief said to myself “Yeah right, get stuffed, I have no interest joining the herd mentality of Bank CEOs, because after that entreaty from Gord Nixon, I oppose the idea of bank mergers now more than ever. On two fronts now, and not just one.

The lesson in all of this, if there is one, is that any thinking Canadians is as well qualified as any CEO or Bank CEO or politician to know what is best for Canada when it comes to policy making. No one person innately more or less so than the other. Meanwhile those in positions of authority are often the ones least qualified to make judgments about what is best for Canada, as they are often in positions of conflict. You can’t have your day job being the obligation to maximize shareholder value for say, the TD Bank or Power Corporation, and then be expected to completely divorce yourself from that role, and then be in a position to be the one to best judge what is best for Canada, as that is an absurdity, and only leads to the pursuit of self interests that are completely contradictory to what is best for Canada, and only leads to pathetic episodes like this and the litany of negatives outcome that arise from this kind of utterly self interested lobbying designed to screw the average Canadian:

“High-profile directors and CEOs, meanwhile, had approached Mr. Flaherty personally to express their concerns: Many felt they were being pressed into trusts because of their duty to maximize shareholder value, despite their misgivings about the structure. Paul Desmarais Jr., the well-connected chairman of Power Corp. of Canada, even railed against trusts in a conversation with Prime Minister Stephen Harper during a trip to Mexico,” (Globe and Mail, November 2, 2006)