CHAPTER 2

Facts, Actions, and Anecdotes

The president of a major bank in Canada reportedly told the House of Commons committee on August 1, 1995: "We need to move from past anecdotes and impressions to a focus that's based on facts and on actions"¹ [my emphasis and italics].

A review of the facts unconceals the following. Many financial institutions grossly misdirected their loans, favoring commercial real estate over manufacturing and high-technology. Loan misdirections and excessive overinvestments in commercial real estate had many serious consequences: the National economy was destabilized, many funding-limited high-tech companies were weakened or destroyed, the safety net was put at risk, etc. Losses from overinvestments and speculations resulted from a real-estate fiasco of gargantuan proportions. Starting around 1989, a "credit crunch" developed at many banks. Statistics derived from annual reports of Canada's two largest banks, for example, indicate that cash resources per share, in constant 1986 dollars, fell substantially:

1. At Royal Bank, by about 80.5%--from $128.47 in 1981 to $25.05 in 1989.
2. At CIBC, by about 82.8%--from $178.18 in 1980 to $30.71 in 1989.

With less cash, some banks froze, reduced, or called the loans of many funding-limited firms. In other words, many viable and strategic funding-limited firms were destabilized, directly or indirectly, by actions of banks. Shielded by net litigation advantages over small borrowers, and by agents, some banks, creditors, or their agents used predatory techniques to recover funds. A large number of firms were either weakened or ruined, with potentially catastrophic consequences for the Nation. In Canada, many weakened high-tech firms were acquired by American firms.

THE MONTE CARLO SIMULATIONS IN THIS BOOK DEMONSTRATE VIVIDLY HOW BANK POLICIES AND ACTIONS CAN INCREASE SUBSTANTIALLY THE PROBABILITY OF BUSINESS FAILURES.

Here are some more facts. Between 1989 and 1994, the total number of business and consumer bankruptcies reached a staggering 311,185.² How many bankruptcies could have been avoided had policies or actions of banks been different? In 1994, the per-capita number of business failures in Canada was about 46.9% higher than in the U.S.!³ Between 1966 and 1993, there were an incredible 89,791 more business failures than would have been expected had the business environment in Canada been identical to that in the United States.

FOR BUSINESS OWNERS, THEIR FAMILIES, AND EMPLOYEES, THESE 89,791 EXTRA BANKRUPTCIES COULD NEVER BE "ANECDOTES"! IF THE STRUCTURAL PROBLEMS OF CAPITALIST ECONOMIES BECAME CHRONIC, AND, IF AS A RESULT, PEOPLE DECIDED TO SUDDENLY WITHDRAW ALL THEIR MATURED DEPOSITS AND SAVINGS FROM BANKS, THEN, WOULD BANK EXECUTIVES REFER TO ENSUING BANK FAILURES, IF ANY, AS "ANECDOTES"?

Many in banks and in government may want people to "turn the page on the past." But this is not easy. If bank actions or inactions increased, directly or indirectly, the number of business failures, then shouldn't the implicated banks be made responsible for their share of the resulting losses and liabilities? Clearly, borrowers must meet their obligations. But so must banks.

Government and bank ombudsmen can help deal with errors and with exploitative or predatory practices in the marketplace. But people need much much more. Governments must give assent to laws that stop:

1. Gross misdirection of loans and excessive speculation.
2. Substantial concentration of financial and commercial powers.
3. Excessive "conscious parallelism" or "tacit collusion" in the financial sector.
4. Systematic manipulation of the Rule of Law. "Net advantages" for Big Business and Big Government at the expense of citizens must be eliminated.

If items 1 through 3 cannot be stopped, offenders should be penalized or taxed--retroactively, if necessary. As for item 4:

LEGISLATION AND JUDICIAL PROCEDURES MUST NEVER FAVOR LENDERS OVER BORROWERS. WE NEED LAWS THAT GUARANTEE THE SAFETY AND STABILITY OF LOANS FOR BOTH LENDERS AND BORROWERS. WE NEED A BANK LOAN SAFETY ACT. ONLY THEN CAN PEOPLE BEGIN TO TURN THE PAGE ON THE PAST.

² Consumer and Corporate Affairs Canada, Bankruptcy Branch (number of business and consumer bankruptcies in Canada).

³ Data sources used to calculate this percentage include: Economic Report of the President, February 1997, at 337 (Table B-32: Population by Age Group, 1929-96; total U.S. population, July 1; cited source: Department of Commerce, Bureau of the Census), and 407 (Table B-94: Business Formation and Business Failures, 1955-96; business failures data ending 1983 and beginning 1984 are not strictly comparable; cited sources: Department of Commerce (Bureau of Economic Analysis) and The Dun & Bradstreet Corporation).

TACIT COLLUSION?
POWERFUL EVIDENCE OF "CONSCIOUS PARALLELISM" AT CANADA'S TOP THREE BANKS

CREDIT CRUNCH AT CANADA'S TOP THREE BANKS
THE EMPIRICAL EVIDENCE

CREATIVE DESTRUCTION OR PREDATION?
EVIDENCE FROM PER-CAPITA MORTALITY OF BUSINESSES IN THE U.S. AND CANADA