In 2008, as the world economy melted down led by the U.S. housing market, a select few American Hedge Fund managers cashed in the insurance policies that they had taken out on products they knew to be faulty and made billions of dollars at the expense of those invested in their falsely propped up funds. As Canadians, we sat back on our high horse, grateful that this type of fraudulent behaviour doesn’t happen here. Or so we thought. As it turns out, these things do happen here, with greater frequency and impunity than anywhere else in the developed world.
Bruce Livesey in The Thieves of Bay Street outlines chapter after chapter of frauds, scandals, and investment scams that happened right here in Canada. In case after case, including the 2008 meltdown, Livesey delineates the myriad of ways in which investment brokers and big banks separate you from your money. The book has sixteen chapters, each dedicated to a different financial nightmare. But perhaps the best way to introduce this book is the close of Livesey’s introduction:
This book sets out to reveal why Canada has become a popular place for investment fraud and thievery, and what the consequences are – and not just for the Alice Campbells of this country, those small investors who can lose a lifetime of savings with one wrong turn. It will examine how bankers and brokers and the very wealthy rob from investors and companies, and how our vaulted financial institutions peddle dangerous investment products and contributed to the U.S. subprime mortgage crisis, the reverberations of which are threatening entire national economies. It’s about the ways that credit rating agencies, underwriters, analysts and lawyers enable fraud, and how regulators and law enforcement sit on the sidelines and do little to stop the fiascos from unfolding. If, like so many of us, you’ve bought the line that Canada’s financial industry is safe and sound and worthy of your respect, prepare to be robbed of something yourself: your faith.
There are a few problems with the system as a whole. First, all the incentives are connected to making a lot of money. By letting people commit fraud, the people behind it can get very rich, and since they know they can get away with it, there is no disincentive to this. Also, the regulatory bodies are provincial; there is no national oversight, with the possible exception of one very small branch of the RCMP that does pathetically little. (The number of investigations is small, and the percentage of convictions is embarrassingly low.) Most of the time, the people sitting on the regulatory bodies are also a part of the industry. Worse, the credit rating agencies are also run by people in the industry, and they have the power to manipulate the ratings for their own gains. When somebody does notice something amiss, these overseeing bodies flick them aside like a cow swatting flies, to the effect that nothing substantial is accomplished.
One of the scariest chapters of this book comes near the end and describes situations in which somebody realizes that a scam is in the works, informs the various regulating and investigative bodies, from the financial regulators to the RCMP, and they do NOTHING about it. In fact, many times they dismiss the case with the wave of a hand. A great example of this is Conrad Black. He broke several financial regulations in Canada, was reported to investigators, and yet nothing was done. It took the Americans to prosecute Black, and they did so knowing that they had to because Canada wouldn’t. But his case is not the only one. Many of the cases examined in this book had early warning signs that were completely ignored.
Often, it is up to the Americans to prosecute our financial criminals. In the rare case where a Canadian is charged and prosecuted, the punishments are minimal. Fines are usually far less than the amount stolen from investors, and very rarely is jail time imposed. The victims of these fraudsters can lose their entire life savings, often followed close behind by their health due to the intense stress. The perpetrators don’t even lose the money they stole. What does this say about Canada’s priorities? It sure does not give off a good image of us to the world, as corroborated Livesey in chapter fifteen. It also does nothing to help the Canadians whose livelihoods and/or pensions have vanquished into thin air. As somebody preparing to begin saving for retirement, this picture of the financial industry is chilling to the bone.
These systematic problems lead to the question of “what can be done?” – a question that Livesey raises in the afterword to the book. The conservative government, in the aftermath of the global financial crisis, took steps to attempt to create a national regulatory body, but they face steep opposition from the handful of families that have the power and influence over their provincial regulatory bodies. It has been over two years and still no national regulatory body has been established. In a recent development, the supreme court of Canada ruled the law developed by the Conservatives to tackle this issue is unconstitutional. This begs the question, “what can we do?” Sadly, no solution has been presented.
Nearing the end of the book, Livesey raises a key question that one starts asking almost from the very beginning. He says, “In fact, the evidence is overwhelming: you can’t trust the financial industry to look after your money. So whom can you trust?” As I read this, I couldn’t help but think, “Finally!” But much to my dismay, no answer is provided. This question is followed by a recap of all of the people who cannot be trusted, from your friends and family who can also be swindled to the people doing the swindling. So we come back again to whom can be trusted with our hard-earned money?
In a similar vein, I also wound up wondering what ordinary investors can do to avoid having something like this happening. Suppose that we want to do our due diligence and learn about the companies in which we invest; how do we go about finding that information? How do we find their financial statements and what can we do to verify that they are accurate? Or what should we do instead of investing? Maybe the solution is to avoid investing and just stick all our money under our mattresses again, although I would bet that nobody would advocate for that. The problem with this book is that it offers no answers to any of these questions. It identifies the problem, but there is no proactive quest for a solution.
I blame this lack of solution on the fact that Livesey is a journalist rather than an economist. He makes his living by finding and telling the story, by pointing out the problems, not by trying to find their solutions. However, for those of us faced with the decision on what to do with our hard earned income in the hopes of making it grow enough to retire on, the story is not enough. We need solutions. Where is the story that tells us what to do next?
A number of economists from around the world have proposed what is called the Robin Hood Tax, which may be a solution, or part of a solution, to this problem. If adopted, this would impose a 0.05% tax on financial transactions by institutions, including stocks, bonds, commodities, etc. It would not impose the same tax on individual investors. The purpose would be to raise more money from the financial sector that has traditionally managed to avoid their fair share of the tax burden, while possibly slowing down speculation which theoretically could help to stabilize the markets. The originators of this idea have proposed to use the money raised to help end poverty and hunger around the world (like Robin Hood, taking from the rich to help the poor). Another option for the use of this money would be to help pay back those small investors who lost their life savings from the mismanagement of fraudulent investors. While I am merely an amateur who knows very little about this tax and what it could really do, my knowledge of its existence suggests that Livesey could have found out something about it and included it in the book. And who knows how many other brilliant ideas are out there as solutions that have yet to be exposed because we are all so focused on the problem that we fail to search for the solution.
If we are to move beyond the financial industry as described by Livesey and create for ourselves the safe and stable markets that as Canadians we like to believe we have, we must proactively search for solutions. We must advocate for some independent regulation of the financial markets and protect the rights and assets of the millions of Canadians who work hard for their money and just want a safe place to let it grow so that they can retire comfortably. We must do something to change these circumstances or we will be at the mercy of these financial giants indefinitely.