DeCloet, OSFI, ABCP, Dundee

Derek DeCloet wrote a column in today’s Globe, Watchdog could use more Bay Street bite, which has the major theme of arguing for higher salaries and more direct financial services involvement for senior staff:

Salaries for deputy ministers – Ms. Dickson is paid in line with them – begin at $174,000 and top out at less than $300,000. Even the higher figure is less than one-thirtieth of what Scotiabank CEO Rick Waugh earned last year (nearly $10-million). The Finance Minister earns about $230,000, plus perks. The top of the pay scale for the Governor of the Bank of Canada was $429,600 last year. So there you have it: the three people with the most to say about banking policy and oversight in this country earn a combined salary that’s less than a decent stock analyst or mutual fund manager would make. OSFI’s entire budget is equivalent to nine Rick Waughs.

It’s not all about money, of course – but rare is the person like Mark Carney, willing to forgo millions in riches at Goldman Sachs to become a public servant. And it wouldn’t hurt to have more Bay Street brainpower in Ottawa, even if the banks, who fund OSFI through fees, and taxpayers have to pay for it.

The public can hardly expect five-star regulation on a dime-store budget.

It’s not particularly convincing and DeCloet doesn’t spend a lot of his 750-odd words arguing the case. As far as pay scales are concerned, I don’t consider the salaries of portfolio managers or bank CEOs to be a particularly solid benchmark. The benchmark is: can you get people of the quality you want at the pay offered? There is no evidence introduced to suggest that the OSFI bureaucracy is befuddled at the clever stuff involved in banking; at any rate, should particulars be lacking, there is no consideration of the alternative – from time to time, consultants could be brought in, if expertise in a particular area is found wanting.

Apart from that … well, it’s not particularly apparent to me just how brainy Bay Street brainpower really is, but apart from that, such a staffing objective could very quickly segue into revolving door regulation. While I have no reason to believe that James Gilleran is anything other than a rock of integrity, is his career path something that should be held up for emulation?

However, my main objective in posting this is to take issue with Mr. DeCloet’s justification for addressing issues of staffing and remuneration:

To sum up Ms. Dickson: not my cow, not my farm. Take your complaints and ring the doorbell of the Ontario Securities Commission.

Technically, she may be right. Nothing says that the good superintendent must be overly technical about it, though. The “primary job” may be to watch out for bank customers, but the OSFI Act gives her agency broad responsibility for watching “system-wide or sectoral issues” that may hurt banks and other regulated deposit-takers. And to have a $32-billion frozen blob floating through the financial system, it’s clear enough now, is a pretty major negative. ABCP forced at least one bank, the Dundee Bank of Canada, into a fast sale to Bank of Nova Scotia. It caused a $365-million writedown at another, National Bank. OSFI regulates both.

Let’s look at the Dundee Bank of Canada first:

Dundee Bank Financial Strength
Item 2Q07 3Q07 4Q07
Total Capital $306-million $346-million $343-million
Tier 1 Ratio 12.82% 29.12% 29.85%
Total Capital Ratio 12.82% 29.12% 29.85%
Assets-to-Capital 10.20x 7.54x 9.01x

In the 2007 they lost a total of $146.7-million after tax effects – about half their capital, after ‘fessing up to holdings of about $400-million as reported by Mr. DeCloet last August.

Try as I might, I don’t see anything wrong in any major way with this. Dundee was quite agressive with their ABCP holdings, putting slightly more than their total capital into the sector … were I a shareholder, I would be most upset! But I am not a shareholder, and I am not looking at their financials from the perspective of a shareholder. It does not appear to me that the OSFI can be faulted here, which is the main thing. The bank took risks – large risks – risks larger than they preferred to have taken, in fact, due to their lack of distribution (whereby their money could have been invested in, for instance, mortgages and credit card receivables, like the big banks).

But that’s what businesses do. That’s what common shareholders want. And there was enough value on the balance sheet after this debacle for the bank to be taken over.

Mr. DeCloet has stated a problem – ABCP – and a potential solution – pay OSFI regulators more money – but these points are not adequately connected. What are all these Bay Street wunderkind supposed to do once they complete their hostile takeover of the OSFI? Outlaw leverage? Outlaw commercial paper that doesn’t meet some kind of test? Outlaw risk? Ensure that no investor, anywhere, ever gets hurt for any reason? Details are sadly lacking.

I should also note that the Bank of Canada, despite its apparently inadequate pay-scale, was expressing surprise at ABCP’s popularity in 2003 … but nobody listened. It is now attempting to get the market re-started.

4 Responses to “DeCloet, OSFI, ABCP, Dundee”

  1. […] DeCloet (last mentioned on PrefBlog regarding a column about regulatory pay scales) has written a column in the Globe titled Pull the Plug on Raters’ Special Status in which he […]

  2. […] DeCloet (last mentioned on PrefBlog regarding a column about regulatory pay scales) has written a column in the Globe titled Pull the Plug on Raters’ Special Status in which he […]

  3. […] ABCP? It’s been used to justify a call for higher pay for regulators, to justify calls for the OSFI to expand its mandate to ensure nobody ever loses money on anything […]

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