"I do not have a hangover and I am in good spirits." This is how the grey-haired, grin-inducing Ira Gluskin, a dean of wealth management in Canada, began his first formal address to clients this year.
Having recharged over the holidays at his Florida retreat, he put pen to paper on the first morning of 2008 and etched out a two-page rambler in the whimsical, shoulder-shrugging tone that is his trademark in things of this sort. Mr. Gluskin uses it to coax his roster of multimillion-dollar clients (one must invest at least $2-million just to get in his 46th-floor door) to imbibe the financial wisdom that elevated Gluskin Sheff & Associates, the firm he helped found in 1984, to elite status.
He also uses it as a salve to reduce inflammation among worried investors. "In a nutshell, the problems of the U.S. economy are very real, but the stock market has already discounted most of them," he wrote, going on to quip: "Our little firm buys stocks. If and when they go down faster than they go up, we are highly embarrassed."
Back then, Mr. Gluskin, who spent most of a recent hour-long interview with The Globe and Mail in his stocking feet (striped navy, pastel pink, white and baby blue, elevated on the seat of a sleek boardroom chair), did not foresee that he was about to spend the brunt of the coming 12 months with a designer-sock-clad foot firmly in his mouth. In his interview with The Globe, he conceded as much. But he didn't need to — his writing last January was clear: "There will continue to be ups and downs," he wrote. "In the long run, I am confident that things will be up."
Mr. Gluskin was not the only financial demigod who had his back turned at the start of 2008 to the economic apocalypse that was about to begin. While no one was forecasting the onset of boom times — there was a relative consensus that it would be a bumpy year — neither was anyone forecasting precisely such a monstrous bust. Back in January, there was widespread speculation that the economy could repair itself just as quickly as it had soured. The hope was that maybe the worst had already passed.
THE GATHERING STORM
There is a small cadre of finance whizzes and fringe academics who have, at various volumes, been predicting a market crash and burn for years. In Canada, one of the most prominent among those is Prem Watsa, the humble CEO of Toronto-based Fairfax Financial Holdings. Back in 2003, he and his team concluded that the U.S. housing market was in a speculative froth; from 2003 to 2007, his group hedged against the conventional wisdom in their industry, buying up protection against banks and other entities exposed to the lending and mortgage boom. "We just thought it was a question of time before that came to haunt people," Mr. Watsa said in a recent interview. "We've had 20 years of a great economy without a recession."
He waited several difficult years, repelling attacks for his unorthodox position. But by mid-summer of 2007, the apocalypse Mr. Watsa sensed began to rear its head. The subprime mortgage crisis exploded, bringing some of the biggest U.S. mortgage lenders and insurers to their knees. The market for asset-backed commercial paper — short-term loans made up of bundled assets, including mortgages and car loans, that investors purchased in droves because of their seeming low-risk and high yields — had been frozen, starving banks and spawning a credit crisis. The Dow Jones industrial average went haywire, dipping and then closing one day in July of 2007 above 14,000 for the first time.
That fall, nearly a year before most of the world would witness the devastation firsthand, some of Wall Street's most historic financial institutions hit record lows on the stock market. In October of 2007, Merrill Lynch posted a doozey of a loss: $8.4-billion, all chalked up to subprime. Two months later, it was Morgan Stanley's turn: in December, the company posted its first ever quarterly loss: $5.7-billion, also related to subprime.
