When David Dodge announced his retirement as Bank of Canada governor early in 2007, Bloomberg News asked its followers in the financial community to name the likely replacement.
Thirty-six economists participated in the survey; the runaway choice was Paul Jenkins, the bank’s senior deputy governor. Only three predicted the next leader of Canada’s central bank would be Mark Carney.
No one is underestimating him now.
Mr. Carney is assured a place in history after George Osborne, the British Chancellor of the Exchequer, named him the next governor of the Bank of England, starting July 1. Instantly, the 47-year-old from Fort Smith, NWT, was catapulted into one of the most powerful positions in global finance – with all of the scrutiny that comes with it.
The British central bank has invited outsiders to serve on its policy committee, but never has a non-native run the 318-year-old institution. If things go well, his five-year term at the Bank of England could put him on the very short list of Canadians who have left a lasting mark on the affairs of another nation, joining the likes of Lord Beaverbrook and Norman Bethune.
The economy Mr. Carney will oversee in seven months currently is on the verge of recession; the banks he will be charged with regulating are crippled, and need billions of new capital; and the financial centre he will inhabit is marred by scandal. “He is quite simply the best, most experienced and most qualified person in the world to do the job,” the Chancellor said.
Mr. Osborne apparently isn’t a believer in the political mantra of promising low and delivering high. However, he hardly was the only one showering Mr. Carney in glory this week. Newspapers characterized him as Canada’s economic saviour. David Rosenberg, chief economist at Toronto-based Gluskin Sheff + Associates, likened his London move to the trade of Wayne Gretzky from Edmonton to Los Angeles. Scott Brison, the Liberal finance critic, said he could think of nothing at which Mr. Carney would not excel.
With expectations for Mr. Carney in the stratosphere, it will be fascinating to watch the next chapter. Will he return to home as the heroic rescuer of the British economy? Or will he shrink to the status of mere mortal, fading to the back pages of the business section, where he once said central bankers properly belong? It will take years to find out. But his decision to leave the Bank of Canada with 26 months left in his mandate makes it possible to begin an assessment of his legacy as a public servant in Ottawa.
Few have made a greater impact in so short a time. From his arrival as a deputy governor at the Bank of Canada in 2003 to now, Mr. Carney has been at the centre of most every significant policy decision taken by the central bank or the Finance Department, where he served as a high-ranking deputy minister from 2004 to 2007.
It’s a tenure marked by a massive round of personal and corporate tax cuts, a resurgent dollar, the rise of the BRIC group of emerging-market economies, the most severe financial calamity since the Great Depression and a marked rise in consumer debt to record – some say dangerous – levels.
Mr. Carney faced none of these things alone, and inevitably, the hyperbolic praise that has accompanied his appointment to the Bank of England has also produced a note of skepticism in some quarters – prompting the question, does he really deserve all that credit? Other than being quick to slash interest rates at the onset of the financial crisis, “all he did was mimic the Fed, minus the desperate measures that weren’t applicable to Canada,” said one well-known economist, who offered that comment on condition of anonymity.
Canada’s central bank governor certainly showed leadership through the crisis. In April, 2009, Mr. Carney’s central bank pledged to leave interest rates near zero for a year, so long as inflation stayed calm. It was an extraordinary move, and the U.S. Federal Reserve eventually adopted a similar policy, not the other way around. And plenty of economists would say Mr. Carney deserves credit for restraint, avoiding the multibillion-dollar bond-buying schemes deployed in the United States, Japan and Europe.
Paul Martin, the former prime minister and finance minister, says the question of whether Mr. Carney actually did anything that another central bank governor wouldn’t have done during an epic financial crisis is moot.
“That’s like asking, `What did Eisenhower do?’ ” Mr. Martin said in an interview, referring to Dwight Eisenhower, the supreme commander of the Allied Forces in Europe during the Second World War who went on to become the 34th president of the United States. “It’s a non-question. Mark Carney played the cards he was dealt as well as they could have been played.”
A STAR IS BORN
The myth of Mark Carney, policy maker, begins with a wanted ad in The Economist magazine for the senior deputy governor’s position at the Bank of Canada in 2003. Mr. Carney, a high-flying investment banker with Goldman Sachs Group Inc., was stirred to set money-making aside and try public policy. He didn’t get the senior deputy’s job, but Governor David Dodge found a spot for him on the bank’s governing council.
“We needed someone both to cover the international side of the work of the bank and to begin to strengthen our capital markets capacity,” Mr. Dodge said in an interview. “The fit was wonderful.”
But Mr. Dodge didn’t get to keep him around for very long. That’s because Mr. Martin’s Liberal government took notice of the Oxford-and-Harvard-educated economist in its midst. “We convinced Mark that some experience in the Department of Finance would be good for him,” said Ralph Goodale, who was minister at the time.
Mr. Carney won instant admiration in government, if only because he walked away from a seven-figure paycheque to take up public service. It wasn’t long before Mr. Carney was able to show his new colleagues why he used to get paid the big bucks.
In 2004, the government decided to sell its remaining 18.6 per cent stake in Petro-Canada. Mr. Carney – who, as an investment banker at Goldman Sachs, had worked on the attempted privatization of the Ontario government’s Hydro One – was handed responsibility for getting Ottawa out of the oil business.
“He was focused, he understood the issues and he wanted his advisers to address the issues,” said Kirby Gavelin, head of equity capital markets at RBC Dominion Securities, which was one of three investment banks the government hired to round up buyers for its Petrocan shares.
Selling shares in an oil company amid a global economic boom always was going to be profitable, but Mr. Carney embraced a strategy that probably netted Canadian taxpayers hundreds of millions of dollars extra in proceeds. The safest path was simply to sell the shares to the banks, which happily would have purchased them at a slight discount from the market price, and then sell them later for a profit.
That approach is called a “bought deal.” The investment banks actually advised a riskier path, something called a “marketed offering,” which involves management hitting the road on a sales effort, yielding information the investment bankers use to come up with a price. The risk is that price could end up being lower than what the investment banks would have been willing to pay at the outset.
Many called the decision to go with a marketed offering “dumb” because it risked giving away some family jewels at fire sale prices, Mr. Goodale said.
But Mr. Carney fought off the critics. Petrocan’s stock price rose during the marketing period, and the government eventually sold its shares for $64.50 apiece, which was at least $5 more than what investment banks would have paid in a bought deal. “It turned out to be the most successful sale of its kind, ever,” Mr. Goodale said in an interview. “Mark had his heels dug in, and he proved to be right.”
THE CRISIS HITS HOME
Canada’s financial system weathered the meltdown of 2007-08 better than most. But it was far from untouched.
In the summer of 2007, the market for a short-term investment product called Canadian asset-backed commercial paper, or ABCP, suddenly dried up when new investors refused to buy maturing paper from other investors. Compounding the problem, the derivatives trades underlying the investments were threatening to go bad amid the stress in credit markets. The potential losses were in the tens of billions unless a restructuring was agreed upon.
During the financial crisis, investors lost access to cash invested in about $35-billion of ABCP. It took a protracted set of negotiations to save those investors from immense losses, and Mr. Carney played the closer in the final talks.
Negotiators among the various parties took the deal as far as they could over 16 arduous months. As the end of 2008 approached, they were within sight of resolution but at a loss as to how to agree on the final points. At that point, Mr. Carney stepped in and rammed the deal home.
In Ottawa, he played a role in convincing the federal Finance Minister Jim Flaherty that the government should provide a financial guarantee that helped seal the deal, arguing that there was not much risk it would be tapped. Mr. Flaherty had been opposed to stepping in, but in the end, he did.
Mr. Carney has so far been right. The federal government has not had to put forward any cash.
He also got on the phone to the foreign banks who needed to agree to restructure the derivatives trades, reaching far above the executives who had been negotiating the deal to talk directly to those at the top, such as then-Deutsche Bank CEO Josef Ackermann. After talking with Mr. Carney, and seeing the support from the government, banks that had been recalcitrant fell into line and the deal was wrapped up.
Relieved ABCP investors started to get their money back a few months later.
It was not the first time Mr. Carney’s expertise in financial markets was deployed on a tricky file for Mr. Flaherty.
After markets closed on Oct. 31, 2006, the Finance Minister announced an end to the income trust bonanza, saying a move by large corporations such as BCE Inc. to the tax-minimizing structure was distorting the economy.
The so-called “Halloween surprise” was extremely controversial, particularly since it broke an election campaign pledge by the Conservatives. Behind the scenes, Mr. Carney was one of a small group of senior Finance officials who advised Mr. Flaherty – and he’s widely viewed as having played a key role in getting the Harper government to move.
“Clearly [Carney] had a strong view and was able to persuade the Finance Minister and the PM to reverse ground, which they haven’t done much of,” said former Liberal finance minister John Manley, now head of the Canadian Council of Chief Executives. “I think he had to be an activist on it.”
Whether Mr. Carney’s advice stood out from his colleagues is unclear. “Nothing is a one-man show in finance,” said Rob Wright, deputy minister at Finance from 2006 until his retirement in July, 2009. “As public servants we provide advice and support. The driver on income trusts was Jim Flaherty. He was well supported by the government.”
A DARING INTEREST RATE MOVE
Mr. Carney was a different kind of central banker.
Typically, Bank of Canada governors were incubated inside the walls of the central bank. David Dodge did not, but he was a long-time public servant. Mr. Carney is the first true Ottawa outsider to run the institution; it’s why so few people thought he was a serious candidate for the job, despite his growing reputation around the Finance Department.
It’s not easy for a governor to put his or her stamp on the Bank of Canada. By agreement with the government, the central bank’s primary mandate is to keep inflation contained around an annual rate of 2 per cent. That limits the scope for policy experimentation.
Still, when it came to using the primary lever in his job – short-term interest rates – Mr. Carney acted boldly, slashing its benchmark rate by half a percentage point in March, 2008.
The Bank of Canada prefers to raise and lower interest rates in quarter-point increments. The aggressive move was a reaction to signs that things were about to go bad in the U.S. that other central banks ignored until several months later.
“There were lots of us who thought things could get bad, but not as bad as they did,” said Andrew Spence, a managing director at the Ontario Municipal Employees Retirement System who crossed paths with Mr. Carney at the end his one-year term as an adviser at the central bank in 2003. “Mark had an inkling that it would be.”
Still, not all are blown away by Mr. Carney’s performance on monetary policy, especially academic purists.
Christopher Ragan, an economist at McGill University who has worked as an adviser at both the Bank of Canada and the Finance Department, says he’s a great admirer of Mr. Carney. He just thinks the adulation should be kept in perspective. “I don’t see a fundamental legacy; I don’t see a fundamental legacy for Dodge either,” Prof. Ragan said.
It’s also difficult to assess Mr. Carney’s policy record because the job only is half done.
The crisis is past, but a government report Friday that showed Canada’s gross domestic product grew at an annual rate of 0.6 per cent in the third quarter suggests the recovery is far from sound. Household debt levels have risen to record levels, in part because of the Bank of Canada’s ultra-low interest -rate policy. Housing prices in some cities look dangerously high, also because of low rates.
“It’s not clear whether some of the [monetary policy] decisions today are the right ones,” said Jack Mintz, director of the the University of Calgary’s School of Public Policy. “The real issue coming down the road is how we get out of this.”
And then there’s the matter of Mr. Carney’s celebrity.
On one hand, it opened doors that the governor of the Bank of Canada typically might not be able to open. “He allowed Canada to punch above its weight,” said Gordon Nixon, CEO of Royal Bank of Canada.
If the reports out of Ottawa are true, some in the Liberal Party came to see the central bank Governor as a potential leader. Mr. Carney denied the reports, but not aggressively enough to make them go away. The persistent rumours created the impression that Mr. Carney could be out of step with the government, risking the central bank’s credibility as an independent actor.
“He should have shut that thing down long before he did,” Prof. Ragan said. “It was becoming a problem.”
It’s not a problem any more.