If you want to pinpoint the beginning of the end of the Big Swinging Dick era, you'll need to go back to 2006, near the height of energy-market hysteria.
That August, a minuscule private company now named Athabasca Oil Corp. started raising money from the 1%, marketing its land on Fort McMurray's outskirts as something that would make the Saudis jealous. No one knew if it was true, of course, but word spread quickly, and shares bought for 10 cents soared to $2.50.
The hype hit its peak four years later, when Athabasca went public at $18 per share. It was a triumph for the company's earliest backers, whose returns ranged from 600% to something-that-will-make-you-cry, and it was an undisputed victory for the independent investment dealers that underwrote the IPO.
Seven of Athabasca's 11 underwriters were scrappy independents, and they earned the biggest chunk of the $81-million commission cheque. Of the indies, GMP Securities, the co-lead adviser, made the most. In typical GMP fashion, employees popped Champagne the day Athabasca hit the market.
Fast-forward six years, and all that seems like a dream. In January, GMP slashed nearly one-quarter of its staff, and its rival independents are cutting to the bone. Some have shut down altogether. Dundee Securities, owned by the once-glorified Ned Goodman, sold its retail brokerage to Euro Pacific in January, and its investment bank is likely to be bought out by its own employees to help shield Dundee from more pain.
The neutering of Canada's independent brokerages comes courtesy of several factors. Commodity deals, once the boutiques' bread and butter, have plummeted, with the mining sector depressed and the Big Banks sucking up much of the remaining energy work. The trading game has changed, too. The rise of the machines has sidelined many traders and compressed commissions to a fraction of what they used to be.
You might be asking yourself: So what if a bunch of old-school traders and bankers disappear from the Street? So the media will have fewer bon vivants to write about. But that's not the only consequence of this shift. It raises serious questions about the very future of Canadian innovation and our ability to uncover the next tech or mining star.
Peter Brown, the man who built Canaccord, one of the few contemporary independents to rival GMP in swagger, doesn't mince words. If his firm were starting from scratch in 2016, he swears it wouldn't stand a chance. "I don't think you can do it today," he laments. "It's a broken model."
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The boutique that epitomized the BSD was Gordon Capital and its founder, Jimmy Connacher (a.k.a. the Piranha), a man who prided himself on doing what more established firms wouldn't. "We wouldn't say no," Connacher once said. "We were outside the box all the time."
That applied equally to work and play (which is why Gordon is still legendary, despite being acquired by HSBC in 1998, by which time it was a shell of its former self). Legends abound. Connacher, they say, once showed up to a Christmas party wearing nothing but a string of lights, and two female secretaries received breast implants as a bonus. There was a corporate yacht, the G-Force, available for private dalliances, and a butler named Basil to serve drinks so traders wouldn't have to leave their phones. Every Friday, employees were invited into the Fishbowl, the glass-walled executive suite, for a catered lunch, complete with wine. When the weekly lunch moved to Rodney's Oyster House (the catering bills having reached astronomical heights), the gathering would often stretch well into the night.
No matter how late and how drunken the nights were, though, each day at Gordon began with a meeting at 7:30 a.m. sharp, and by the mid-1980s, Gordon accounted for an average of 15% of daily trading on the Toronto Stock Exchange.
Brad Griffiths, a onetime Gordon star who died in 2011, likened the place to Hotel California: "It was tough to get into and tough to get out." When it began to fade, Griffiths fled and set up his own shop, GMP Capital, with corporate lawyer Gene McBurney. "We wanted to do exactly what Gordon did in the '80s," McBurney explains by phone from the Bahamas, where he has just landed after five days in Colombia. "We thought it had lost its way."
Reviving the business included reigniting the after-work shenanigans. McBurney doesn't deny GMP and its rivals played hard, but argues that the best firms, like his, were still loaded with smart people. "It wasn't a bunch of yahoos getting together and throwing darts at a dart board," he says.
Indeed, even GMP's rivals bowed down to the brains and work ethic of its star trader, Mike Wekerle, a.k.a. Wek. The man practically had his own orbit. Tattooed, with shaggy blond hair, he looked more like someone from Kid Rock's posse than Bay Street's best market-maker. He started at First Marathon Securities at 19 and jumped to GMP when it launched 13 years later. Wek could work at a torrential pace during the day and then endure legendary, alcohol-fuelled escapades after markets closed. At various points, he owned a Porsche GT, a beach house on Harbour Island in the Bahamas, and a stake in chi-chi Toronto restaurant Splendido. Seymour Schulich once told this magazine that Wek had "the balls of a cat burglar."
Of course, there was a more staid side to some of the independents. Lawrence Bloomberg, who founded First Marathon in 1979, was a wiry runner whose parties, his friends would joke, ended with liqueurs on the driveway because he went to bed so early. But in 1993, Bloomberg earned a then-hefty $6.9 million. Justifying such payments, First Marathon offered this explanation: "These people are all-stars."
Meanwhile, at the Big Banks, multiple divisions shared profit pools, so a fixed-income loss might hurt equity traders. And there was (and still is) an unwritten rule that no one should expect to make more than the group heads, and the group heads should never make more than the bank's CEO.
That was blasphemy to the independents. At GMP, 60% of fees went to cover expenses and non-partner salaries, and the rest went to the bonus pool and partners. Better yet, the cheques came quickly—often monthly. "If you got paid double the CEO, he'd pat you on the back," one investment banker remembers fondly. In 2002, former GMP Calgary rainmaker Tom Budd made $12.5 million, roughly double the head of Canada's biggest bank.
The paycheques were so massive because the partners (who also owned the dealers) got a cut of profits as part of their annual compensation, and because they had a direct claim on the business they brought in. "It was an eat-what-you-kill environment," says Jim Davidson, one of FirstEnergy Capital's co-founders. "If you brought in a $12-million M&A fee, you had a great year—and you deserved to have a great year."
That tended to lure employees with an appetite for risk. Think of it as choosing between a career in government (the Big Banks) or at a start-up (the independents). Working at a Big Bank guaranteed a decent, somewhat stable income. Working for an independent was riskier but came with the prospect of huge scores. "You tended to get the best and the brightest, and they tended to be young," says Davidson, who was 33 when he helped set up FirstEnergy.
The brokerages selected for aggression, too. "I'd take an ex-jock with a B+ average over an academic with an A+ average," McBurney says frankly. He wanted people who were driven to win—without relying on a Big Bank brand name to woo clients.
The effects were tangible. Bankers at Gordon Capital—considered an outsider even among other, larger brokerages like Wood Gundy and Dominion Securities—single-handedly invented the bought deal in 1982 (over Scotch, of course) as a way of getting in on a deal for Canadian Utilities. Instead of telling clients they'd do their best to raise money for them (while fighting for fees with the other dealers), Gordon fronted the cash and absorbed all the risk that came with selling the new shares to investors. The bought deal is now the dominant equity-financing vehicle in Canada.
Independents were also more comfortable playing in grey areas, something one former trader referred to as "flirting with the edges of acceptability."
The best of these dealers had ringleaders who were tapped into Bay Street's information flow. Wek got the most glory, but there were others, including Canaccord's Graham Saunders (better known as Suds), and John (Johnny E) Esteireiro of Genuity (which was run by David Kassie, once one of Bay Street's best-paid and most aggressive investment bankers).
On trading desks, information was a special currency. A ringleader might get a tip about the next big tech start-up or junior miner and tell his friends about it (a practice that, in some cases, amounted to blatant stock promotion). Long before it was confirmed that Athabasca had about seven billion barrels of oil in the ground, GMP—one of its earliest backers—helped persuade some of Bay Street's top fund managers to invest; Dynamic's Rohit Sehgal put in $10 million.
With publicly traded companies, a ringleader might call his closest fund managers to assess the appetite for a new gold financing—without giving away the name of the company, since that would be illegal. Fund managers who correctly guessed the issuer could make money by shorting its shares, since bought deals are sold at a discount to entice investors, forcing the issuer's stock price to fall.
In exchange for the tidbit, the fund manager might step up with a buzz-making lead order on a new financing or to bolster a deal that was struggling to sell. And most likely, they'd book their next order with the firm's trading desk.
You might wonder how all this got past internal compliance rules. The short answer: The guidelines at independents were a little more lax. They were often more willing to let employees personally invest in companies they were doing business with—forbidden at bank-owned dealers. (Last year, National Bank Financial banned employees from even trading individual stocks in their personal accounts.)
Outside watchdogs would hit the brakes when they could. The Investment Industry Regulatory Organization of Canada dinged Canaccord with a $1.1-million penalty in 2013 in part for not paying close enough attention to which of its clients were investing in risky companies. (Mom-and-pop investors are supposed to be steered away from the most volatile stuff.) First Marathon was slapped for allowing employees to act as investors, promoters and underwriters for junior mining and tech stocks in the early 1990s—against the interests of their clients. The most famous of all was Cartaway Resources: First Marathon employees bought control of the shell company on the Alberta Stock Exchange and pumped its share price to $26 within two years. The stock crashed to $2 after geological reports proved it was overhyped.
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Disruption often seems to happen overnight—one day taxis are the only game in town; the next, it's all Uber. But dig a little deeper and you'll find that the demise of the independents has been a long time coming.
The first salvo came in 1987, when the feds opened the doors to bank-owned investment dealers. Four of the largest indies—among them Dominion Securities and Nesbitt Thomson—were quickly swallowed (by RBC and Bank of Montreal, respectively), turning the banks into formidable players almost overnight.
For the next two decades, there was enough business to go around—the independents simply had to be more aggressive. The banks were less likely to touch companies with no profit (and sometimes even no revenue). But Canaccord and other independents swept the corners to find emerging companies in need of creative financing ideas. Then they'd propose, say, a zero-coupon bond, which lets clients borrow money interest-free up-front, with the interest paid as a lump sum when the bond matures. More risk, big potential payout.
The Big Banks' edge over the indies sped up after the dot-com bust, when commodities like oil and gold popped. Suddenly, the resource business was a heckuva lot more interesting. And as mining and energy companies began looking for corporate loans to fuel their growth, the banks swooped in with money the brokerages couldn't provide.
Around the same time, the world of stock trading was disrupted. It used to be that portfolio managers had to go through a human being to trade shares, with the middleman charging a five-cent commission per share. Now, computers could just as easily line up buyers and sellers—at one-fifth the cost. Shrinking commissions were only half the problem. Because they weren't in the middle of trades, ringleaders had less information to use as currency.
Electronic trading hurt the banks, too, but they had other business lines to lean on. Derivatives, for one, are now a crucial component of mergers and acquisitions, guaranteeing a company the ability to, say, sell gold for $1,200 (U.S.) an ounce, regardless of the market price. That guarantee can make the acquisition of a rival gold miner less risky—and the fees for those derivative transactions can bring in more money than traditional M&A advice.
There's a lot of bitterness on the Street, and it runs deep. In a letter to employees in January, on the day GMP cut 73 employees, CEO Harris Fricker defended the move, arguing "there will be no regulatory rollback of anti-competitive practices as the amorphous blob that is the bank oligopoly will continue to expand in search of new revenues and earnings."
Fricker et al. wouldn't be this angry if the commodity market was still smoking hot. Independents made a killing in 2010 and 2011, when energy and mining deals were through the roof. But they do have some legitimate points. While the major global banks caused the financial crisis, smaller dealers are the ones suffering from the resulting regulatory crackdown. The extra compliance costs post-2008—such as installing systems to monitor trades more closely—can be crippling for indie shops.
New client "suitability" rules—meant to en-sure mom-and-pop investors don't get duped—have raised ire, too. Brown says he knows a 76-year-old in Vancouver who made his fortune bringing three mines to production. The man recently asked his broker at a Big Six bank to put $150,000 into a new mining venture. The broker refused, arguing it wasn't suitable for someone his age—despite the client's expertise and riches. Regulators, Brown argues, "do not understand the unintended consequences of what they do." If even wealthy Canadians can't bet on the next great miners, how will these companies ever raise the early capital needed to grow?
Same goes for the independents—if they disappear, who will bet on unknown companies desperate for cash? When Canadian Natural Resources was still small, First Marathon and Calgary's Peters & Co. led early financing rounds. When Canadian investors were too timid to take a bet on Research In Motion, GMP took the company public in 1995, selling shares to U.S. investors. These two corporations combined have been worth more than $100 billion, attracting global investors and giving Canadians something to be proud of.
Sure, sometimes it got ugly. Athabasca, for one, crashed and burned. Though its shares debuted at $18 in 2010, they soon cratered. It turns out there is such a thing as too much hype, and public investors eventually saw through it. Canada's IPO market went into a state of shock—and everyone blamed GMP. But the banks aren't perfect, either: During the income-trust era, they made huge commissions taking some questionable companies public. And to date, one of Canada's highest-profile tipping scandals erupted inside RBC Dominion Securities, the most blue-chip of the country's investment dealers.
So are the independents dead? Not quite—but they do need to evolve. Too many still rely on their trading desks, which in years past brought in enough money to keep the lights on. Investment banking fees were the gravy. That model is now inverted, meaning the bankers carry the burden of keeping the firms afloat. There's more to keep above water, too, since the independents are much bigger than they used to be. Some of them used the money they made during the commodity boom to expand to London and Houston and New York.
At GMP, it's telling—and definitely a good thing—that the cuts were largely aimed at the old-school sales and trading business. What's unknown is whether the bankers who remain have what it takes to restore the glory—at GMP and all the independents. Almost all of the old stars, the ones who slugged it out with the Big Banks before the commodity boom brought in easy fees, have left the business. It's up to the current class to prove they're just as good as the bad boys who groomed them.
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