Peter Brown
68, founder and chairman of Canaccord Financial Inc., of Vancouver
In Canada, there is what I call brutal bank dominance of the market. What the 1987 Big Bang did for Canaccord was to scare the hell out of a lot of the independent investment dealers. We were fortunate enough to buy eight of them so we could be big enough to stand the gaff. So when Ottawa allowed the walls to break down, we took over a bunch of dealers who felt they would be unable to compete. And the mergers didn't depersonalize our own brokerage business. After all, I am not a bank-I care about people.
The United States could deregulate its financial system because it had 15,000 banks and 15,000 brokers. So when, for example, U.S. high-tech investment banker Hambrecht & Quist was taken over by Chase Manhattan, there were other high-tech brokers to fill the void. It still allowed for competition.
But Canada, as usual, just followed the United States and allowed six banks to grab off 80% of the investment revenue in Canada, which was not good for the country. Where that had happened historically-in the Netherlands, for example-small-business financing had declined, regional coverage had declined and eventually the small-account service declined.
So today, if you have an account that is under $350,000, and you want to talk to the bank, you talk to a machine. That was a fundamental mistake in Canada. We had a different dynamic here but we just followed the Americans into deregulation. And that led to where we are now.
Donald Johnson
74, advisory board member, BMO Capital Markets, and former president of Burns Fry Ltd., which was acquired by Bank of Montreal in 1994
In 1987, Burns Fry knew it had to partner up with a big financial institution to be competitive. We looked at different alternatives and finally did a deal with the U.S. bank, Security Pacific. But a couple of years later Security Pacific got into difficulty, and it was acquired by Bank of America-which at that time didn't want to be in investment banking. So it was in the best interests of our company, clients and employees to buy the firm back from Bank of America. Even so, we knew it did not make strategic sense long-term to continue as an independent. Then Bank of Montreal approached us and merged us with their investment bank, Nesbitt Thomson. It turned out to be a good fit, but it meant that we ended up selling ourselves twice.
I think customers are still well served, even though it is not quite as personal a relationship as it used to be. The benefits of being owned by a bank are that you have the strong balance sheet and the resources to compete. Being owned by a Canadian bank in this environment is very fortunate, compared with investment dealers that were acquired by U.S. or foreign banks.
The highlight of my investment banking career came in 2000, when we were retained by BAT [British American Tobacco]in the unbundling of its Canadian subsidiary, Imasco. We wouldn't have been engaged if we had not been part of a larger investment firm.
But the big change has been cultural. At Burns Fry, we had a partnership culture; then we became part of a major financial institution. With an employee-owned investment dealer, members of the management team are direct owners of the business. They are more conscious of the risks associated with decisions because their own capital is on the line. There is a potential to be less risk-averse when a decision does not involve the exposure of your own capital. Photograph by KC Armstrong
Gordon Cheesbrough
57, managing partner, Blair Franklin Capital Partners, founded 2003.
Cheesbrough was a director at independent dealer McLeod Young Weir (and CEO once it became Scotia Capital), and then CEO at Altamira Investment Services.
In 1987, Cheesbrough was running global fixed-income trading at McLeod
I remember the 1987 crash like it was yesterday. I moved from my desk near the trading floor, to a spot right on the bond desk, during the week. I knew that given the losses we were suffering on our equity holdings, we needed to make money on bonds, so we traded like nothing you've ever seen.
My most vivid memory is of that one terrifying October morning when liquidity completely dried up. You simply couldn't trade a position. I remember turning to one of my colleagues and saying, "Twelve hours ago we were solvent, and now we're not, because we can't access the market."
That experience has stayed with me. I am always aware of the profound importance of liquidity. When we started a hedge fund in 2004, we took steps to ensure that our overall portfolio was always liquid. That served us well in 2008.
One thing I've realized over what's now a long career is that everything moves in cycles, and that the pendulum will always swing back. Back in '87, when the Canadian market totally deregulated and the Americans began to undo the Glass-Steagall Act [which had separated commercial banks from investment banks] I remember thinking that eventually, we'll see the financial world re-regulate.
I didn't claim to be prescient enough to know when that move would come, but it's clearly now upon us. Hedge funds will face increasing regulation around the globe.
On the advisory side of the business, Blair Franklin was founded with the idea that CEOs and boards would appreciate, and pay for, totally unconflicted advice. We advise on the best course of action, and we're not then following up by trying to sell a product. That lack of conflict is becoming increasingly important. Interview by Andrew Willis
Rob Peters
67, rancher, investor and retired chairman of Peters & Co., the Calgary investment bank he founded in 1971
I still wake up at 6 a.m. and when I work out, I am watching CNBC and catching the market opening. I run my own portfolio, which is fairly hefty. I don't do as much trading as finding small companies and riding through with them. Still, I always have a pretty good idea of where the market is. Is that necessary for a long-term investor? No. So do I miss [the daily market] Yeah. The opening bell still makes my toes tingle.
I probably use a lot of old techniques. I tried to sell a block of stock a couple of days ago, and I got a little fed up because something funny was happening on the other side of the trade. So I said to my broker, "Fill or kill." He said, "What the hell's that?" I said, "It's simple-either take it or I'm going to kill it and the offer's gone." He didn't take it and I sold it for 10% more the next day.
The nice thing about the smaller investment firms is that your key players can still be practitioners. But when you're a manager in one of the bigger firms, you're not in the middle of the war all the time-and that's what I loved. Being small means your best people are still doing the business, making contact with clients and finding potential deals, as opposed to administering a group of people. Often when you get up that high in a big organization, you hear about the victories but you're not there for the action.
We've seen a lot more money-particularly American money-come into the energy market. So instead of deals being done with a handshake, people are negotiating through legal paperwork. In Calgary, you used to say, "Here's the deal." Then you would shake hands, go to your lawyers, and say, "Write it up." But we've seen a lot more formality in how things get done.
Our business didn't change after 1987 because we really stuck to our knitting. We had a very nice niche in the oil and gas business, primarily in junior oils. We expanded in the U.S., in Europe, and even had a bit of a following in Hong Kong. Is it less personal now? No, the investment business is a relationship business, and the people who do well are the ones who can make money for their clients. It's that simple. Photograph by Andrew Querner
Tony Arrell
65, chairman and CEO of Burgundy Asset Management in Toronto, who spent 23 years as an analyst and top executive at formerly independent brokerage firms Gardiner Watson, Wood Gundy and Midland Walwyn
People have got bored or fed up with the idea of just buying good companies and hanging on to them. In the past 20 years, there has been much more interest in trying to enhance investment returns by using a lot of leverage, through derivatives or by engaging in very rapid trading practices-what I call black-box investing.
One reason for the surge in alternative investments is that the past 10 years have been the decade of the poorest returns ever from just owning stocks. If you had owned the Standard and Poor's 500 index in 2000, and held it through the decade, you would have ended the period with a little less money, even though you would have collected a whole bunch of dividends. The performance was worse than even in the 1930s.
The typical holding period for stocks has shortened dramatically to the point where many people aren't really investors any more; they are more in the camp of traders. In 2008, the New York Stock Exchange turned over its entire value by 138%. When I started in the business in the early 1970s, the turnover was only about 20% a year.
In the late 1980s, with the banks looking to take over the brokerage business, it became less attractive to me. I was more entrepreneurial. But my major motivation was that, with my background in research, I wanted to be in the investment management business. So at my firm, we study companies very carefully and try to find ones that are good businesses, run by good people and available at good prices. We buy them and try to hang on to them. It seems sort of simple and obvious, but it always comes as a surprise that it is not what most people do.
Many of the alternative strategies today are trying to supercharge returns by using leverage. For example, pension funds all have assumptions on investment returns, and those assumptions haven't been met by conventional investing. So when someone comes in with a pitch for a new fund that offers much higher possible returns-and if it is credible-it tends to attract interest. Meanwhile, we have 125 years or so of statistical information on major stock indices. Our approach is still the most credible and we're sticking with it. Photograph by Joseph + Jaime
Anthony Graham
53, former senior executive and managing director, Lévesque Beaubien, of Montreal, which was taken over by National Bank in 1988. Now, president of Wittington Investments, the Weston family holding company
In the old days, banks and brokers saw themselves as very, very different. It was like the Army versus the Navy. The brokers always thought of the bankers as dressed-up bureaucrats; the bankers always thought of the brokers as cowboys.
Then, in 1987, things changed. A number of brokerages [including Lévesque Beaubien]had gone public and, for the first time, their shares were trading at multiples to book value. Then, the legislation changed to allow banks to buy brokers. Against that backdrop, the stock market crash of October, 1987, shook people up. There was a square dance going on and people were choosing partners. There was fear and opportunity; there was avarice, cupidity, stupidity-everything you could ask for.
After the bank-broker marriages, many brokers boasted that their banks still left them alone: "They understand that we're so good, they're not going to touch us. These are two separate cultures." That has certainly changed now. Yet, maybe in some ways, the brokers took over the bankers. We used to fear that brokers would end up being paid like the [more modestly compensated]bankers. In those days, nobody ever thought it would go the other way around.
After the National Bank took us over, I still owned 10% of the [investment]firm for a while. As time moved on, the bank bought out 100% of the shares, and once all your money is off the table, it's a different motivation. I figured it was time to go. I was of the old school. I had decided in the very early days that I wanted to be an investment banker; I didn't want to be a banker banker. In my mind the world was changing. There are still some independent firms and some characters who consider themselves fairly independent no matter who signs their paycheques. But there is no question who dominates the league tables-it is the banker bankers.
Before 1987, brokerage firms were much smaller, and it was our money on the table. When Lévesque Beaubien was a partnership, we did a major transaction to buy out our senior partner. He said, "Be careful, boys, you could lose your shirt in this business," and it literally was your shirt. Now, of course, it is different-it's investors' money, and so it is a very different culture.
Financial instruments are also much more complex. Lévesque Beaubien used to be based in the old head office of the Royal Bank at 360 St. James Street in Montreal. Every morning, the executive committee would come in and have coffee-five or six guys, representing 80% of the ownership of the firm. You would quickly find out what our inventory consisted of, what the new-issue market looked like, what issues we got stuck with.
But look at the complexity of the stuff that institutions are running now. Today, you couldn't have a conversation among five guys and in 20 minutes figure out exactly what exposure you have. You wouldn't know. Leading up to the financial crisis, were they taking greater risk? Yes. Did they realize they were taking greater risk? I don't know. Photograph by Lee Towndrow