Monday, May 7, 2012

Thieves of Bay Street

Bruce Livesey paints a picture of the Canadian investment industry as a Wild West in his book Thieves of Bay Street. His detailed stories about the people involved in corruption among public companies, brokers, bankers, and regulators are a compelling read. I’m not prepared to declare our future doomed, but it is clear that we need more effective regulation.

I didn’t always agree with the book’s characterization of problems. Livesey quotes William Lazonick complaining about companies “maximizing shareholder value” at the expense of “creation of jobs.” The purpose of a business is to make money for its owners. Creating jobs is a side effect. We need laws that govern how workers can be treated, but we can’t look to businesses to put worker interests ahead of the interests of owners. I think most of the problems we have are with attempts to boost short-term share prices. If we can find a way to discourage businesses from seeking the short-term gains that come with creative accounting and leveraged buyouts, the interests of owners and workers will be much better aligned.

Of particular interest to me was the story of Nortel’s executives selling millions of dollars in stock before bad news about company results came out. One Nortel project manager claimed that the accounting practice of booking sales before a product was delivered was elevated to recording revenue “for products that not only hadn’t been built, but weren’t even scheduled to be engineered.”

While quoting statistics to illustrate how wealth is becoming more concentrated, Livesey states that middle class wealth has “shifted into the hands of the most affluent” and they “lend this money back to the very people who were now scrambling to pay everyday bills.” The implication that wealth comes from stealing from ordinary people is not one that I can buy into. No doubt it is true in some cases. And I agree that huge disparities are societally undesirable. But I don’t buy that most wealthy people are crooks. Those who are crooks should be punished, but I refuse to demonize all wealthy people.

Stock analyst Ross Healy makes the interesting claim that “analysts don’t read financial statements,” and that “as few as 5 percent of analysts every consult a company’s balance sheet before making a recommendation.” If true, it’s hard to imagine why anyone should pay attention to analyst recommendations.

Livesey closes saying that we are “hostages of a system that can only lead to ruin.” I can’t buy that we are doomed. The many stories in the book of life savings stolen by thieves are truly horrific, but I don’t think this is the fate awaiting most of us. After reading all the personal stories of tragedy, the reader can be forgiven for considering stuffing his life savings in a mattress, but I think the right answer is to remain optimistic, be wary, and work toward more effective regulation.

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