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This would be a good day to pay off a loan

As I write this, CIBC is announcing a $300 million dollar write down in the third quarter on bad investments they have made into what is known as the sub prime market. They are not the first or the last bank to proffer such news.

As I write this, CIBC is announcing a $300 million dollar write down in the third quarter on bad investments they have made into what is known as the sub prime market.

They are not the first or the last bank to proffer such news. Worldwide, generally, the bigger the bank the bigger the write-down.

I remember 20 years ago the banks in Canada were writing off billion dollar investments in South American banks.

Here is something you can count on in 2008. Now that the banks have admitted to their mistakes, the fallout will arrive on your desk with tighter lending policies, less liquidity and before the end of the year, you will think the sub prime crisis was your fault.

Actually, years ago, as one of my banks was tidying up a ridiculous investment in a Mexican bank, they thought it was a good time to tidy me up as well. Of course I hadn’t lost any money, or actually missed any payments. My crime was that my ratios were off. Most of you know about ratios. In this case, my debt to equity of 0.50 to one became one to one or whatever it was at the time.

Everything was fine until one day the bank called me up and said one of my companies was only worth half of what they thought it had been worth when they lent me money. By their calculations my company was now worth less than the debt to the bank. I said that was crazy and that the company was worth much more than the debt.

Nothing much happened for a while. Then one day, the smiling man from the glass tower in Toronto called. He said if I could raise the money to buy out a discounted loan, (i.e. what they thought the company was worth) they would look at writing off the rest of the loan.

I couldn’t believe it. They were prepared to write off money loaned to a profitable business. It seemed ridiculous to me, but I try not to look gift horses in the mouth, so I got to work.

It took me less than a week to find the money. I met the smiling man and he said great, he would take the offer to his bosses.

I never met the nice smiling man again. In fact, he refused my phone calls. The next call came from a grumpy man who said he was from a place called “special loans” and that he wanted to sit down with me.

I assumed all of this was to complete the transaction. No, the special loans man whom we subsequently called “Jack the Bear,” wanted more security or he wanted to put the company up for sale to third parties. I pointed out to Jack that the last time I was in his nice tower I had been asked to make an offer on the debt at what the bank thought the company was worth. He said, well that is why you have to deal with me now. I said that makes no sense. He said your company is only worth such and such and you proved it by making the offer. I said no Jack, I would never sell the company for this much, but at these silly valuations recommended by “smiling man,” I was a buyer.

Well, Jack and I played chicken for many years and nearly came to blows one time, but finally Jack made an offer that made sense and I found another banker who thought this looked like a very good risk indeed. Jack wrote off a considerable amount of money, which to this day still mystifies me. He didn’t have to.

The reason he did the deal is that the guys in “special loans” have no attachment to the loan. They didn’t make it and they aren’t accountable for it. In fact, “Jack the Bear” looked pretty good. He liquidated what the bank had decided was a bad loan. The irony of course is that it was never a bad loan, just bad stewardship from the bank.

You’ll find that in the years after banks make bad investments usually in foreign countries, the people that really pay are small Canadian business people. Somebody writes a memo at the very top of one of the shiny towers about the economy and all those loans that looked smart yesterday look ill advised today and very few of the people who made the loans will be asked to manage them through tough times.

2008 is a year after the banks have made lousy investments.

This is a good time to pay down your loan. Don’t wait for the phone call from the nice man, whom you haven’t talked to in nine months. He’s probably going to break your heart. Send him a cheque.

Michael Atkins
President
Laurentian Media Group
matkins@laurentianmedia.com