The Toronto Board of Trade held its 121st annual dinner this past Monday night, and the nice folks at Direct Energy offered up a place at their table. This allowed me to take in the after-dinner speech by Tony Fell, the long-time head of RBC Capital Markets who retired as chairman back in 2007.
Fell has had a long and distinguished career in Canadian banking, going back to 1959 when he took a job in the research department of Dominion Securities (which eventually became RBC Capital Markets). As a result Fell brings with him a lifetime of wisdom and insider knowledge to the subject of the current meltdown, and it was extremely interesting to hear his frank and candid take on whats happening right now.
Like many, Fell thinks that what were witnessing is the meltdown of a 25-year U.S. dollar-denominated debt super-cycle that began to inflate in the early80s. The creation of this giant debt bubble got underway with the ascendancy of Reagan to the presidency and the emergence of Greenspan as head of the Federal Reserve. And the two began a long experiment with de-regulation in the financial services sector in the United States. As a result prohibitions against lending were rolled back across the financial services, and that allowed credit creation to go ahead at levels that preceded the Great Depression. By the end of this whole process we had continually upped the amount of outstanding debt to the point that investment banks in the U.S. were levered 30-to-1 in terms of assets. But that era, said Fell, has come to an end. The grand experiment of de-regulation is done.
What we can expect in the years ahead is a less profitable banking industry as financial service firms focus more on organic growth than growth from off-shoring, de-regulation and credit expansion. The result says Fell is that, we are going to see a multi-year period of retrenchment in the financial services.
Fell also said he expects the savings rate of the average U.S. consumer to rise until it returns to its historical average, which means a permanent hit to consumer spending going forward. A chart handed out before his address shows how the personal savings rate of the average U.S. consumer fell from somewhere around 10% in the early80s to, basically, zero by 2007. As that number moves back to historical norms, say six or eight percent, were going to see that much of a reduction in consumer spending.
Of course, this “new consumer” is what the economy seems to be readjusting to right now. And while its likely necessary (we can take some people away from retail and get them working on rehabilitating our decaying infrastructure), its going to be painful. Also included on Fells handout was a chart showing that over time total U.S. debt as a percentage of GDP rose from a bit over 30% in 1981 to almost 90% in 2007. In terms of lending that represents a spike that mirrors the amazingly rapid increase in lending and credit creation that preceded the Great Depression. No wonder Fell thinks that, this could be a longer, deeper recession than many think.
He also mentioned the recent G30 report on the financial services that was partially authored by Paul Volcker (the best head of the U.S. Federal Reserve, he said). Released just a few days ago, it can be found here. The conclusion is that we basically have to rebuild our broken financial services sector from the ground up, and thats going to take a while.
Finally, Fell mentioned some interesting ideas about the way we do our central banking, suggesting that we need to do something about the extended periods of boom and bust weve all been subjected to over the past generation. This is a subject well cover off in the next print issue of Canadian Busines s. We dont have to run the system the way we do. We can get rid of the big ups and downs. Instead of one big bubble it would be better to have more and frequent [and therefore less damaging] credit cycles, said Fell.
Overall his message seemed to be that financial services are going to be in a period of rehabilitation for some timeU.S. banks may still have to be partially nationalizedand that counters some of the stuff weve heard from bankers still in the industry. Presumably Fell was able to speak frankly now that hes retired, and we thank him for taking the opportunity to do so now that he can. Im trying to get a copy of his whole speech and if we can well paste it here in the weeks ahead for those interested in a really good take on the state of banking in this world credit crisis.
Some other points from Fell:
-Fell suggests banks get away from dealing in complex and expensive derivatives and get back to basic banking. If it has more than two bells and one whistle, its likely a bit much he said.
-The six largest global banks now have over two trillion in assets, which makes it almost impossible to effectively control those organizations. In terms of size, the Canadian banks are, plenty big enoughWhats the matter with being the 30th largest bank in the world?
-Fell also mentioned bond raters and pointed out this is at least the 10th time theyve screwed up in their careers. Fell said he never understood what the raters were for. You need to do your own research. Relying on a company that takes money from an issuer for a rating is a conflict of interest that will always leave that model suspect.