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—— Forwarded Message From: “Iain Black” Reply-To: “Iain Black” Date: Fri, 6 Jul 2001 10:19:21 -0700 To: “Iain J.S. Black” Subject: Fw: FYI – article in the National Post

This came to my attention this morning – thought you’d find it interesting.

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Juniors get the bum’s rush Bank-held brokers endanger health of stock markets

Diane Francis Financial Post Canada’s banking cartel is beginning to harm our economy. Here’s another angle.

Brian Murray is a Toronto merchant banker and chartered accountant. Since 1990, he has raised funds for early-stage companies and taken them public on junior exchanges or over the counter.

“My concern is the increasing trend towards the institutionalization of money and the decline of the junior stock markets in this country,” he wrote recently. “Over the last 10 years, there has been a steady trend, related to the banks acquiring control of most of the brokerage firms in this country, where most brokers will not actually trade in junior stocks, but instead the money all goes to funds, which inherently invest in larger companies.”

An example of the damage done by banks in the brokerage business involves Bre-X Minerals Ltd., Canada’s biggest swindle involving $8-billion in 1997, he said.

Bre-X and related companies started as penny stocks, but it was the big brokers owned by banks, notably Bank of Montreal’s Nesbitt Burns Inc. brokerage arm, and their “analysts” that heavily promoted Bre-X, propelling its value to billions of dollars. These bank-owned brokers run the Toronto Stock Exchange and eventually listed the company and added it prematurely to its TSE 300.

“Post Bre-X, this trend [to avoid investing in small-cap companies] has been even more exaggerated as the banks have virtually banned their brokers from trading in junior stocks. Of course, from the banks’ point of view, it’s pretty nice to take no apparent risk and charge a big juicy management fee every year,” he said.

This yo-yo policymaking is extremely harmful to markets because both overenthusiasm and wholesale abandonment are overreactions and impede the maintenance of fair orderly markets.

“I like to keep reminding some of my friends that Bre-X was just a small fraud until the bank-controlled brokerage firms got involved and the stock moved over to the TSE,” he added appropriately. “In any event, there now exists an enormous problem in this country where there is virtually no liquidity on the junior exchanges in Canada, most stocks are like orphans, public but no one pays attention to them. There are practically no brokers to call who can listen to a good junior story. Companies that need to raise that important risk capital from $1-million to $5-million are in serious trouble.

“In the meantime, my fellow promoters of junior companies realize that we will have to do our deals in the coming years in the U.S,” he said.

Meanwhile, the Americans are also having some problems with an “unlevel” playing field.

As recently as last week, Goldman Sachs Group Inc.’s chief executive, Henry Paulson, said the firm was reluctant to provide unprofitable loans to win underwriting business even though that’s what its banking rivals are doing.

The playing field is unlevel because unprofitable loans by brokers must be deducted from their capital while that’s not the case with banks. So they are being undercut by banks and Goldman’s earnings are down by 24% in the second quarter of this fiscal year.

United Rentals Inc., the biggest U.S. equipment renter, asked Goldman in April to help provide a US$750-million loan in exchange for underwriting a US$450-million bond. Goldman agreed, although it has turned down other companies, costing it business, according to Bloomberg.

Goldman is also lobbying regulators to make it more difficult for banks to give away loans and undercut rivals.

The same problem exists here, according to another reader: “The risk-adverse attitude of the greedy banks has contributed in no small way to the demise of the secondary market for Canadian fixed-income securities. The bank-owned dealers have the brass neck to refer to themselves as ‘underwriters’ when, in fact, most new issues are either pre-marketed; and/or effectively, sold on an agency (order-taking) basis — witness the recent issue of $1.6-billion Telus 7.50% bonds due June 1, 2006. (No risk, provide lines of credit to Telus and the Toronto-Dominion-led banking group collects a hefty $8-million in commissions). So, is the Federal Government responding by opening up the Canadian banking industry to foreign banks? No, it’s too busy passing legislation to allow more domestic bank mergers, enabling more concentration of power and a further stifling of competition.”

Another reader added that the cartel is not serving retail investors. So-called discount brokers haven’t dropped their fees for years despite new technologies and declining U.S. fees.

Clearly, this issue to too important to ignore. The Competition Tribunal must look at this and other issues because investors, companies, entrepreneurs and the economy are increasingly falling victim to the malpractice of cartels.

dfrancis [at] nationalpost [dot] com

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