I am including this article not because it gives a general view of the economy but because I was on the alpha team at AGF Trust that developed their investment loan program from 2002 - 2004.
Brings back memories- shame to see it go down the drain as we gave our blood sweat and tears for it- working long hours to make it work and fully automating it.

It's a long read but also gives insight into using leverage to turbo charge your savings and the dangers involved.

http://www.globeinvestor.com/servlet/story/RTGAM.20090123.wcover24/GIStory/

Too much, too fast, too easily, too cheaply?
DEREK DeCLOET AND SHIRLEY WON


Friday, January 23, 2009

A few weeks ago, Blake Goldring was out at his favourite Bay Street lunch spot, the exclusive National Club, when he ran into a senior official he knew from the Office of the Superintendent of Financial Institutions, the federal banking regulator.

As the two men were parting ways after a brief chat, Mr. Goldring, the amiable chairman and chief executive officer of financial holding company AGF Management Ltd., said: “So, I'll see you around.”

“No,” came the official's reply, “you don't want to see me around.”

Mr. Goldring smiles as he tells the story, but the subtext is deadly serious. Any mention of AGF in the same breath as Ottawa's financial watchdog is a sensitive subject for him.

His company, which eight years ago made the decision to dive deeply into the business of lending money, was besieged by rumours last fall that OSFI was worried about the financial strength of its subsidiary, AGF Trust Co. The rumours were untrue and were unfairly spread by competitors, Mr. Goldring says, and the trust's most recent regulatory documents appear to back him up, showing that, as of Nov. 30, OSFI had not forced AGF to inject more capital into its lending arm.

Yet AGF still can't escape the perception that it is about to pay a heavy price for lending too much, too fast, too easily and too cheaply. The global financial crisis, and the demise of fast-growing financial companies like Countrywide Financial Corp., have cast a cloud over any lender that grew rapidly during the era of easy credit. Investors have begun to see truth in an old Wall Street adage: If it grows like a weed, it's a weed. They've also lost faith that regulators were watching closely enough to stop financial institutions from doing dumb things.

AGF is no Countrywide, clearly. But in this gloomy economic climate, the stunning expansion of the company's loan portfolio has raised the suspicions of some people on Bay Street that it may suffer significant losses, as the vise grip of recession and unemployment tightens around more borrowers. AGF Trust's assets have risen tenfold since 2003, giving it a $5.3-billion balance sheet, which makes it nearly as large as Home Capital Group Inc., a highly successful alternative lending firm that has been around since the mid-1980s.

An examination of AGF Trust's regulatory financial statements shows that most of that growth occurred after 2004. Its customers now owe it $2.4-billion for investment loans they took to buy mutual funds and other assets that may now be worth as little as $1.7-billion, according to the estimates of one analyst. AGF, these documents show, also participated in the real estate boom, moving hundreds of millions of dollars into uninsured mortgages and home equity credit lines between 2005 and 2007, as Canadian home prices were nearing their peak.

Interviews with investment advisers, competitors and former AGF insiders paint a picture of a firm that, until the credit crisis, was eager to lend money at low rates with few restrictions. “You would go online into the AGF Trust website [and] do a loan application online. No proof of income. No proof of assets. Push the button,” says Andrew Mayhew, president of Mayhew Wealth Management Ltd. in Mississauga. “Behind the scenes, they did a credit report. But minutes later, it comes back approved.”

A veteran executive at a Toronto-based financial institution believes that AGF Trust was “too aggressive” and “didn't know what they were doing” during its high-growth years. “We often just shook our heads and said, ‘Fine, let them have the deal,'“ said the executive, who spoke on condition of anonymity. “Because sometimes brokers would phone us and say, ‘Can you do better? We've got this [loan] commitment from AGF.' [We would say], ‘No, no.'” AGF's losses from bad loans have been minimal so far (the company will reveal its financial results next week for the September to November period). But that hasn't prevented it from becoming a case study of the difficulties that alternative lenders face in an era of more expensive money and plummeting confidence in even the most established banks.

And it has not stopped people from asking whether proper risk management was done – both by the company, but also by the regulator.

Punished more than most

During what has been a horrible time for financial services companies everywhere, AGF has been punished more than most. The firm's stock price is down 67 per cent in the past 12 months – the worst performance of any of the 39 Canadian companies in the S&P/TSX financial index, and far more than the declines of its two main public competitors, IGM Financial Inc. (down 30 per cent) and CI Financial Corp. (down 35). For AGF shareholders, the decline has wiped out all the gains of the past 10 years. The stock's dividend yield, at 12.3 per cent, indicates that the market believes AGF will have to follow scores of other financial companies and slash the payout.

Things are so tough that BMO Nesbitt Burns analyst John Reucassel baldly stated in print recently that selling the whole company “may be the best course of action for AGF.”

The stock crash has sliced some $200-million off the Goldring family's net worth. But what really stings is the implication that AGF, a business that the Goldrings have kept tight control over forever and have no desire to sell, might somehow fall victim to the same excessive exuberance that has crippled much larger financial institutions around the world since the beginning of the credit crisis in August, 2007.

“You're seeing really great companies – ours and others – that have been badly hurt, and I would argue, too much so,” Mr. Goldring says. “It has been a ghastly period.”

Of the speculation of sizable loan losses to come, which might require AGF to pump money into the trust company to satisfy regulators, Mr. Goldring says there's no substance to it. “I just can't countenance, frankly, the misinformed opinion that gets put out there. … It's essential that people know that we've got a well-run, good trust company that can stand alone on its own basis.

“This is serious, serious, serious business. I take it unbelievably seriously.”

The growth of AGF Trust

AGF's move into lending began, strangely enough, with an internal debate about whether to get out of that business entirely.

The 52-year-old firm had owned a small trust company since the 1980s, but never did much with it. By 2000, when co-founder Warren Goldring formally handed power to his son, AGF Trust was still a tiny operation. About 35 employees underwrote a small number of low-risk mortgages, mostly in Southern Ontario.

The Goldrings had been content to focus on selling mutual funds, which offered more than enough growth, thanks to the 1990s bull market and the unprecedented boom in fund sales. Then they got a phone call: Did AGF want to sell its trust licence?

“It was at that point that I really started to think long and hard,” Blake Goldring says. The last large independent trust company, Canada Trust Co., had just been swallowed by Toronto-Dominion Bank. The merger created a surfeit of ex-Canada Trust managers looking for new work. One of them was Mario Causarano, an Italian-speaking accountant from Toronto. Over lunch, the two men batted around ideas: What could they do with AGF Trust? Persuaded that the business had potential, Mr. Goldring hired Mr. Causarano to be the trust's president in 2001 with a mandate to make it grow.

By that point, AGF's main business was on the verge of trouble. The equity bubble had popped and was deflating the prospects for fund management companies. In 2002, it got worse. Brandes Investment Management Partners LP, the well-regarded San Diego firm that managed about one-quarter of AGF's assets, walked out to set up its own business in Canada. The “Brandes bomb” tipped AGF into a multiyear malaise and tested its new CEO. Mr. Goldring held a highly publicized search to replace Brandes and landed Harris Associates LP. But Harris's performance was subpar and the firm was sacked and replaced with internal AGF fund managers. Manulife Financial Corp. delivered another kick in 2004 by withdrawing $900-million it had placed with AGF.

Retail fund customers were also taking their money out, and former Canadian Football League player Randy Ambrosie was brought in to shake up the demoralized sales staff. By 2005, AGF's profit per share had fallen 44 per cent from its high point in 2001, even though a new equity bull market had taken hold.

In that hailstorm, Mr. Causarano's trust company stood out. “AGF needed a good-news story,” says one former insider. “This was a good-news story. [Blake Goldring] played it up. He talked about it a lot.”

The bulk of AGF Trust's growth came from a new program to offer investment loans to individuals through their financial advisers. In the fund industry, that's not such a new strategy. IGM's Mackenzie Financial unit has done so for years. If it works well, for the fund manager it can be a two-for-one deal, bringing in a new stream of interest income while also lifting mutual fund sales. In a rising market, the investor doesn't get hurt by using leverage.

Financial advisers like it, too, because a bigger sale means a bigger commission. And for the independent advisers who mainly sell mutual funds out of small financial planning shops, there's another benefit if they can arrange loans through AGF Trust or another alternative lender: They can avoid dealing with banks that might try to poach their best clients. “Most advisers don't want their clients anywhere near a big bank,” says AGF chief financial officer Greg Henderson. “To them, the bank's kind of a dirty word.”

Still, it's not an easy living for flea-sized lenders to exist in the shadow of elephants. The Goodman family, which controls DundeeWealth Inc., found that out when they set up Dundee Bank of Canada for that same purpose – to sell loans through financial advisers. After raising $2-billion in deposits, they promptly drove into the asset-backed commercial paper swamp; to extract themselves from it, they had to arrange the hasty sale of the bank and 18 per cent of DundeeWealth to Bank of Nova Scotia.

Others are too scared to even try to go up against the banks. Executives at CI Financial, AGF's much-larger mutual fund competitor, thought hard about getting into the banking business, but concluded they just couldn't compete. “You saw what happened with Dundee,” says CI president Stephen MacPhail, a former trust company executive. “When things didn't go as well as they would have hoped, they didn't have the size of company backing it up to make it work.”

What made AGF Trust different from some other investment-loan operations was how few restrictions they placed on loans.

Borrowers weren't even required to invest in AGF's line of funds – though they could get a lower interest rate if they did.

“It was fantastic,” said Michael Hill, a financial adviser with Windsor, Ont.-based De Thomas Financial Corp. “They gave us prime rates, virtually zero underwriting and we could do anything we wanted with the money.” He arranged AGF loans to buy exchange-traded funds for his clients.

“It was shocking that they would give away so much … the hope was that the money would go back to AGF funds. I knew what they were shooting for.”

Better yet, from Mr. Hill's point of view, virtually all of AGF's investment loans were done on a “no margin call” basis, meaning the company could not automatically call the loan, or require the investor to come up with more capital, just because the market value of the underlying investments went down.

Brokerage firms use margin calls to protect their capital during a market decline, and to ensure that their customers don't wind up with too much debt that's backed by declining investment. They used them frequently last fall to force retail investors to cut their personal leverage: Canadian margin debt dropped 36.6 per cent in the 12 months ended Nov. 30 to $9.6-billion, says the Investment Industry Regulatory Organization of Canada.

But at AGF Trust, the debt owed to it by investors hasn't gone down as stock prices tumbled.

The market's collapse has exposed a potential weakness in AGF Trust's strategy. Mr. Reucassel, the BMO analyst, has estimated that as of Nov. 30, perhaps $700-million of the firm's investment loans were unsecured (that is, the loans exceed the value of the collateral by that amount – similar to a situation where a mortgage is worth more than the home). GMP Securities analyst Stephen Boland believes the number is more like $500-million. (AGF Management's market capitalization is $729-million.) What no one knows yet is how much of that unsecured debt will turn into losses for AGF, as borrowers lose their jobs and can't – or won't – repay. “In a market like this, when you have no margin calls on loans and people borrowed the money to invest, and the loans are still outstanding but the fund values are down, what prevents people from walking?” Mr. Hill asks. “People do everything they can to pay [for] their home, and even if they do go bankrupt, often people will try to work out a deal to stay in the house,” says the financial executive who requested anonymity. “[But] they don't love their investment loan like they might love their house.”

But others say the problem is manageable. Mr. Boland points out that banks' credit card portfolios are also unsecured, yet the losses on them run only into the 4- to 5-per-cent range. The average customer who owes AGF money on an investment loan has a “beacon score” of 721, indicating a strong credit rating. The score is based on a person's payment history and debt profile. AGF executives are placing their faith in that.

“I can't believe that because the underlying asset's gone down, they're going to wreck their whole credit situation because of that,” says Mr. Henderson, the chief financial officer. It may also help that AGF Trust did not deal directly with the public; financial advisers who convinced their clients to borrow in the first place will work hard to get them to stick with the strategy and not panic.

But some borrowers may struggle to repay, even if they want to. One popular strategy was to borrow from AGF – generally at rates at or near prime – and put the money into high-income mutual funds that promised monthly distributions and an annual yield of 8 per cent or more. The distributions more than covered the loan interest, allowing the investor to build his portfolio with borrowed money without digging into his own income.

Not every adviser thinks it's a sound idea, however. Mr. Mayhew, for one, says counting on fund payments to pay the interest on the loan is “a huge can of worms” because the distributions are unsustainable. IA Clarington, the mutual funds unit of Industrial Alliance Insurance and Financial Services Inc., recently chopped the payout on a Canadian dividend fund by 36 per cent, and many other funds are sure to follow because the stocks and income trusts they're invested in are slashing theirs. AGF Trust decided last fall that it would no longer lend money to fund purchases of funds from Clarington and Stone & Co., two purveyors of high-income funds, because Mr. Causarano felt his trust company had enough exposure to those groups.

That was only one change he made in response to the crisis. AGF Trust is pulling back. In early November, it laid off about 50 of its 400 employees, and said it would kill some of the most attractive parts of its lending program. Investors will no longer be able to borrow 100 per cent of the amount they want to invest, for example, except for some RRSP loans for some of its most loyal advisers.

In an environment where the markets can swing 10 per cent in a day, “it would be like playing with fire, to keep that stuff going,” Mr. Henderson says. AGF's mortgage portfolio is also getting smaller after years of hypergrowth, and it will no longer give home equity lines of credit.

All of these are necessary changes, Mr. Causarano says, because the credit crisis has increased borrowing costs for financial institutions. Since AGF doesn't have branches, it relies on selling guaranteed investment certificates through brokers to get the money for funding operations – and in the GIC market, buyers have little loyalty. They'll jump to wherever the best rate is.

An analysis by Mr. Reucassel found that AGF's interest margins have been falling faster than the big banks – making him wonder if the profits from the trust company will be enough to offset the risk, once the full effects of the recession are felt.

In addition to the spectre of higher loan defaults, there are questions about how well the strategy met AGF's other objective of increasing sales of mutual funds. Mr. Henderson says just less than $1-billion of the firm's mutual fund assets were funded by loans from the trust, or between 4 and 5 per cent of its $20-billion in mutual funds under management.

If the trust is helping fund sales, there has been little sign of it lately. Investor redemptions and the market crash caused AGF to lose 32.8 per cent of its fund assets in 2008, the second-largest percentage decline among Canada's top 10 fund companies.

Mr. Goldring does have a couple of advantages for weathering the crises. For all its troubles, the investment management business is still a cash cow. While AGF Trust is heavily leveraged like all financial institutions (its assets are 21 times its equity), the parent company, AGF Management, presciently repaid most of its debt before the financial crisis. If it's forced at some point to prop up its lending division, it has bank lines that it can tap, Mr. Goldring says.

“There are a number of options. You hate to speculate,” he says. With the stock price so low, “the last thing I'd ever want to do is issue equity to deal with that.” But he makes no apologies for the strategy and says it has worked – the trust company produced $50.2-million in profit before taxes, interest and amortization in the 12 months that ended Aug. 31.

“I think anybody running their business by watching or reading only analyst reports or analyst comments would be doing a grave disservice to their shareholders,” he says.

The real problem may turn out to be not that AGF Trust will face big loan defaults, but the financial crisis will squeeze the consumer loan business so hard – and raise the alternative lenders' cost of borrowing so high – that the trust can't make an acceptable return any more. At the very least, AGF Management's eight-year experiment has altered, perhaps for a long time, equity investors' view of the risks that lie in what used to be a reliably dull fund firm.

Mr. Goldring vows to fight on: “Lending money is a good business. It's got to be done prudently. You've got to have the proper controls. But you can do well at it.

“I believe in just proving people wrong.”

© The Globe and Mail

http://ca.finance.yahoo.com/personal-finance/article/cpmoney/homebuyers-urged-beware-mortgage-policy-tied-secure-line-credit-20090122

Homebuyers urged to beware mortgage policy tied to secure line of credit

MONTREAL - Homebuyers are being urged to read the fine print and to recognize the potential consequences of tying their mortgage to a grossly inflated secure line of credit - an increasingly common practice that's only now raising eyebrows as people review their finances in tough economic times.

Recently divorced and just two days away from closing on her new home, Sherryl Nickel was shocked when she arrived at her credit union to sign the paperwork and realized the institution had registered a home equity line of credit worth $750,000 when she'd requested and been approved for $200,000.

"They just said, 'It's complete. It's done. We're doing this as a service to you' when I questioned it," said the Vancouver retiree, noting the home was worth only $535,000.

"You don't have time to say, 'Whoa, whoa, whoa, send this back to your head office and get the paperwork redone.' You just don't have that opportunity."

Her lawyer later told her the practice is common and is billed as a boon for consumers who won't have to go through the process of hiring a lawyer again should they need additional credit down the road.

But the practice is also raising questions about the impact it might have on one's creditworthiness and ability to shop around with other lending institutions.

In times of economic uncertainty, it also raises concerns for those considering bankruptcy as a way out, credit counsellor Margaret Johnson said, adding the practice is about a decade old but seems to be occurring more often among her cash-strapped clients.

The founder of Solutions Credit Counselling Service Inc. said secured debt can't be written off in bankruptcy and that many of these "loan master" agreements factor in credit cards and other unsecured loans one might have with a particular lending institution.

"It's all rolled into the mortgage or secured lending so you don't really have an overdraft anymore or you don't really have a Visa product anymore," she said.

"It's all covered under the agreement attached to your house."

It's another reason why Johnson believes consumers ought to diversify their finances and bank with a variety of institutions, another thing such mortgage agreements prevent.

Because the registered amount meets or exceeds the value of the property, Johnson said there's no equity left in the home to offer another lender in exchange for credit.

"What it does is it makes you a prisoner of the financial institution that's got your mortgage," she said.

Paul Grewal, a mortgage lender with Toronto-based Street Capital Financial Corp., doesn't deal in these types of mortgages but believes those who do ought to be forthright with customers.

"The banks need to provide more clarity to the borrower about how much they're actually borrowing and how much is being registered against their home," he said.

The pitch that it simplifies future borrowing also isn't completely accurate, he said, noting borrowers aren't automatically pre-approved for the additional funds registered against their property and may be disappointed if they come in seeking cash due to financial troubles.

Lenders admit it's a way to keep customers.

"Lots of caisses (credit unions) did it already because they realized all this was good for retaining clients," said Nathalie Genest, a spokeswoman for Desjardins Group, adding her company is among the last to widely adopt the practice.

"We register a higher amount simply because every year, when the home appreciates, if we have to refinance or renew the mortgage four or five years later, it avoids having to return to the notary to seek additional funds.

She said there's no limit on the amount that can be registered and that it won't affect a person's credit file.

TD Bank Financial Group said it gives customers the option between a standard mortgage and a larger home equity line of credit as a way of saving both time and money should the client want more credit.

"We offer this option early in our discussions with the customer and only proceed if the customer agrees to it," spokeswoman Kelly Hechler said in an email.

She insisted it does not affect customers' credit ratings or their ability to borrow elsewhere.

RBC spokeswoman Stephanie Lu said the bank does provide such mortgages to "avoid the need to complete additional paperwork, appraisals and registrations at a later date" but that the amount registered would never exceed the appraised value of the home.

Michael Lofquist, a spokesman for consumer credit reporting company Equifax, said while a standard mortgage won't have any effect on one's credit worthiness, a home equity loan will.

While the extent of the impact isn't clear, Lofquist said it will appear on one's credit history and could be a deterrent to other lenders who might see it.

Steven Katz of TransUnion, another consumer credit reporting company, said it comes down to understanding what you've agreed to.

He said the only thing that should show up on a credit report is available credit, regardless of whether it is being used.

"Know what you're signing up for, read the fine print and check your credit report on a regular basis to make sure it accurately reflects what you know to be the credit history that you've earned."

Queen's University finance professor Louis Gagnon suggested it's in a bank's best interest to put as hefty a lien on one's property as possible. He said it also offers protection to clients.

"In this market environment, facing a barrier to leverage is actually a pretty good thing," said the former RBC senior manager who hadn't thought much about the practice until it happened to him.

"Cash is king and people have to pay down their debt... It helps people be a bit more conservative."

I am sure many of you have heard of the annual Davos economic forum. This year it starts wednesday.
Among the entertainers this year there will be Peter Gabriel, Jet Li and not to be beat our very own


Amitabh Bachchan!

His Bollywood moves are gonna put Mick to shame!

Today is budget day in Canadaand the federal budget promises more political intrigue in the ‘soapopera’ unfolding in Ottawa. Harper has promised a six point economic action plan which will include jobtraining, infrastructure spending and (likely) some assurance that Canadianbanks will remain competitive with their global counterparts (who have beensubsidized by their respective governments).

Yesterday we saw European shares jump by more than 3%,ending a five day losing streak. A 73% surge in British bank Barclays boostedlagging financials while oil shares also tracked higher (oil prices are higheragain this morning).

The Dow Jones Stoxx (Europe)banks index rose 7%. Financial stocks spiked, with Lloyds jumping 32%, INGjumping 27.8%, Royal Bank of Scotlandjumping 19.8%. BNP Paribas jumping 16.9% and Societe Generale jumping 11% (allthese banks led the 58% decline in the banking index in the last 6-months).

Stocks rose in “yo-yo” or “choppy”trade lifted by optimism over a $68 billion takeover in the drug industry thatoffset a grim warning about the year ahead from Caterpillar and worries overthe state of the financial sector (financial shares in the U.S. ending the daydown). Caterpillar announced 20,000 job cuts, Home Depot 7,000 and whenyou include other firms total jump cuts announced yesterday exceeded 70,000.

A very rare piece of good news helped sentiment, as sales ofexisting U.S.homes unexpectedly jumped 6.5% in December. Pfizer the world's biggest drugmaker, said it would buy rival Wyeth, suggesting that some companies areattractively valued after a dismal 2008 (although, I would have expected somesmaller M&A activity to start things rolling and it is an indication thatthere is potential for some deals to get done).

In Canada,the index posted a modest gain of 0.33% which was led by financials and energy.The stock market “clawed” back from a 1.2% mid afternoon fall butremained well off its early 2.2% mid morning gain.

The Dow Jones industrial average jumped 0.48%, the Standard& Poor's 500 Index jumped 0.56% and the Nasdaq Composite Index jumped0.82%. The broad based S&P 500 index is down more than 7% for theyear so far (not the start to 2009 that we were looking for) but it is up about11% from the 11-year lows hit on November 20th.

There is a little bit of optimism and confidence back in themarket today after a hard week – likely attributable to bargainhunting. Today will be interesting with budget day in Canada (although, this will likely not influenceCanadian stock market significantly) and we should hear more about the U.S. stimuluspackage within a week or so.

This morning, we will continue to see an increase in oilprices based on OPEC cuts and cold weather. European shares have given upa little of yesterdays gains but bank stocks continue to advance while U.S. futuresare pointing higher.