Wednesday, March 19, 2008

Business: who is to blame for America's subprime fiasco?

By James Sturgeon
Convergence Spring 2008

Crises, by their nature, are usually preceded by a good deal of oversight.

The dithering of British Prime Minister Chamberlain on the eve of the Second World War, or more recently, the United States federal government's response to Hurricane Katrina's levelling of New Orleans stand as two examples of historic idleness.

In both cases, foresight was nowhere to be found, with devastating results.

It’s safe to assume the implosion of America's sub-prime mortgage market and the ensuing global credit crisis among the world’s pre-eminent banks can summarily join history’s long list of the grossly overlooked-until-it-was-too-late.

“People say over and over again, how could this collapse in the U.S. housing market, and in particular, the low end of the U.S. housing market cause this global financial meltdown, which is what we came pretty close to,” says David Olive, a senior business columnist at the Toronto Star.

“By the early fall [2007], you had Citibank, the biggest bank in the world, and Merrill Lynch, the biggest brokerage in the world, each declaring multi-billion dollar write-downs. That was unprecedented.”

Equally disconcerting was how easily the underlying cause of those write-downs failed to be noticed.

It’s become glaringly apparent in recent months that everyone – from American regulators to global bankers and, not least, media – was left holding their hats when the shaky foundation of America’s sub-prime housing boom began to crumble last year.

Some background may be useful here:

Without garnering much attention, a combination of unmitigated lending from suspect mortgage brokers and Wall Street greed approved and sold off an astonishing US$600-billion in risky mortgage-backed securities to institutional clients around the world by 2006, according to Inside Mortgage Finance, an industry newsletter.

“It was in effect, the passing on of credit from the original lenders,” says Michael Veall, chair of economics at McMaster University in Hamilton. “You’re not going to take the same care to ensure it was a safe loan.”

It was like playing hot potato with a hand grenade. When a trickle of U.S. sub-prime defaults grew into a torrent by the beginning of last summer, the value of those securities plunged.



Euphemistically, what followed has been called a ‘liquidity’ crisis. In reality, a panic shot through the global financial system as losses mounted, and stricken banks reined in lending money to one another – the lifeblood of modern global commerce.

“I must admit, I didn’t foresee this,” Veall adds.

Few did. After all, the sub-prime boom of the previous five years had been fuelling skyrocketing home values across the United States. Glowing real estate data amid robust economic figures beguiled the vast majority, including many journalists, even the experienced Olive.

“When things are going really well, it’s not the sort of thing you complain about,” he says. “The tide of euphoria was very powerful and you really don’t know for sure that it’s not justified.”

Only after two sub-prime-stuffed hedge funds, managed by the (formerly) fifth-largest investment bank on Wall Street, Bear Stearns, “utterly collapsed” in July 2007 did Olive begin to seriously doubt the spectacular housing boom south of the border.

“To have this happen to a company the size and of prestige of Bear Stearns meant this was trouble,” the former editor-in-chief of Report on Business magazine says. “It was at that point that I began to look at the health of the U.S. housing market.”

By the time summer turned to fall, the chilly repercussions of the failing sub-prime market, and the internationally held securities tied to it, became fully understood, and widely reported on.

Here in Canada, Canadian Imperial Bank of Commerce sent shivers through the market after it announced a $750-million write-down tied to sub-prime losses and warned of more (it has escalated to over $3-billion since).

“I blew it,” Olive says, offering a mea culpa of sorts. “I monitor the U.S. economy as closely as any financial journalist in Canada is able to, and I blew it … I did not see the warnings.”

In America, the story is much the same, albeit, intermittent coverage did prevail at times, says Jonathan Higuera, deputy director at the Reynolds National Center for Business Journalism at Arizona State University.

“This is how media work, we find something and write a story, even a great story, and then we move on to the next one. Unless someone else picks up the ball, we don’t stay on top of it,” he says. “This is one of the cases where we should have stayed on top of it.”

It’s true that The New York Times brought the entire ugly business -- the rising tide of slippery lenders and their tie to Wall Street -- into plain view as early as March 2000 in a far-reaching investigative report by Diana B. Henriques and Lowell Bergman.

But Higuera says: “I don’t think even they knew what they had on their hands or how deep this was going to go.”

More often than not, the glare emitted by the housing boom proved more attractive and easier to report than the avaricious lending that was at the core of it, Higuera, a former business reporter at the Arizona Republic, says.

“[As a reporter] am I going to write a story about predatory lending practices or am I going to talk about how housing prices have gone up 50 per cent?

"The other side was harder to write. It would take a lot more research, a lot more time and a lot more resources,” he says.

“Media in many cases opted to tell the up-side story — the one the real estate community and mortgage industry would rather have you write.”

But the degree of culpability among journalists, whatever it may be, fails to explain why America’s sub-prime mortgage industry was permitted to run amok in the first place.

That responsibility rests squarely on the rise of morally dubious lending practices, and negligence among politicians and regulators to mitigate it, argues columnist Eddie Roth of the Dayton Daily News.

“Here, I know our business reporters and reporters on the social justice beat were keenly interested in this,” the former civil lawyer says. “[But] unscrupulous mortgage lenders have been permitted to thrive in Ohio because of near complete absence of consumer protection.”

“What’s become obvious is that there were no controls in the end.”

Since 2002, Roth has written dozens of editorials decrying predatory lending in the state, one of the worst afflicted alongside Nevada, Florida and California. Ohio now suffers from the sixth-worst foreclosure rate in the country.

“State lawmakers weren’t interested in doing anything, federal lawmakers weren’t willing to do anything, regulators weren’t willing to do anything.

“They didn’t appreciate how bad it could get,” Roth says.

Wherever the blame may lie, there is one certainty: the fallout from America’s sub-prime debacle has yet to be fully meted out.

Bear Stearns’s well-documented demise will see the 85-year-old bank annexed and eventually dissolve under rival JP Morgan Chase over the course of the year. We’ll surely hear of more mega-write-downs, too.



CIBC revealed in late March it still has staggering exposure to the U.S. housing market and it’s far from alone. Congress is now tabling suggestions on the wholesale overhauling of that country’s lending and brokerage industries.

As for journalism, Olive, a cynic to the end, quips:

“I would like to say that we learned something new from all this. But regrettably, there’s that saying ‘it’s not one thing after another, it’s the same damn thing over and over again.’

“All I really learned is that we are apparently destined to be suckers every decade or so.”

Friday, March 07, 2008

Sports feature: Of Bowlers and Batsmen


The consummate global game, cricket is finally making in-roads into the Ontario collegiate sports system. The question now is, when can we expect to see it go varsity? Sweat examines.

By James Sturgeon
Sweat spring 2008

Picture 20,000 spectators suspended in time and space, their attention transfixed upon a small white ball balanced on the tips of a fielder’s fingers. The hopes and dreams of millions rest on what happens next.

It’s a classic sequence played out across professional ballparks in North America every summer, except for this: it isn’t North America. The sport you’re envisioning isn’t even baseball.

The location is Beausejour Stadium, West Indies, and the sport is cricket.

Last summer, thousands of supporters from across the globe poured into the Caribbean to cheer on their nations during the 2007 Cricket World Cup. According to some estimates, television broadcasts beamed the more-than-month-long tournament into the homes of another two billion.

It was a global event in every sense. Yet the passion felt by so many from Barbados to Australia is lost on most Canadians. None of Canada’s major networks picked up broadcasting rights to even a single match. With such scant domestic interest, it’s no surprise then that cricket has barely registered a pulse among collegiate sports in Ontario.

That is, until recently.

Cricket has been played intermittently across Ontario campuses for years to be sure, but it has always been on the periphery, with players snatching up a few hours of gym time to play ‘tape ball’ (an indoor version named after the softer taped-tennis ball that substitutes the much harder outdoor ball).

But over the last year or so indoor cricket has been gaining ground in the Ontario Colleges Athletic Associaton. The evidence? Both the number of teams and tournaments are on the rise.

Seneca has held an outdoor tournament since 2004, while Sheridan hosted its first competition two years ago. But both events have been stocked with only a few informal college clubs. Teams from McMaster and York universities as well as the University of Toronto helped fill out the brackets.

Sheridan’s tournament last February marked a change though. Stalwart clubs like Seneca and Centennial were joined by host Sheridan, George Brown, and the just-formed team from Georgian. For the first time, cricket had gathered the minimum number of OCAA schools (five) to qualify as a varsity sport. Humber would form a side in September to push that total to six.

“Initially I didn’t know that cricket was even available here,” says Richard Munro, Humber’s inaugural coach. When the school’s athletic department released a communiqué in September asking for volunteers for a cricket team, the 31-year-old native of South Africa and longtime cricket player stepped up to the plate.

According to the coach, a group of 50 or so students showed up to tryouts. “Then I realized how huge cricket is becoming here,” says Munro, also computer technician at Humber.

Sarfaraz Khan puts that figure closer to 75. “Competition wise, there was lot,” says the 20-year-old business administration student and Humber player. Khan moved to Canada in 2000 from Mumbai, India, and has played in suburban leagues in the Greater Toronto Area since.

Like Khan, virtually all of Humber’s players — in fact, most players across the extramural circuit — hail from somewhere other than Canada. “Definitely the majority are from Asia and the West Indies,” says Munro.

The creation of Humber’s team is in large due to the efforts of recreation coordinator Jennifer Maclam.

“I kept getting bombarded with a lot of international students almost flooding the office,” she says. “It came to a point where I said, ‘OK, we’re buying cricket equipment. Why not spend a few hundred dollars and make 500 hundred people happy.’ ”

“It’s really been word of mouth,” says Sterling Ivany, extramural coordinator at Georgian College in Barrie. Ivany says Georgian’s team was formed last February after several students brought the Sheridan tournament to his attention.

“We had a cricket club that began playing last fall. We got them some gym space and some time to play and then [the Sheridan] tournament came up so we picked a team and went from there.

“It's a lot of fun and it's pretty competitive,” Ivany adds. “A couple of the teams are just fantastic."

What’s remarkable is how quickly the game has mobilized. In the last year, a tournament at Georgian has been added to the Seneca, Sheridan and U of T Mississauga day-longs, while teams such as Humber and Georgian have tipped the sport into varsity-status eligibility.

Humber plans on hosting its own outdoor competition this coming fall, according to Maclam.

Armed with some momentum now, the question becomes: when will cricket move from the margins of the OCAA extramural system into a fully funded varsity sport? Not in 2008-09. Do not get hopes up for 2009-10 either.

Ivany says a few other tournaments are needed to demonstrate consistent success over a couple of years. “Then we can move down the road,” he says.

Maclam, also an executive on the OCAA extramural board of directors, would like to see cricket go varsity. “There’s enough interest and skilled players,” she says.

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