I trained as a commercial banker in a large branch on the west side of Vancouver. The site boasted nine seasoned account managers and acted as regional hub. We were not far from some of the most expensive real estate in the country, and the size of our commercial borrowers reflected that fact.
One day a few weeks into my training all the tenured account managers went out to a luncheon, leaving me alone with a few support staff to watch the shop. I'm not sure what they were thinking. I had no authority to approve anything that might come up in their absence. I knew just enough to be afraid, and the moment they left I began fidgeting -- hoping that I would not be asked to draw upon my fledgling basket of indecision.
No such luck.
After a while an important downtown lawyer made a deposit for $450,000 and simultaneously wanted to withdraw the entire balance for conversion to a bank draft to be deposited in-trust at another institution. I had about as much authority as a cheese crisp, but the most senior member of the clerical staff quipped: "Okay college boy, what's your call?"
Our bank would be on the hook for the entire balance if the deposit proved to have been unreliable. I pulled the account information up on the old black and green computer screen. No approved credit whatsoever, but the legal firm had millions of dollars on deposit in various trust accounts held with us, none of which was available for recourse.
The lawyer was pacing around anxiously -- late for a court date. I pseudo-confidently asked the senior teller to pull the lawyer's deposit slip to verify the capacity of the deposit source if possible, watching the lawyer peripherally. He was nervous.
Next I spoke with him personally, with his deposit slip in hand querying him on the transaction. We were both sweating. While he spoke, my mind raced, drifted, and my eye caught hold of two small words on the deposit slip: "In-trust." That's when it fell together for me. His life's work hinged on the trusts the courts and his clients put in him. He had more to lose than this transaction if he were trying to pull something over on us. His worried demeanor was a reflection of his court date, and not an attempt at ill-gotten gain.
With a squiggle of ink I approved the transaction, and immediately started a fervent prayer that lasted until the gang of real bankers returned from lunch to ratify the decision for me.
It was the first of literally thousands of assessments covering hundreds of millions of dollars over a nineteen-year span.
Years later I sat in a corner office evaluating the wind-up of a borrower whose second-generation family enterprise was failing. The question was not "if," but "how" to sell his business assets and promptly pay down the loans. Should we seize control and bring in an expensive receivership team to manage it down, or should we allow him to manage the wind-down himself?
If we brought in our people, the resale price would fall dramatically, but we would be in complete control. If we allowed the man to conduct his own closing out sale, we would give up control in exchange for a potentially higher return, and a modicum of respectability for his lost enterprise.
There was no senior banker to ratify my decision. The decision was mine to make and account for.
After a day or two the verdict crystallized for me. He was losing out to a big-box competitor partly because the opponent was willing to compete on his day of worship, while he refused to breach that personal code of conduct. As a business decision, this was crippling, but one thing was not in question. He was a man of principle.
With that in mind, I granted the client the ability to manage down the inventory himself, rather than bring in the expensive hired help. The loan cleared off in the course of time with no ill effect.
If there is one single word which sums up both the credit evaluation and the investment question it is: Integrity.
Integrity of Cash Flow.
Integrity of the Balance Sheet.
Integrity of the Credit History.
Integrity of our Collateral.
But without a doubt, Integrity of Management is the hinge pin of them all.
In a world where the complexity of investments makes their evaluation difficult to determine, another element of integrity becomes critical for Mr. & Mrs. Investor. The advisor. He or she must have impeccable scruples. If not, the integrity of your cash flow, and your balance sheet may some day come into question.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
