Toronto brokers in for foreign inroads
If Salomon Brothers were allowed to, it could buy all the investment dealers in Canada and then do it again. The total capitalization of Salomon Brothers is US$2.9 billion. The total capitalization of the Canadian investment industry is C$1.23 billion, which equals US$885 million.
That scares the daylights out of Canadian brokers, who now have a monopoly, with minor exception, on buying and selling stock and dealing in corporate and government finance underwritings.
And what really terrifies them is the prospect of rule changes coming up on Jan. 1 which could change forever the private club that has made Bay Street, Toronto's Wall Street, a tighter clique than any in London or New York.
Foreign dealers (read American) will soon be allowed in. Salomon Brothers; Goldman, Sachs; Morgan Stanley; and other American firms have rented space in downtown Toronto ready to do business on Jan. 2, the first business day of 1987.
Those foreign dealers will be limited to 30 percent of the total security business in Canada.
The little bang in Toronto comes in the new year, when the Ontario Securities Commission is to open up the securities industry to foreign competition and the big domestic banks. For while Canadian investment dealers are small potatoes on the world stage, Canadian banks are relatively big stuff. In Canada, banks are allowed countrywide branch systems. The power of the banks is concentrated in the ``Big Five.'' This means the five big banks in Canada do 83 percent of the banking business in the country. Until now they haven't been allowed to deal in corporate and government finance or act as stockbrokers. One bank, Toronto Dominion, has a small discount brokerage operation, a money loser.
All that will be changing in January, when banks will be allowed to own 30 percent of investment dealers, although the banks will not be allowed to own seats on the exchange. These deals have already been done and will be announced on Jan. 2.
Other changes will allow foreign firms to own 30 percent of a Canadian investment dealer.
These rules are being made by the Ontario Securities Commission; what goes for Ontario goes for the country. The rules cover the 74 members of the Toronto Stock Exchange. The exchange does 77 percent of the equity trading in Canada.
The Canadian brokerage industry has been kept small for two reasons. The big banks -- the most powerful financial forces in Canada -- have been excluded from getting involved. And the brokerage community has been tightknit. Until recently the typical firm was owned by the directors who paid themsleves handsomely.
In the recent public underwriting of Dominion Securities, the prospectus showed that the seven top directors shared $6.9 million in salaries and bonuses for fiscal year 1985. This is for a firm with total capital of $250 million.
There is no way of really comparing the top salaries with those of chartered banks, since the numbers do not have to be disclosed. The top 160 executives of the Royal Bank of Canada, however, were paid $18.5 million last year. Royal Bank has capital of $4.5 billion and assets of $98.2 billion.
The market has taken a dim view of Canadian brokerage stocks. Dominion Securities is down almost $2 since its issue; Pemberton Houston is off by a third, as is Nesbitt Thomson. Lowen Ondaatje and Lev`esque, Beaubien are off by about 19 percent. All those stocks were issued this year.
An exception is First Marathon Securities, an aggressive young firm whose shares have gone from $4 to $14 in 2 years.