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Noted Short Seller Marc Cohodes Comments On The Recent Events At Home Capital
Noted Short Seller Marc Cohodes Comments On The Recent Events At Home Capital
The past two months have been a roller coaster ride for Home Capital shareholders culminating in the announcement of Berkshire Hathaway’s investment in the company this week. But the deal raises at least as many questions as it answers, not least of which is whose interests are being served? There are many professed facts about the company and the events of the last two months that just don’t add up. We think shareholders and the public are still a long way from discovering the truth of what has transpired at the company. Given the evident intervention in the Home Capital drama by various arms of the Canadian government, there must be something vital to the economy at stake here. It seems to us that a deep dive into the Home Capital story is in order.
It all starts with Gerry
The most salient fact to know about Home Capital is that it is a veritable extension of the person who ran it for almost 30 years, Gerald Soloway. Soloway and fellow Home Capital board member John Marsh gained control of a public shell company in 1986 and merged the then tiny Home Savings of St. Catharines into the shell. From this humble start, Soloway grew Home into the 9th largest bank in Canada, and was by all accounts, a domineering presence within the company (so domineering, in fact, that he was viewed internally as still running the company even after handing the CEO reins to Martin Reid.) In a very real way, the culture of the company reflects the values and character of Soloway himself. So far so good, a Canadian success story, right? The fly in the ointment is that Soloway is a serial, convicted fraudster, going back even before the start of the Home Capital story, and it appears that many of the business practices of the company reflect his penchant for cutting corners.
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Home Capital scandal may presage a slowdown: Don Pittis
Is false income data a symptom of an industry that has run its course?
Could the scandal at Home Capital just be the beginning? The Canadian alternative mortgage company halted its shares after it was revealed that some of its brokers had been falsifying information on the income of mortgage customers.
As the soaring housing markets in Alberta and Saskatchewan go off the boil, a gradual weakening in Canada’s roaring real estate business may reveal more irregularities in the market.
It is a phenomenon we have seen happen so frequently that the uncovering of scandal in a market is often seen as a cause rather that a symptom of a market’s decline. Sometimes they go hand in hand.
On a conference call yesterday Home Capital CEO Gerald Soloway insisted that the problem with its brokers was not an indication of a mortgage fraud crisis across Canada. Home Capital’s delinquencies remain low, and the company says it has stopped doing business with the brokers that investigators had shown to be pretending customers’ income qualified them for mortgages.
Pressure to succeed
It is hard to draw a direct line of cause and effect between the first few scandals in a weakening market and that weakening.
But as markets get into trouble, more and more accounts get shuffled off to the riskier end of the business. Pressure to succeed intensifies. People trying to make a living are more willing to take shortcuts. And it is only as the markets weaken that shortcuts — or outright fraud — are revealed.
There are many examples but the most notorious case is Bernie Madoff, author of what many consider be the biggest swindle in U.S. history. Madoff’s scheme was to accept investors’ money and falsify the income statement on their investment returns. Even as other funds began to do badly, Madoff’s remained strong.
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