The man who would destroy the ATB
Bankrupt Moe Rahall files a lawsuit alleging Alberta's state-owned bank is illegal
Alberta Report, February 98, Colby Cosh

Nineteen-ninety-eight was supposed to be the year of the Alberta Treasury Branches' resurrection. When control of the provincial government's pseudo-bank was turned over to an independent board of directors last year, the institution had a confused mandated, a $152-million accumulated deficit and a loan portfolio uglier than Roseanne Barr in Spandex. Worse, the ATB's public image was tainted by suspicion of political manipulation of its loan practices and numerous police investigations into the actions of its employees.

The installation of an "arm's length" board, coupled with the ATB's reinvention as a crown corporation last October, was designed to counter widespread suspicion that it had become the Tory cabinet's political slush fund. To restore confidence in its financial affairs, the ATB restructured its debt, squeezed its creditors, swallowed a one-time loss of $198 million and toughened up its lending practices. It even planned to start paying deposit insurance premiums, to the provincial government, for the first time in its 60-year history.

Despite all those efforts, however, 1998 may prove to be that ATB's undoing. Former Edmonton entrepreneur Monier M. "Moe" Rahall whose $100-million commercial real estate empire was wiped out when the ATB pulled the plug on his loans three years ago, has launched an extraordinary legal action designed to prove that the bank is illegal. Mr. Rahall is backed by a team of formidable Ontario lawyers and by the opinion of two Supreme Court of Canada justices who declared in 1970 that the province of Alberta does not have the constitutional authority to own and operate a bank. If he succeeds, Mr. Rahall will have his revenge, and the Klein government will have no choice but to sell or dissolve the ATB.

Even before he launched his lawsuit in late December, the 37-year-old Rahall had already made himself the ATB's least popular ex-customer by writing a scorching book about the bank called Banksters and Prairie Boys. The self-published Banksters, one of the best selling books of 1997, was filled with breathtaking allegations of corruption aimed at ATB officials, their Progressive Conservative political masters and a host of prominent Alberta businessmen and corporations. It made a lot of powerful people very angry, and made Mr. Rahall persona non grata in his native Edmonton.

In 1977, Mr. Rahall, the son of a Lebanese Canadian cab driver, got a job washing the Grand Marquis of Edmonton Journal publisher J. Patrick O'Callaghan. Gradually, he worked his way up to junior circulation manager and spent his days tossing bundles of papers out of Journal trucks. Somewhere along the line, the well-read Rahall ran across the autobiography of Lee Iacocca, the celebrated chairman of the Chrysler Corporation. "I guess I identified with it so much because Iacocca is the son of an immigrant, too," says Mr. Rahall. "There's something about second-generation immigrants that makes us eager to pull ourselves up by our bootstraps."

He set out to make his fortune in real estate and acquired his first property, a four-plex in Edmonton's Killarney district, in 1985. Within a decade, thanks to his personal charm, enthusiasm and skill as a deal-maker, and his pliant ATB banker, he had assembled a heavily-leveraged real estate portfolio worth and estimated $100 million. "When my trustee asked me how I managed to amass so much I couldn't really tell him," says Mr. Rahall with a laugh. "I never knew how much I had until I went bankrupt."

Like so many others, Mr. Rahall was a victim of the prolonged recession of the late 1980's and early 1990's that crushed commercial real estate values in Edmonton. At first he worked closely with the ATB and other creditors to restructure his debt. But then the relationship soured badly, according to Mr. Rahall when his bankers began to treat him unjustly. In one instance, he claims, an ATB manager forced him to rent cars at a discount to one of the manager' friends and took a kickback on the deal. The bank petitioned their client into bankruptcy in 1995.

Then he wrote Banksters, flaying the ATB by quoting from a treasure trove of damning letters and documents. The book biliously portrayed the ATB as the tool of corrupt political, judicial and financial elite. Booksellers sold nearly 15,000 copies yet its most scandalous accusations have gone unrebutted; to date, Mr. Rahall has been hit with just one defamation suit. But he is not finished taking revenge, and he is no longer playing alone.

In late December, he filed suit in the Federal Court of Canada against the federal and provincial governments and the Bank of Canada, with the assistance of a three-man legal team: Jerry Levitan, Toronto-based lead counsel for the Ontario Teacher's Union in an action against the Harris government; T. Sher Singh, a Guelf lawyer and columnist who fought Brian Mulroney's GST Senate appointments before the Supreme Court in 1990; and Eddie Greenspan, probably Canada's highest price criminal lawyer and certainly its most famous. The suit contends that Alberta is violating the Canadian constitution by operating a bank, since banking and bank regulation are the constitutional responsibility of Ottawa.

Oddly, the two-pronged lawsuit is not aimed directly at the ATB. The suit's first part is a complaint that the Bank of Canada is violating its federal controlling legislation, the Bank of Canada Act, by dealing with the ATB. Like chartered banks, the ATB receives Bank of Canada "clearing" services, whereby at the end of each business day the various banks add up their paper and report the results to the Bank of Canada. The Bank of Canada calculates the net debts and credits between lenders and makes sure the institutions which are owed money get access to it.

The act says the at the Bank of Canada can do this for "any bank or other member of the Canadian Payments Association." But the ATB is neither a chartered bank nor a CPA member. The CPA accepts only institutions whose deposits are guaranteed by the Canada Deposit Insurance Corporation, and the ATB's deposits are guaranteed by the province, not by the CDIC.

If the ATB had to switch to the CDIC, it would lose a competitive advantage over the banks. The CDIC insures deposits only up to $60,000, but ATB deposits get an unlimited 100% guarantee from Alberta taxpayers. Now that it is a quasi-independent crown corporation, the ATB intends to build up a proper capital surplus like a real bank, but it is introducing the deposit insurance fee incrementally and will not pay the full amount until 2004. By then it will pay the same fee as the banks - 0.17% of deposits -- even though the province's 100% deposit protection guarantee is far more generous than the CDIC's.

So the first part of the lawsuit, by itself could force the ATB to lose a valuable government-be-stowed edge. But the second part is even more explosive. It argues that it is totally unconstitutional for the Alberta Treasury to run a bank or anything resembling a bank. And that is a contention that has never really been tested.

The constitution gives the federal government exclusive jurisdiction over banking and the incorporation of banks. The federal government has never given any formal approval to the existence of the ATB, however, and the ATB has always been careful not to describe itself as a bank. In fact, it was not very much like a bank to begin with. Originally, ATB deposits were governed by individual trust contracts with customers, and the ATB did no lending. These stipulations, however, were tossed out in 1939, and the ATB became much more like a bank.

Today the ATB has moved even further. Its loans are not drawn on the Treasury anymore, and as of January 20, the ATB unlike credit unions , acquired the legal right to sell mutual funds and insurance. "That Alberta is defying the constitution by operating a bank serious consequences for the public," says Rahall lawyer Singh. "The public in Alberta is completely unprotected by any higher authority. We're hearing about major scandals and bad decisions by the Treasury Branches, and that's fine: the legal system will take care of those. But Mr. Rahall's situation is a good example of where things can go completely awry."

Mr. Rahall claims he is the victim of a vendetta by a powerful but virtually unregulated institution. He alleges the bankruptcy petition was designed to impoverish him, thereby preventing him from suing the ATB over the actions of its corrupt manager. He notes the ATB fought successfully to have the profits from Banksters and Prairieboys placed in trust, even thought the manuscript was finished after Mr. Rahall went bankrupt. And in September, he adds, his bankruptcy proceedings were prolonged for a year when the ATB demanded a continuance, though it was the only one of 30 creditors to do so. Mr. Rahall says that if he had been dealing with a chartered bank, he could have gone to the Bank of Canada or the federal government for redress. But the ATB is answerable only to the provincial auditor general.

The original creators of the Alberta Treasury Branches, the Social Credit administration of William Aberhart, knew that they were creating an outlaw entity. After Aberhart became premier in 1935, the Socreds passed a serious of laws designed to gain provincial control of the money supply and create, by fiat, a "social dividend" for citizens. The Liberal lieutenant governor blocked a few of the laws and Ottawa used its power of disallowance to erase the rest. Only one Socred monetarist law got through: the Treasury Branches Act of 1938.

The act infringed on federal power just as the others did, and the Socreds knew it. But popular opinion was hostile to the eastern banks and their tight-fisted prairie lending policies, and the Socreds knew that too. "There was no legal justification for {the ATB} at all," says former Alberta treasurer Anders Aalborg, a Lloydminster MLA from 1948 to 1971. "They were justified by the fact that any farmer who went to his local bank to get a loan was turned away." Alvin Finkel, a history professor at Athabasca University, says that prime minister Mackenzie King could have killed the Treasury Branches Act, "but he was relieved to be presented with something he could allow the Social Credit eccentrics to pass. It was a small competitor for the banks, because no institutional creditor was going to the ATB. Effectively it was not so different from the caisses populaires in Quebec."

But the ATB now controls $9 billion in depositor cash and is very different from credit unions and caisses because of its government-guaranteed deposits, its direct dealings with the Bank of Canada, and its selling of insurance and mutual funds. "Even Ralph Klein said 'the ATB will operate like any other bank,' in January," says Mr. Rahall. "He's winning our case for us."

The Rahall team has some legal precedent on their side. Even before recent changes to the ATB, judges had attacked its legal foundations. In 1967, for example, an ATB creditor, Breckenridge Speedway Ltd., tried to avoid repaying a loan by arguing that the province had no business running a bank. The majority decision of the Alberta Court of Appeal was that the loan had to be repaid, but the constitutionality of the bank was irrelevant to the issue.

Justice L.A. Porter, in a minority decision, went further. While agreeing that the loan was valid, he said outright that the Alberta Treasury Branches were incorporated unlawfully. When the case went to the Supreme Court in 1970, a seven judge majority again refused to comment on the ATB's lawfulness. But justices J.J. Spence and Emmett Hall endorsed Mr. Justice Porter's opinion in another minority ruling. "The Treasury Branch Act is invalid as trenching upon a legislative field into which it is prohibited from entering," they said.

Mr. Rahall has obtained the high priced services of Eddie Greenspan and his colleagues even though his bankruptcy trustee will not even front him cash to buy business cards. Asked if chartered banks are funding his suit to undercut a state-backed competitor, Mr. Rahall, grins and crafts a coy answer.

"I have some help," he says. "There are some interested parties, and some friends of mine, who think the ATB could undermine the Canadian banking system. Some people are concerned that when they see an Alberta-owned bank selling mutual funds, B.C. will want one, Saskatchewan will want one. But the lines aren't completely drawn as to who's helping me. Put simply, no, I don't have direct support from any institutions [banks] of that sort." Mr. Rahall notes that his attorneys have agreed to smaller-than-usual retainers. "Top lawyers spend all their time wrangling with questions of money. This is a pure question of law. They like the challenge."

A win, Mr. Rahall thinks, would set in motion a slow and painful death spiral for the ATB. He envisions a splitting of the institution: bum corporate loans would be hived off and sold and fire-sale rates, and the more palatable majority of the ATB assets would be sold to the highest bidder. A share offering to ATB depositors would probably not solve the legal problems unless the resultant entity was reinvented as a credit union. That seems unlikely because it would lose its ability to sell mutual funds and insurance and because existing credit unions would raise a political ruckus.

There is reason to think Albertans might support a sell-off. On January 20 the Canadian Federation of Independent Business released a survey of its Alberta members on the subject, and 51% pf the 2,400 small business owners who responded favoured a sale. "They believe that the banking climate has changed and the circumstances that existed during the Depression …. Are no longer relevant," explained the CFIB report. "While Canada's other financial institutions are posting billion-dollar profits, the ATB is expected to be in the red for at least one more year and will require $500 million in new capital in order to compete in the future."

On the other hand, rural MLAs say their constituents still support the ATB. "They were very concerned a year ago about the potential for political influence on the loan portfolio," says Lethbridge East Liberal MLA Ken Nicol of his voters. "They're waiting to see if the new structure is really going to keep politics out, but if there are no new rumours for the next three to five years, they'll feel very comfortable with the status quo." Mr. Nicol adds that if Alberta were forced to give up the ATB, his constituents would strongly favor a share offering to depositors.

Strangely enough, there are probably a few people in the Klein administration who are secretly hoping the Rahall suit succeeds. The malodorous recent history of the ATB is a political embarrassment to the Tories, and it undoubtedly offends the less-government, pro-privatization sensibilities of conservative ideologues in cabinet. Moreover, last week's announcement of the proposed merger between the Royal Bank of Canada and the Bank of Montreal is expected to set off a feeding frenzy of mergers and acquisitions in the banking sector as all the big players try to get bigger. Under these circumstances, the ATB's assets in booming Alberta would fetch a premium price.

Treasury Branches spokesman Darlene Dickinson says the ATB is currently deciding how it will participate in and respond to the Rahall suit. She directed questions about the ATB's constitutionality to Alberta Justice, whose spokesperson, Peter Tadman, suggested "You should probably phone Darlene Dickinson about that."

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