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So you want to take on the Big Banks?

How far did Ned Goodman have to go to find the inspiration for his new bank? To the kitchen table.

"My wife owns some Dynamic mutual funds, and for purposes of her own she went to her bank [for a loan]," says Mr. Goodman, the Toronto investor who founded Dundee Corp., which controls Dynamic and other financial and real estate assets. The banker asked what would secure the loan; she offered her funds as collateral.

He refused, then delivered this zinger: "If you had a Royal Bank fund, we'd do it."

Dirty, rotten big banks. They're always using their muscle to drive their competitors into the ground. Back in the day when Mr. Goodman was in short pants, Canada had sizable trust companies, consumer finance firms, life insurers, investment managers. The Big Five carved up the trust companies (after some of them committed financial suicide, admittedly), grabbed much of the mortgage business and now own the Canadian consumer. Only the feds have stopped them from dominating life insurance, too.

Most importantly to Mr. Goodman, they're making ever-deeper inroads into fund management, the Dundee group's most important line of business. From weak sisters a decade ago, the six largest domestic banks have captured about 36 per cent of the $700-billion mutual fund industry and the number keeps rising, no doubt aided by the kind of sharp-elbowed tactics employed by his wife's banker.

"It's a monopoly, it's a cartel, it's an oligopoly," Mr. Goodman says of the Big Six. For him, that's not a new refrain. Rather than trying to beat 'em, he has joined 'em, creating the Dundee Bank of Canada, which this week unwittingly found itself in the middle of the crisis in the Canadian debt market.

The idea of the bank is simple. Its raison d'être is to provide loans to people through their financial advisers, so that the Mrs. Goodmans of the world don't always have to turn to the major banks when they want money. No branches, no fat marketing campaigns, no free iPod for opening a chequing account.

Like most alternative banks, Dundee must offer higher rates of interest to attract deposits. There's the rub: At a time of generally low interest rates, how do you make a buck in banking when you've got to pay your customers 4 per cent? It's tough, even for those who've been at it for a while and are backstopped by far larger institutions.

Take the case of ING Bank of Canada, which has been operating in Canada for a decade (and is owned by ING Groep, the massive financial services company based in the Netherlands. ING is easily one of the most successful foreign competitors in consumer banking. It has a deposit base of $15-billion in Canada. It has developed a recognizable brand here, despite spending almost nothing on real estate because it has no branches.

Care to guess how much this fine institution has earned in the past 10 fiscal years? About $233-million by my calculations, including five years of startup losses. In other words, Royal Bank of Canada made more money in three weeks this spring than ING has made in the past decade. Even today, the results are ho-hum: In 2006, ING made about $70-million - not much of a return for a bank that began the year with well over $1-billion in equity.

ING, at least, has been able to take those deposits and turn them into residential mortgages, a profitable (and, in Canada, fairly low-risk) part of the lending business. But the major banks have figured out how to curtail the growth of new players like ING without beating them on rates.

And the competition doesn't always play nice, as Mr. Goodman might say, and as he found out again recently. His new bank has taken in $2-billion in deposits in less than a year. The money has been coming in so fast that Dundee hasn't been able to deploy very much of it into mortgages or other loans. So a large chunk - about $800-million - was parked in commercial paper, short-term debt that supposedly carries almost no risk. You probably know what happened next: Some of the commercial paper being sold in Canada was revealed to be riskier than believed, since it was backed by high-risk mortgages to Americans.

"Not our problem," said most of the big banks, and the short-term debt market lurched into crisis. On Bay Street, people began to whisper, or chuckle, about Dundee's massive exposure to the stuff - what if Ned's new bank ran into trouble? - and the stock price of DundeeWealth, the financial services group that owns the bank, dropped 19 per cent in eight days. The company defused the problem, but at a cost: Two Goodman-controlled public companies are now stuck owning some $400-million worth of asset-backed commercial paper, the value of which is unclear.

Welcome to the bankers' world, Mr. Goodman. How are you enjoying it so far?

ddecloet@globeandmail.com

© 2007 The Globe and Mail. All rights reserved.

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