Jim Prentice: A Risk-averse Banker Meets the Black Swan

Two energy company executives made a wager. The one who bet that Jim Prentice would never give up $3 million a year in exchange for power lost. True story.

Mr Prentice

On May 16, 2014, Mr Prentice entered the Progressive Conservative leadership race. After two months of dancing on the edge, he managed to satisfy himself that he had a shot at winning. His funding strategy is  ready to roll, his four campaign co-chairs are assembled and he’s been endorsed by 18 MLAs so far.

Jobs Minister Lukaszuk made an interesting point with respect to the 18 MLAs eager to prove their loyalty—none of them has a clue what Mr Prentice stands for.

Mr Prentice’s policies

As much as it pains Ms Soapbox to say so, she agrees with Mr Lukaszuk. Mr Prentice hasn’t said a word about his policies, likely because they won’t be finished, even in draft form, until this weekend.

While the 18 MLAs may be content to endorse Mr Prentice on blind faith, more discerning Alberta voters should read some of the speeches Mr Prentice made while he was senior executive vice president and vice chair of the Canadian Imperial Bank of Commerce—particularly since all of these speeches concern the energy industry.

Mr Prentice’s policy is simple: rip, strip and ship—with a dash of “social contract” thrown in on the side.

Here’s an example.  Last October Mr Prentice spoke at the CIBC Global Investors Forum. He said he supports the free market (“Free markets produce impressive results when they are allowed to work”) but managed to argue all the same for greater regulatory control of Canadian/US energy policy. He’d like “full-on harmonization” of the transportation grid, rail and aviation industries and wants to stop US state governments from creating their own renewables standards and low-carbon fuel standards because they shut out Canadian hydro and bitumen.

Mr Prentice acknowledged that Canada and the US should be environmental leaders but was content to fall back on industry innovations and the existing environmental regime to get there.  Even the petulant prime minister recognizes that Canada needs to step up its environmental game if it hopes to make Canadian bitumen more acceptable to American and European markets.  

Mr Prentice stressed the need to open up Asian markets (this as a “national imperative”) but failed to consider upgrading in Alberta or elsewhere in Canada in order to create jobs and reduce the opposition to raw bitumen from the US and Europe.

Stress testing

Mr Prentice wants Alberta (and Canada) to be an energy superpower. However he’s missed the forest for the trees. This is not surprising given Mr Prentice’s recent experience as a banker.

Banks are in the business of identifying, managing and controlling risk. There’s not much point in lending someone money if they can’t pay it back with interest.     

CIBC manages risk by running daily “stress test scenarios” to figure out what impact certain events would have on the bank’s financial wellbeing. Some events like 9/11 or the sub-prime/Lehman Bros collapse have a negative impact. Others like the US debt default or the growth of Chinese economy have a positive effect.

Not one of the bank’s 12 scenarios focuses on the energy industry. Given the importance of energy to the Canadian economy this is puzzling…until you remember the black swan.

The Black Swan

The premise of Taleb’s book, The Black Swan, is that while extreme events are rare, they do happen. And when they do, all hell breaks loose. Examples of Black Swan events are 9/11 and the rise of the internet, particularly Google. The energy industry, like international banking, is not immune from Black Swan events

For example, if the Alberta Energy Regulator determines that the bitumen leaks at CNRL’s Primrose site were not caused by wellbore failure but a geological condition exacerbated by fracking, the future of fracking is in serious jeopardy.

On a more dramatic scale, concerns about the impact of climate change have filtered into the minds of investment bankers who’ve asked all the major energy companies to describe how they would respond to regulations that reduce emissions levels to the point that their oil and coal deposits become stranded assets.**If the banks are not satisfied with the energy companies’ response, the cost of running their operations will skyrocket.

No longer business as usual

Mr Prentice’s speeches indicate that he has fallen prey to the “business as usual” outlook—it  reflects an optimistic bias, sees familiar patterns and is blind to the unexpected. ***

While the energy industry may be forgiven for ignoring the grim possibility that the gravy train may leave the station;  the future Premier of Alberta cannot assume that Alberta’s prosperity will continue forever if he can just find a way to ram a pipeline to the west coast, another to the Gulf of Mexico and a third to New Brunswick.

Albertans deserve a premier with vision who can transform a tired old government into one capable of creating a diverse economy capable of supporting investments in people and infrastructure through the boom and bust of the energy cycle.

It’s the only way to ensure that when the next black swan drifts by Alberta won’t go into a tailspin.

*2013 Annual Report starting at p 63

** http://www.bloomberg.com/news/2013-10-24/investor-group-presses-oil-companies-on-unburnable-carbon-.html



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24 Responses to Jim Prentice: A Risk-averse Banker Meets the Black Swan

  1. berryfarmer says:

    I’m concerned when you say “he has his funding in place already.” The new Elections Alberta rules prohibit fundraising until a candidates papers have been officially accepted by Elections Alberta. If he picked up his papers Wednesday and hasn’t submitted them with 500 signatures yet, he cannot fund raise. We went through all this with Greg Clark. We were the first party to have a leadership contest under the new rules. Even an old farmer like me could understand them. Why can’t big deal banker get it straight?

  2. Will, you make a good point…I used sloppy language. What I meant to say was that Mr Prentice’s funding machine is ready to go. This is based on comments made by Don Braid at the recent Spur event when he said Mr Prentice wanted to ensure he could raise $10 million for his leadership race and the election plus comments in the Herald to the effect that Mr Prentice sold half the tickets for the PC leaders dinner–an indication of his “financial muscle”. I changed the sentence to avoid the implication that Mr Prentice violated Alberta’s fundraising rules. That was not my intention. Thank you for pointing it out.

  3. Jim Lees says:

    This may sound far-fetched, but I wonder if he would change his philosophy as Leader of the Official Opposition? That role and his
    apparent philosophy don’t appear to be compatible. I wonder if that scenario is one he is giving serious thought to…..

    • Jim, what an intriguing scenario. It’s hard to figure out what Mr Prentice is up to. Everyone assumes that he wants the prime minister’s job and is simply using this as a stepping stone to get back into federal politics. You’d think he’s considered the possibility that it all goes pear shaped and he goes down in history as the man who led the PCs into the opposition and then annihilation (how’s that for a Black Swan event!). In any event everything he’s said in the press and in speeches demonstrates a desire to develop the oilsands as quickly as possible. He’s not a proponent of the Peter Lougheed measured-development strategy.

  4. While we’re on the topic of getting the facts straight, I checked CIBC’s filings on Sedar for 2013. They indicate that the top 5 CIBC executives received between $2.5 million to $10 million in compensation. Mr Prentice was not listed in the top 5 which means that the energy executive who bet Mr Prentice wouldn’t give up his pay package for a shot at the premier’s job was wrong about Mr Prentice’s compensation. Having said that, I wouldn’t be surprised if Mr Prentice received something around the $2 million mark given where he was in the CIBC pecking order.

  5. Julie Ali says:

    Hi Susan,

    Mr. Prentice seems to be the Premier-in-waiting.
    I also don’t like the fact that everyone has pretty much crowned the next King of the oil monarchy without any sort of consultation with the citizens. Don’t grassroots supporters count? I thought Mr. Hancock had just been yapping about the failure of the party to listen to the grassroots folks and here we have no mention of what the ordinary Tory voters think about the new King.

    And what about the other guy in the race? No one seems to think that Mr. McIver is going to win. Why not?
    Hopefully Mr. Lukaskuk will run and it will be even more amusing than it normally is when the Tories run a leadership race in Alberta. Why is it amusing? Well, I guess because we no longer care who leads this party and they do. Most Tory voters have stopped listening to this party because we understand that this party no longer represents citizens (if they ever represented citizens).

    The sad part of this entire mockery of democracy is that we have so many bright folks in Canada and in Alberta who would do a fabulous job in leadership positions like this and they aren’t in these positions. Why not? What is it about politics that ensures that good men and women do not enter public service of the most visible and demanding kind?

    Why are we left with the worst of the best in political parties? Can it be that you have to be dispassionate, cunning, manipulative and dark to get to the top? I hope not. I sure wish though I had evidence that we have some leaders with character, courage and compassion around.

    Instead, we seem to have people who lie, lack integrity and simply promise what they have no intention of giving to the people in terms of legislation, policies, services and supports. It may be that these people start out well but disintegrate in their jobs. Certainly the feeding frenzy with the Redford was an alarming indication to this voter that these folks are piranhas even with their own.

    I do think we have kept the current hires in their jobs too long. If we can’t turf the entire Tory party, it is certainly time to winnow them down to a small group of workers. I don’t even think they should form the official opposition but certainly if we have five Tory members left in the next provincial election I think this would be very productive. Such a small residue would provide both a a salutary lesson in democracy to past employees and remind the new hires of the Wildrosies what happens when citizens wake up. Albertans may use their brains and keep the Wildrosies as a minority government but it’s hard to say. Albertans tend to vote in massive swings and the pendulum goes only towards the Tory type parties. I don’t know why they think the Liberals and the NDP are communists. I mean haven’t the Tories proved to us who the real communists are?

    • Julie, I’m with you on the need for a real leadership race. I really hope McIver stays in the race and Lukaszuk decides to run. The fact that so many MLAs stampeded into the Prentice camp before he declared his intention to run smacks of desperation. MLA George Rogers says he’s backing Prentice because he’s the “strongest candidate.” Why? Prentice had a decent record under Harper in Indian & Northern Affairs, I’m not sure what he accomplished in Industry, he seemed to be making some headway in Environment and then quit. What worries me is that since he became a bank executive he sounds like an energy industry spokesman. The industry has more than enough spokesmen exerting influence on our government; the last thing we need is to have one in the premier’s office.

    • berryfarmer says:

      Julie, I thoroughly enjoyed reading your response. It captures so much of what so many of us feel.

  6. .. exceptional article.. and insightful resonant comments..

    For quite a while I’ve been pointing at the Black Swans circling over Alberttawa
    and wondering what Marshall McLuhan would make, of the sick mealy frauds ‘in charge’

    Soon we’ll hear ‘Paramountcy’ slipping greasily from Harper’s lips,
    crying for his steel pipes.. while clearing the caribou & fish & scary native folks in his way
    until a nation steps up.. and says .. ‘Just Stop.. Now Go Away .. Don’t Come Back ..’

    Sideshow politikal freeks like Jason Kenney, Tony Clement.. McKay
    or the less tainted or toxic Prentice will stoop to hear the faint ‘legacy’ wail of Harper
    ‘Paramountcy .. Paramount.. urg.. jobs.. my royal legacy.. pipelines.. the Ekonomy
    ‘….. Paramountcy …..’ ahh .. eh.. glurp..’

    Satirists & historians will make hay with this pompous ignorant narcissist ..
    while the rest of the nation, for generations will try to clean after the disaster.. & plague

    The Black Swan Event .. is .. Stephen Harper
    the venomous Party cowards backing his dark gospel
    Like a plague ship from another planet
    cursing our shores, our lands, our people

    Spawning & enabling the Christy Clarks, Rob Fords, Calandras, Tim Hudaks,
    Duffys, Wrights, Allison Redfords, Gail Sheas, Joe Olivers, Del Mastros,
    Rob Anders…. not a single exemplar among them.. losers all

    • Stephen Harper = Black Swan event. It fits the definition of “black swan” perfectly…
      …an unexpected event (read Harperland sheer luck and brute force made him PM)
      …of large magnitude and consequence (the list is too long to set out here)
      …and their dominant role in history (the damage Harper has caused to democracy and our sense of self as Canadians is mind boggling)

  7. Phil Elder says:

    A shrewd assessment of the latest “pig in a poke” fad for desperate Alberta Tories. When all else fails, fall back on the status quo.

    • Phil, the Wildrose and Blue Tories are worried that Prentice is too “red”. Nothing could be further from the truth. I hope the “red” Tories figure that out before it’s too late.

  8. Carlos Beca says:

    Susan this is an excellent post but this week I have to say that you missed an extraordinarily important point and that is that Mr. Prentice is the best premier to do what he is supposed to be doing in Alberta. Open the doors to more exploration and more money out of the province as fast as possible. You forgot that the Premier of this province is selected by the oil businesses. Furthermore if you think that he gave up a 3 million dollar job for power, think again. He will have that money anyway even if in the long term. It is just a question of adjusting bank accounts. I am sure Mr. Prentice has all the necessary know how as far as offshore bank accounts are concerned. If Alison Redford can hide from us the plans to build a top class condo, imagine what else is not going on in this province that we know nothing about.
    Prentice does not need any social experience or anything else other than what he knows as a banker and that is take from the citizens as much as one can to fatten their coffers. The banking and the oild industry will take care of him and Danielle Smith.

    • Carlos, I received a notice from the Calgary Chamber of Commerce promoting a Jim Prentice event. Mr Prentice will roll out his vision for Alberta this Friday. As much as I’d like to hear his vision for the future the $99 ticket price gave me pause. The event will be packed with industry representatives. We’ve only just begun and already it feels like those who are prepared to pay will get a sneak preview of his vision while the rest of Alberta can wait until he’s good and ready to tell us.
      Here’s an interesting article on Jim Prentice “Big Oil’s kindred spirit”. http://business.financialpost.com/2014/05/16/big-oils-kindred-spirit-jim-prentice-must-now-convince-ordinary-albertans/?__lsa=f229-f470

      • Carlos Beca says:

        Susan, I am sure that the oil industry will be there and $99. For corporate Calgary it is nothing but it is just high enough to keep the general public away. It reminds me of that NBA manager – ‘Do not bring blacks to watch the game’ – sounds similar.
        This article is very moderate. I would suggest you read this
        and this one
        I would say that any politician that Lorne Gunter from the Edmonton Sun and Alicia Corbella from the Calgary Herald support is someone I do not want to know about.
        I have no doubts he has big oil and bank money behind him and I am sure he is the Oil industry pick of the season.
        Well considering that the revolution is on although in the cables and servers of the Internet I would say that if he turns out to be who I suspect he is, he will be gone or he will be the last breath of the PC party. Mr. Prentice as Alison Redford before him still do not understand that their status quo type of politics can no longer survive.

      • Carlos, excellent links, especially the Stuart Thomson article “What’s so great about Jim Prentice”. I’ve talked to a few people who have expressed the same view about Mr Prentice’s achievements as MP. Admittedly, Indian Affairs and Environment were not easy portfolios under Harper, but the PC party appears to have gotten carried away with the “leadership” aspect that Lorne Gunter is blathering on about.

  9. carlosbeca says:

    Susan, I am sure that the oil industry will be there and $99. For corporate Calgary it is nothing but it is just high enough to keep the general public away. It reminds me of that NBA manager – ‘Do not bring blacks to watch the game’ – sounds similar.
    This article is very moderate. I would suggest you read this
    and this one
    I would say that any politician that Lorne Gunter from the Edmonton Sun and Alicia Corbella from the Calgary Herald support is someone I do not want to know about.
    I have no doubts he has big oil and bank money behind him and I am sure he is the Oil industry pick of the season.
    Well considering that the revolution is on although in the cables and servers of the Internet I would say that if he turns out to be who I suspect he is, he will be gone or he will be the last breath of the PC party. Mr. Prentice as Alison Redford before him still do not understand that their status quo type of politics can no longer survive.

  10. carlosbeca says:

    Susan I noticed that my comment is being moderated. If you feel uncomfortable with my posts please do let me know and I will stop them right away. It is not a problem at all and I do not want in any way be a pest to your blog. I really do not need to.
    Thank you

    • Carlos, I just checked on the comments. Your comments were moderated only because they included links to other articles. The wordpress program does that sometimes (I don’t know why). You’re not a pest. I welcome your view point and the articles that you attach. Please feel free to continue to do so.

  11. Carlos Beca says:

    Well Susan Mr. Prentice said the usual – how much he loves the province and all of us and how things are going to change…… etc. I use to give these people the benefit of the doubt, now I can barely wait for next election and see if there is a way to get rid of them.
    In order to fix politics there will have to be a real big shift in behaviour and concepts and I really do not see this happening with the PCs. Now that Mr. Lukaszuk got involved it is even worse. I could not believe his words on how he had to do what he was told type thing….blah blah blah. Gosh he just did not have a choice other than implementing what wonderland princess had in mind. These are the same people that keep telling us that we always have a choice. The tough conservatives that love competition in MacDonalds and even bring in cheap and intimidated foreign workers but cannot wait for the easy entitlements for themselves. It is called the elite socialism. Share at the top and beat the weak to a pulp.
    Same old same old. I think we are reaching the tipping point though and so Mr. Prentice will have to implement some real changes so that the voters get a little softer and keep voting them in. I bet he will start with the planes. Maybe will sell one of them so that it sounds like real change.

    • Carlos, given all the hoopla about Mr Prentice’s “vision” for Alberta I expected him to come out with something better than this. As they say on the tee shirts “Been there, done that”. Disgruntled PCs don’t have much to hold on to if all they’re getting from him is “Trust me, I’m different.” But like you say Albertans have finally reached the tipping point and it might not work this time. Here’s a wild scenario…now that Mr Lukaszuk entered the race, there’s a chance that the leadership race will go two rounds, the guy who doesn’t get the most votes will drop off and given how screwy Alberta politics is, this guy could be…wait for it…Mr Prentice, leaving Mr McIver and Mr Lukaszuk (representing the north and the south) to duke it out on Sept 20. Wouldn’t that be wild!

      • Carlos Beca says:

        I agree Susan
        What about showing some difference rather than saying that he is the real deal. What about what he has in mind for the screwed up budget process? what about his vision on education? What about his vision on health care? Does he believe in privatization?
        I would be happy to know if he believes in anything at all.
        This idea that they cannot reveal their visions because they can either loose the vote or pass some good ideas to the opposition is just another old excuse to have no vision at all. The objective is the throne and the planes and the entitlements and nothing else as far as I am concerned. All those entitlements should be abolished anyway. We are not a corporation, contrary to what they think. We are a government that should treat their employees with respect and fairness but not make emperors out of them. It is time that the brains kick in again rather than relying on the market to provide them with what the so called competition provides or like they like to emphasize ‘What the market can bare’. Well guess what as a citizen I care if I get an evolving democracy and a sustainable good quality uncorrupt government. If Mr. Prentice wants money then stay in the private sector because apparently they do not mind to lavish them with it, whether or not they deserve it – it is called market sense which if one cares to check a bit deeper, means legalized robbery. We all saw lots of it in 2008, at that time they could not hide it.

      • carlosbeca says:

        I forgot to mention that your election scenario is very possible and if it happens and Lukaszuk wins I will move to Tibete and become a monk.

      • Carlos, I’ll go with you! 🙂

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