Spinning more and more corporate plates, cheered on by dealmakers, Paul Reichmann stumbled
By Peter Foster
Paul Reichmann was once the reigning genius not merely of Canadian business but of the global real estate industry. Now he is reportedly about to lose his stake in Canary Wharf, the spectacular London development whose construction sunk Olympia & York, the company he controlled, in 1991. His 8.45% share was apparently pledged as collateral for a loan that has been called.
There is something sad, even pathetic, that eighteen years after O&Y went out with a bang, Paul Reichmann will finally be forced out of its crown jewel, although likely not with a whimper. Mr. Reichmann should perhaps have bowed out gracefully long ago. In the end he appears like nothing so much as real estate’s answer to Monty Python’s limbless Black Knight (“It’s just a flesh wound”) who simply didn’t know when to give up.
Canary Wharf was one of the greatest development gambles in real estate history. Envisioned as a “third business district” for London, it would be a mini-Manhattan built on a derelict stretch of the Thames known as the Isle of Dogs. But as the project rose, so it took Paul Reichmann, and his family’s fortune, down.
In some ways, O&Y’s crash was inevitable, not so much because of the cyclical nature of real estate, but because of the character of Mr. Reichmann. He was virtually deified in the financial community, and that was a problem. Whom the Gods wish to destroy, they first give access to unlimited credit. Still, the credit had a sound basis.
What first put it O&Y on the global development map was Toronto’s First Canadian Place. That white marble monolith was followed by “the deal of the century,” acquiring a huge swathe of New York property at the bottom of the market in 1977. His next venture was the magnificent World Trade Center in Lower Manhattan. Meanwhile his ambitions within Canada had moved beyond real estate into complex corporate conglomeration. He took over Gulf Canada. He seized control of Abitibi-Price. He made a run at Hiram Walker.
The growing size and scope of the O&Y empire — and its constant internal reorganization -— raised questions about the logic of it all, but very few people thought to ask them.
Spinning more and more corporate plates, and cheered on by dealmakers, Mr. Reichmann eventually began to stumble. Canary Wharf provided the coup de grace. The scheme faced enormous challenges both in terms of access and attracting institutions from the iconic Square Mile. The 1991 recession bankrupted it.
The Reichmanns have been good to me. They provided me with the material for two books. The first, The Master Builders, was published in 1987, when the Reichmann mystique was approaching its height. However, I dared then to express an unfashionable skepticism. The book ended with a chapter titled “The Paul Principle,” which suggested that, by analogy to the Peter Principle, Paul Reichmann would be elevated to the “level of his incompetence,” only in this case by his bankers.
I came to this conclusion because I had seen it before. I had previously written a book on Dome Petroleum, which was once to the Alberta oil patch what Mr. Reichmann would become to real estate, a Canadian “champion” and a corporate disaster.
The parallels seemed clear. Just as bankers had elbowed each other out of the way to lend to Dome, so they were now opening the vaults to Paul Reichmann with a woeful absence of due diligence. They were exhibiting the kind of bankerly herd mentality which was significantly behind previous crises (Third World debt) and subsequent ones (the subprime debacle). Indeed, Paul Reichmann’s personality was a little like complex derivatives, everybody bought it but nobody really understood it.
The amazing thing about Mr. Reichmann, however, was that after the crash he showed no inclination to disappear. There was something almost embarrassing about his obsession with trying to regain control of Canary Wharf from the very bankers who had trusted him too much in the first place. Nevertheless, he found partners, including a prominent Saudi prince, and three years after O&Y went into receivership Mr. Reichmann was back in control of Canary Wharf, although he only had a minority interest. Four years later, Canary Wharf was taken public. However, in 2004 control was seized by Songbird Estates, a consortium of Chinese, Qatari and American investors. Mr. Reichmann, after failing to mount a rival offer, tenaciously held on to his stake.
The global financial meltdown has presented as big a blow to Canary Wharf as the 1991 recession. The project’s value reportedly dived 30% last year, triggering lending covenants, which seem to have brought Paul Reichmann’s dream to an end.
Mr. Reichmann, now in his late seventies, is not a poor man. The Reichmann family is nowhere near as prominent as it once was in Canadian business, but the next generation — chips off the old block — regained control of First Canadian Place and have other real estate interests. They should perhaps hope that nobody quite of Uncle Paul’s stature appears again. His genius and cleverness, like collateralized debt obligations and credit default swaps, ultimately proved a very dangerous thing.
National Post (CanWest)
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