That age-old story of too much house and too much leverage

The kids and I did a day trip yesterday to Casa Loma in Toronto. I had not been in years and now that they are almost 9 and 10 they were able to take in a good deal of the historic story. I was reminded again of the epic nature of human behaviour, cycles and money.
Sir Henry Pellatt, the dreamer behind the “castle”, left his studies at Upper Canada College when he was seventeen to pursue a career in commerce in the family business. By the age of 23 he became a full partner in his father's stock brokerage firm, from that time on known as Pellatt and Pellatt.
In the same year that Thomas Edison developed steam-generated electricity, Sir Henry realized that supplying electricity could be extremely profitable. He founded the Toronto Electric Light Company in 1883. By the time he was thirty, the Toronto Electric Light Company enjoyed a monopoly on the supply of street lighting to the city. Copious amounts of easy money were now flowing to Sir Henry.
In 1892 we are told by his bio, Pellatt's father retired, “enabling Sir Henry to invest with more risk.” Cue the red flags.
“By 1901, Sir Henry was chairman of 21 companies with interests in mining, insurance, land and electricity. In 1902, he and his partners won the rights to build the first Canadian hydro-generating plant at Niagara Falls. He was knighted in 1905 for his military service with the Queen's Own Rifles.”
Surely he was now too big to fail?
His bio goes on: “Pellatt's Midas touch continued through most of his business life. In 1911, armed with a fortune of $17 million, Pellatt drew up plans to build his dream castle with Canadian architect E. J. Lennox.”
The plot thickened. Those of us building “dream homes” beware. The castle took more than 3 years and 3 million dollars to complete. It had a live-in staff of 40 and took more than $50,000 a year (in 1914!) for maintenance and up-keep. At the time the average house in Toronto was valued at $2,500. The Pellatt’s lived large in the castle for 9 lavish years. But cycles were changing and Pellatt was unprepared.
The bio continues: “To finance expansion, Pellatt and Pellatt went further and further into debt. The one sure source of income from the monopoly of electrical power vanished when political decisions allowed for public ownership of electricity. In a futile attempt to restore his wealth, Sir Henry turned to land speculation.”
Unbeknownst to Sir Henry, now he had that quintessential recipe for financial disaster: years of easy income engender lavish spending; continued in the face of declining income; increasing debt; intensified risk-seeking and financial speculation.
Sir Henry did not take into account the effects of World War I and the secular shifts that were taking place in markets and investor sentiment. During the war Canadians put their money into war bonds, not homes. After the war the economy slumped, tilting Pellatt and Pellatt into bankruptcy. The company owed the Home Bank of Canada $1.7 million – or in today's terms $20 million.
During the preceding good times, the banks had wildly over-levered themselves. Now they began to crumble into bankruptcy along with their biggest clients. Several bank heads were arrested and taken away from their mansions in handcuffs. Sound very familiar?
“With his stock worthless and his business debts out of control, Sir Henry was forced to auction off his prized possessions for a fraction of their worth and to abandon his dream of a noble castle.”
In the end, we are told, Sir Henry died penniless. Although he undoubtedly also left a legacy of great philanthropy and charitable works. Perhaps most importantly, I think, Sir Henry left the rest of us an incredible, enduring, allegory of human behaviour and money. His story can inspire us to reach for our dreams. And he serves as a wonderful inverse mentor about what not to do.
“So?” I asked my kids as we walked back to the Subway. “What’s the moral of Sir Henry’s story do you think?” They both chimed in: “Don’t build houses that are too big. Don’t spend too much even if you are rich. And don’t borrow lots of money.”
Lessons we would all do well to live by. We are grateful to Sir Henry for the reminder. If you get the chance, do visit Casa Loma. Sit there in his garden and take it all in.

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