Too big to prosecute, our bankers

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Re: absolute power corrupts absolutely, Our Canadian Banks

Postby admin » Tue Jan 27, 2009 11:33 am

Royal Bank of Canada Sued Over Failed Hedge Funds (Update1)

An earlier suit was withdrawn to seek a private settlement,
but was refiled when a deal could not be reached, a lawyer said.
By Cynthia Cotts

Jan. 26 (Bloomberg) -- Royal Bank of Canada, the country’s biggest bank by assets, was sued by investors in Olympus United Funds who claim they lost more than $90 million in the funds’ collapse.

Royal Bank, based in Toronto, “secretly managed” the funds, according to a complaint filed Jan. 23 in U.S. District Court in Manhattan. The funds’ parent company Norshield Financial Group filed for receivership in June 2005 amid probes by securities regulators.

“In its dealings and relationships with Norshield, Royal Bank of Canada assumed control of investments, exercised discretion in key areas and thus became liable for my clients’ losses,” Lee Squitieri, a lawyer for the investors, said in an interview.

Royal Bank officials allegedly overstated the funds’ assets, breached their fiduciary duties to investors, committed fraud and misrepresented material facts, the investors said in the complaint. They seek unspecified damages.

“Royal Bank of Canada believes the lawsuit is without merit and will vigorously defend against the claims,” Jackie Braden, a spokeswoman for the bank, said in a statement today.

Among the investors suing are Balanced Return Fund Ltd., Mendota Capital and Commax Investors Services Ltd.

Squitieri filed an identical lawsuit last May, he said. The parties agreed to resolve the matter privately, after which he withdrew the suit with the option to refile it later, he said.

“We did not reach a satisfactory resolution,” Squitieri said.

The complaint doesn’t identify individuals responsible for the funds because investors can obtain complete relief without doing so, according to the lawyer.

The case is Balanced Return Fund v. Royal Bank, 09-cv-695, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Cynthia Cotts in New York at
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Postby admin » Wed Nov 26, 2008 2:05 pm

RBC pays US$10.98 million to settle US mortgage fraud probe
By Jonathan Stempel

Wed Nov 26, 2008 3:01am EST

NEW YORK (Reuters) - A Royal Bank of Canada (RY.TO: Quote, Profile, Research, Stock Buzz) mortgage unit will pay $10.98 million to settle charges it gave the U.S. government false information about borrowers who took out 219 home loans that ended up in foreclosure.

RBC Mortgage Co agreed to the payment to avoid litigation but denied wrongdoing, according to Patrick Fitzgerald, the U.S. attorney in Chicago, who announced the settlement.

Investigators accused RBC of knowing that 219 loans made in the Rockford and Freeport, Illinois, areas between February 2001 and April 2004 were based on false or fraudulent statements about the borrowers' credit, employment or sources of equity.

They said the lender also submitted false information about the loans to the U.S. Department of Housing and Urban Development.

"Mortgage lenders should know that they must maintain the integrity of the lending process so that federally insured mortgages will be available to worthy borrowers and not based on fraud and deceit," Fitzgerald said in a statement.

RBC spokesman Kevin Foster said the lender has cooperated fully, and takes any allegation of employee misconduct very seriously. He also said RBC sold the unit where the alleged misconduct took place in 2005.

The civil case is related to a separate federal criminal probe that resulted in the convictions of 25 defendants, including three RBC Mortgage officers, Fitzgerald said.

Tuesday's settlement includes payments of about $10.7 million to cover the charges, and $264,000 for other claims stemming from a HUD audit of loans that RBC was accused of improperly certifying as current.

(Reporting by Jonathan Stempel, editing by Matthew Lewis, Richard Chang)
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Postby admin » Sat Nov 15, 2008 1:08 pm

Canada’s largest bank gives OBSI the kissoff and spits on clients

The Royal Bank of Canada (RBC) has announced the introduction of a new independent dispute resolution process, effective November 1, 2008. RBC has retained the services of Toronto-based ADR Chambers, an alternate dispute resolution firm, replacing OBSI. RBC had taken strong objection to a number of positive proposed OBSI mandate changes in a Feb. 1, 2008 Comment letter (available on the OBSI website). RBC asserts that it expects the new appeal process will result in quicker response to RBC banking clients' concerns that remain unresolved after review by the RBC Ombudsman. ADR members are all independent contractors who contract individually with the clients through ADR Chambers Inc., a for-profit corporation which provides administrative services to the members and the clients to assist in the delivery of the dispute resolution services. ADR fees will be paid directly by RBC which potentially could give rise to a conflict-of interest ( a la bond rating agencies). The time line goal on a best efforts is 180 days or less but no clear automatic review if this time is exceeded. Their connection to FCAC, law enforcement and OSFI is not yet clear to us. Investment complaints will continue to be serviced by OBSI. HYPERLINK "" Terms of reference at HYPERLINK ""

Many of the terms of reference are similar to OBSI and the dollar limit is identical-$350,000. But there are some huge disadvantages to using ADR’s services compared to OBSI:
ADR is not committed to following ISO guidelines for external dispute resolution entities
The 2 year Ontario limitations clock is not stopped as is the case with OBSI
ADR will not take on a case until after RBC has self-declared they have completed the process, regardless of any level of reasonableness [OBSI standard is now 90  days]
There is no News Release issued should RBC not accept a recommendation as is the case with OBSI
Unlike OBSI , ADR will not formally deal with systemic cases of financial assault but they may raise the issue with RBC
There is no automatic independent review/assessment of ADR operations
Governance is more opaque even than OBSI
According to OBSI’s 2007 Annual Report just 25 % of banking disputes recommended compensation compared to 61 % of investment cases. Only 7 RBC banking cases were referred to OBSI in 2007. Similar to the current framework with OBSI, the ADR Terms of Reference provide that where a complaint involves an area that falls within their mandate and that of another Ombuds service, ADR will, we are told, cooperate with that service to respond to the complaint. It is our understanding that the all-important process that will be used to engage clients [ referred to as complainants] will be client –friendly as is the case with OBSI and not legalistic as is the case with their work on IIROC arbitrations. Overall, a giant step backward for banking financial consumers. If other banks also go their own way, OBSI could implode and a Government legislated Ombuds service put in place.

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Postby admin » Fri Nov 14, 2008 11:31 am

information that's in the public domain Re: Michael Wilson

1. Michael Wilson was our GOC Minister of Finance 1984-1991

2. Michael Wilson was Chairman of UBS Canada from 2001-2006

3. Michael Wilson was appointed by PM Stephen Harper as
our Canadian Ambassador to the United States of America
on March 13, 2006 — a position that Michael Wilson still holds !!

Swiss banking's $5.6-billion man
Accused by the United States of helping wealthy Americans hide their fortunes from the IRS, former UBS executive also led a covert team in Canada that funnelled mountains of cash offshore

Raoul Weil was indicted in a U.S. tax evasion crackdown this week.


From Friday's Globe and Mail

November 14, 2008 at 2:00 AM EST

A senior Swiss banker who was charged two days ago by United States prosecutors with dispatching bankers to help rich Americans evade taxes also oversaw a covert team in Canada that funnelled as much as $5.6-billion offshore, The Globe and Mail has learned.

Raoul Weil, former head of wealth management for Swiss financial giant UBS, has been accused by the U.S. Department of Justice of equipping a team of bankers with encrypted computers and countersurveillance training in an effort to conceal $20-billion from the Internal Revenue Service.

Internal UBS records, as well as interviews with former UBS officials, show Mr. Weil was in charge of a similar operation in Canada. A team of a dozen or so bankers, known internally in UBS's Zurich and Geneva offices as the “Canada Desk,” made several trips a year to UBS-sponsored events, such as chamber orchestra concerts, and encouraged the country's wealthy elites to move their money to Switzerland.

UBS operates a legitimate, licensed Canadian subsidiary, which manages the multimillion-dollar portfolios of many well-to-do clients, but officials from the subsidiary say the members of the Canada Desk never set foot in its offices in Toronto, Montreal, Calgary and Vancouver.

There is so much secrecy surrounding the Canada Desk, which has been led by a Zurich-based banker named Edith Roellin, that many former directors said they had never heard of the group.

“It was not talked about. It was never mentioned. I didn't really even know they existed,” said Fred Ladly, a former director of the Canadian subsidiary's wealth-management division for about 10 years. “I think I could say this for all the other members. If I knew something like that was going on, I'd quit.”

Another former official of the licensed business said the subsidiary kept a “distance” from Ms. Roellin and her team.

“From a compliance and governance perspective, UBS Canada did not participate nor know of those assets,” said the former official, who declined to be named.

Although their dealings in Canada are discreet, Ms. Roellin and her team appear to do significantly better business than UBS's licensed operation. Internal bank balance sheets obtained through the investigations in the United States show that as of October, 2005, the Canada Desk managed $5.6-billion. The licensed business held less than half that – $2.6-billion.

The bank declined to make Ms. Roellin available for an interview, and she did not respond to an e-mail request for comment.

Despite the highly publicized indictment of Mr. Weil, which made the front page of The Wall Street Journal, as well as the arrest of several UBS bankers in countries such as Brazil, the Canadian operation has received little scrutiny from law-enforcement officials. The Canada Revenue Agency has refused to say whether it has launched an investigation.

Records released in the United States show that the bank itself was aware it was on shaky legal ground every time Ms. Roellin and her team touched down at a Canadian airport.

One UBS slideshow, which was released through a U.S. Senate hearing and dated 2003-2005, warns:

“It is not permissible for non-Canadians [sic] banks outside of Canada to seek out
banking relationships with Canadian residents while the residents are in Canada.”
That law is a provision of the Bank Act that Parliament passed more than two decades ago to clamp down on foreign bankers – so-called suitcase bankers – attempting to skirt domestic regulations. As the law stands, a banker who does not work for a licensed subsidiary or branch is not supposed to be in Canada doing business.

“That would be illegal” said Robert MacIntosh, a former president of the Canadian Bankers Association, when he was told about UBS's dual operations. “That's what happens over time. People bend around the rules and forget what the rules were in the first place.”

Some of the bank's defenders argue that Ms. Roellin and her team aren't in violation of the law because UBS has a licensed operation in Canada. However, each UBS Canada official interviewed by The Globe disavowed the conduct of Ms. Roellin and the Canada Desk.

UBS declined to explain why it issued an internal warning about that provision of the Bank Act, but continued to send Swiss bankers to Canada.

“I don't think it makes sense that we go into this thing,” UBS spokesman Serge Steiner said when asked about the contradiction between the bank's internal warning and Ms. Roellin's regular trips to Toronto. “We can't go now and discuss every and each detail on several documents.”

Canada's banking regulator, the Office of the Superintendent of Financial Institutions, is responsible for enforcing the law, but in the past three years it hasn't handed out any formal notices of violation. A spokesman for the regulator said the normal practice is to issue an informal notice, which he said is usually sufficient to get offenders to stop. The agency declined to say how many informal notices it has issued.

No former management executives of UBS's Canadian subsidiary reached by The Globe would speak on the record, but several said there were legitimate reasons why a Canadian would prefer a Swiss UBS banker over someone from the Canadian branches. One former official highlighted the service culture and reputation of Swiss bankers. The former officials also pointed to the expansive pool of mutual funds available through the Swiss offices, which dwarf the securities products available in Canada.

Professor Reuven Avi-Yonah, an international tax expert at the University of Michigan and a member of the board of editors of the Canadian Tax Journal, dismissed those explanations. If enhanced service was the main reason for parking savings in Switzerland, UBS could implement similar service at its Canadian branches, Prof. Avi-Yonah said.

As for mutual-fund options, no one from the Canada Desk is registered with the country's securities commissions, which means it's illegal for them to market securities during their trips.

“By and large, the main reason is bank secrecy and to hide income from Revenue Canada,” Prof. Avi-Yonah said. “When UBS sends their own Swiss people into Canada to solicit the funds that's basically what they're promising.”
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Postby admin » Fri Nov 14, 2008 11:28 am

To: David Andrew

Please confirm that the OBSI took a proactive decision to narrow its mandate to specifically exclude rbc customer complaints.

Please provide me the documentation of the decision of the OBSI to narrow its mandate or to allow its mandate to be narrowed such that it will no longer consider complaints from the Canadian public who are customers of RBC.

Given your much repeated public statements to the effect that you are independent and objective, please square that with this recent RBC decision for me. I do not understand how such a corporation could decide on its own to remove its customers from your purview? Is this unique to RBC or could other companies also arbitrarily decide to exclude their customers from access to the supposedly independent review services of the OBSI?

You are no doubt familiar with the recently announced role of ADR as per its site:

RBC opts to go solo on complaints
November 08, 2008
Ellen Roseman

C arolyne Parfitt, an RBC credit card customer since 1983, couldn't believe how she was treated when she missed a few monthly payments while travelling.
The bank said she would pay a 16.99 per cent rate on her low-rate Visa – up from 11.99 per cent – if she missed two more payments in a row or three in a year.
Parfitt spoke to a customer service supervisor, and was told she'd have to follow the cardholder rules.
So she asked to close her account.
"What other recourse did I have to show my disapproval? Whatever happened to customer retention?
"I'd never let my clients leave in such a fashion, so frustrated and brushed aside after 25 years."
It may be the spillover from the U.S. credit crunch, but Canadian banks are getting tougher with customers.
"We are contacting Ms. Parfitt to apologize for the mishandling of her situation," said Beja Rodeck, an RBC spokesperson I contacted.
Until recently, Parfitt could have appealed to the Ombudsman for Banking Services and Investments.
This is a voluntary complaint-handling system set up in 1996, when the industry wanted to discourage Ottawa from setting up a federal banking ombudsman. But late last week, RBC announced it was pulling out of OBSI on Nov. 1.
It has retained ADR Chambers, an independent dispute resolution firm, to provide an appeal process for clients who disagree with the findings of the RBC ombudsman.
Was RBC unhappy with OBSI? Why was it leaving so abruptly?
I asked for an interview with an RBC executive, but didn't get one.
Instead, I had to send my questions to media contact Jackie Braden, who sent back information that was in the news release.
Among the benefits of the new system, she said, was "ADR Chambers' commitment to address disputes on a timely and comprehensive basis."
Timeliness has been an issue for OBSI. It's criticized by consumer advocates for not handling enough complaints and not turning them around more quickly.
According to OBSI's annual report, it opened 468 case files in 2007 – the highest ever.
It recommended compensation to clients in only 25 per cent of the banking cases, compared with 61 per cent of the investment cases.
With 21, Scotiabank had the most banking cases opened, followed by TD Bank with 15, CIBC (10), National Bank (8) and RBC (7).
"In the context of our overall business activities, we have very few complaints," Braden said.
"While we have over 10 million clients, we have generally had less than 10 open cases with OBSI each year. To date, we have always accepted OBSI's recommendations.
"The key driver for this change (to ADR Chambers) was our clients and, in particular, improving timeliness of complaints handling. For example, we have a case that's been with OBSI since May 2006."
"The OBSI will still handle RBC investment complaints, but not RBC banking complaints."
RBC didn't respond to my question about OBSI's board adopting new terms of reference on Oct. 27 – four days before its pullout.
The new terms allow OBSI to identify systemic shortcomings and recommend compensation for all affected customers – not just for the person who complained.
RBC's move to another dispute resolution service, coming so soon after a major expansion of the independent ombudsman's powers, may indicate its displeasure.
To me, it shows that Canada's largest bank prefers to be held accountable only for problems that affect one customer at a time.
Ellen Roseman's column appears Wednesday, Saturday and Sunday.

I look forward to your response.

James MacDonald MBA
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Postby admin » Mon Nov 03, 2008 6:51 pm

Time to clean house, say bankers
Warning System

Duncan Mavin, Financial Post

Friday, July 18, 2008

A group of the world's top bankers yesterday admitted the industry was to blame for the current crisis and called on the sector to clean house following the global credit crunch. The bankers also said they will set up a squad of crack industry veterans tasked with warning regulators, central banks and the media about similar problems in the future.

"There were serious weaknesses in the business practices of a number of firms," said Dr. Josef Ackermann, the chairman of Deutsche Bank AG, who heads the Institute of International Finance. "It is essential for the industry to reform."

Dr. Ackermann was speaking in Washington after the IIF released the final version of its report on market best practices, which includes proposals intended to strengthen the financial-services industry after a year of setbacks. Banks around the world have written off about $400-billion since the credit crunch was sparked by fears about the U. S. sub-prime mortgage market, and a number of banks in the U. S. and Europe have gone to the wall.

One of the IIF's key recommendations is that a group of 15 to 20 experienced bankers, including prominent participants of "the highest distinction," will meet two or three times a year to act as an early-warning system on emerging issues.

Rick Waugh, chief executive of Bank of Nova Scotia -- who chaired the committee responsible for the best-practices report -- said the new "Market Monitoring Group" would not have enforcement powers but it will be in the self-interest of firms to act on its recommendations.

"If you know something is going on, you can take action. But if you don't know, that's when you've got problems," Mr. Waugh said in an interview.

"[During the current crisis,] some banks have not suffered greatly, but some have. The successful firms are the ones with best practices."

Mr. Waugh said he will be instrumental in setting up the monitoring group, although he is not sure whether he will be among its members. After the release of a draft version of the report earlier this year, the IIF was criticized in some quarters for appearing to reject calls for greater regulation of the sector. But Dr. Ackermann said more regulation would be needed.

"This report is not intended to be an exercise in self-regulation," he said. "We recognize that it is essential for the industry to reform and that there is an emerging consensus on the benefits of reinforcing these efforts through effective regulatory incentives and structures."

Dr. Ackermann called the new monitoring group "a major initiative," and said, "It is clear that timely warnings about possible future weaknesses or declining standards will have to be given a higher priority going forward."

The IIF, which represents about 380 financial-services firms around the world, set up the best-practices committee in November and has met with more than 70 banks, and more than 100 CEOs and chief risk officers. Its report also includes recommendations on compensation, risk management, the use of credit-rating agencies and disclosure issues.

The early draft of the report was also controversial because of its apparent criticism of fair-value accounting, which some bankers blame for exacerbating the recent crisis. That position led Goldman Sachs to threaten to withdraw its membership from the IIF. In the final report, the bankers stop short of denouncing fair-value accounting but welcome recent moves by accounting standard setters to revisit valuation issues.

Meanwhile, Scotiabank's Mr. Waugh acknowledged the sector "as a whole needs to do much better" and also said chairing the committee had been a challenge.

Producing the report was "like peeling back an onion" because new issues have been emerging as the committee went about its work, he added.

"The real proof of the committee's success is hopefully in the future we will not have the degree of crisis that we have had this time," Mr. Waugh said. "There will be other crises, but hopefully risk management and all these things will be improved."

(advocate have some of these folks continue to police themselves is a bit too much like letting the foxes guard the henhouse. It has never worked well. It is time for some independant, public interest minded oversight in the financial services sector.)
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Postby admin » Mon Nov 03, 2008 6:50 pm

André LIZOTTE VS RBC Dominion Securities Inc.This is about $ 5.2 million lawsuit initiated by André Lizotte against RBC Dominion Securities Inc, in the Quebec Superior Court in late 1992 for breach of ...

his web site is missing in action, but the court decision said something to the effect that RBC acted with such flagrant disregard for the law, that the court punished them with an "immediate" order to pay Mr Lizottee $1 million dollars, prior even to appeal, in case they would use their bully tactics to further stall and preven justice from being served.

Mr. Lizotte won his case.
Last edited by admin on Mon Nov 03, 2008 6:55 pm, edited 1 time in total.
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Postby admin » Mon Nov 03, 2008 6:49 pm

Court orders CIBC World Markets to pay a retired Montreal couple more than $3 million. The judgment includes an unprecedented 1.5 (m) million dollars in punitive damages. Haroutioun and Alice Markarian sued C-I-B-C after the company seized 1.4 (m) million dollars from their accounts in 2001.
Photograph by :

Paul Delean, CanWest News Service; Montreal Gazette
Published: Thursday, June 15, 2006
MONTREAL -- In a ruling hailed by their lawyer as "a great victory for investors,'' a Superior Court court judge has ordered CIBC World Markets to pay a retired Montreal couple more than $3 million, including an unprecedented $1.5 million in punitive damages.
Haroutioun and Alice Markarian sued CIBC after it seized $1.4 million from their accounts in 2001 to cover the trading losses of people they didn't know. They'd unknowingly guaranteed the accounts by signing documents misrepresented to them by their former CIBC Wood Gundy stockbroker, Harry Migirdic.

During the 25-day trial last year, CIBC claimed the guarantees obtained by Migirdic were valid and the Markarians were the agents of their own misfortune by signing them.

But Superior Court Judge Jean-Pierre Senecal would have none of it. In a sternly worded 150-page judgment, he said the Markarians had clearly been victims of organized fraud and the bank ignored ``reality, facts brought to its attention and common sense'' in pretending otherwise.

He called CIBC's conduct "reprehensible'' and said it never convincingly explained the motives for the actions it took..

Senecal said nobody would willingly put up all their assets at a brokerage to guarantee the accounts of people they don't know. "You'd have to be crazy,'' he wrote. "They (the Markarians) are not.''

The Markarians, he said, were credible, honest people, and the bank had no reason not to believe them when they said they knew nothing of Migirdic's actions.

The bank's own compliance department had itself missed numerous opportunities to detect Migirdic's misdeeds well before 2001, Senecal wrote.

"CIBC must assume responsibility for the fraud of which (the Markarians) were victims,'' he said. "It was responsible not only indirectly, but directly.''

Senecal said CIBC had "cruelly failed'' in its duty to protect its clients and control and supervise its employee. Migirdic, because of a history of regulatory breaches, should have been the subject of particularly close scrutiny, but that was not the case, he said.

He ordered CIBC to return the $1.4 million seized, with interest since June of 2001. He granted the Markarians an additional $1.5 million in punitive damages, which their lawyer Serge Letourneau said is to his knowledge the largest amount ever levied in punitive damages against a brokerage in Canada.

CIBC was also ordered to pay $50,000 to each of the Markarians for moral damages, $94,560 of their legal fees and all trial-related expert costs.

The judgment even included a clause ordering CIBC to turn over $1.5 million to the Markarians regardless of whether it appeals, because of their advanced ages.

© CanWest News Service 2006
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Postby admin » Mon Nov 03, 2008 6:48 pm

from the book "THE CORPORATION":

"A man (even if that man is a corporation) cannot serve two masters. Either he is serving shareholders or he is serving clients. Both are noble. Both are justifiable. But both cannot be served simultaneously. In the majority of cases, the more money a firm makes, the higher the cost borne by clients. "

If one is to read the bank's financial statements, they claim to be there "for the shareholders".

As a former bank employee I read a corporate policy that said "the interests of the bank must come first in any and all decisions made".

As a consumer, I am repeatedly told by the banks that they will place my interests first and foremost in any business dealing, at least concerning their investment dealers.

The code of ethics and professional behavior confirms this "client first" promise.

How can they serve all these masters, and are they simply making empty promises? I think we should find a clear resolution to this issue before we allow the banks to grow ever larger, more powerful.
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Postby admin » Mon Nov 03, 2008 6:47 pm

BMO's position on FMF fiasco
Mum's the word

Barry Critchley
Financial Post

Friday, January 20, 2006

Officially the Bank of Montreal has made no comment on the FMF Capital Group debacle, a U.S. sub-prime mortgage lender that came to Canada, raised $197.5-million from retail investors and less than eight months later suspended distributions.

The units -- which cost $10 when issued in the initial public offering via a deal led by BMO Nesbitt Burns and which never traded at issue price -- now change hands at around 60 cents.

The bank has decided that saying nothing is the best approach. It adopted "my lips are sealed" approach when FMF suspended distributions -- "we don't talk about our clients" and followed a similar line when a class-action lawsuit was filed a few weeks later. Then it said that "we can't comment given that the matter is before the courts."

But the bank -- clearly a takeover target if the new government allows bank mergers -- does take an interest in what's going on -- and what's written. A while back, a spokesperson asked this columnist whether he owned any FMF units. Given that this is a family newspaper, we skip the full reply. (For the record, journalists do have a code of investing conduct.)

But the question seems to be part of a BMO trend: Try and deflect the blame for what appears to be a monstrous lack of due diligence on its part. (The analogy isn't perfect but if a new car performed as badly as FMF, then the manufacturer's warranty would kick in.)

The bank has adopted "don't blame us'' approach in its correspondence with brokers who have written seeking answers.

In recent correspondence it said the following: "It is the responsibility of each investment advisor to review the risks of an investment and determine whether it is suitable for his or her clients."

That approach didn't sit too well with some brokers, including a former BMO Nesbitt broker.

"I find it of interest that the firm seems to be holding the brokers [its IAs] totally responsible for recommending this to clients," he said.

"How can an IA no matter how bright and experienced, be able to critically analyze each new issue over a couple of days when the corporate finance group comprising an army of specialists has been working with the corporate client for weeks and months and then promotes this to the IAs in its roadshows?" There seems to be a huge imbalance here, noted the broker.

Of course the bank has a ready answer: "BMO Nesbitt Burns and its employees conducted themselves appropriately and in accordance with applicable professional standards."

BMO and class-action suit

While BMO has made no public comment on the class action lawsuit, a lot has happened.

▌The firm has hired Winston & Strawn, an international law firm that's home to 875 lawyers. That firm wasn't chosen at random. It acted for BMO in its successful defence of a Bre-X class action lawsuit filed in the U.S. In turn, W&S has hired a Michigan litigation firm of Young & Susser.

▌The six underwriters on the FMF issue are divided into two camps. Four firms have opted to use Winston & Strawn while two -- Canaccord Capital and Blackmont Capital -- have retained Foley & Lardner.

▌BDO Seidman, FMF's auditor, has hired Dickinson Wright, a Detroit-based law firm. BMOs approach of late stands in contrast to what it said when FMF closed its deal.

Back then it said the following: "Ultimately investors were attracted to FMF Capital's strong and predictable revenue and cash flow, a compelling strategy for future growth and a dynamic and committed management team with a proven track record of success."

And for good measure the bank added that "we were delighted to lead this successful offering for FMF Capital, the first financial services company to go public through a cross-border income-participating securities transaction."

BMO and Manulife

BMO's approach is in contrast to what Manulife did last year when it faced a situation with some of its clients who bought Portus hedge funds. With chief executive Dominic D'Allesandro calling the shots, the insurer decided to make its clients whole. The result: The matter has been settled.

Manulife's action and BMO's non-actions came up in a recent conversation with a senior Manulife executive. This executive opined that if a lawyer gave D'Alessandro the same view that is being given to Comper, "he wouldn't be working here anymore. Dominic would have told him that he was fired."

Shorcan's big day

Any day that generates $414,000 for charity has to be regarded as a good day. That's what happened yesterday at Shorcan Brokers Inc., the country's first inter-broker dealer, which has been employee-owned since the end of 1998. The amount raised is 1.3 times Shorcan's target. In 2004 Shorcan raised $301K.

© National Post 2006
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Postby admin » Mon Nov 03, 2008 6:46 pm

by some examples it appears that we should not even allow some bankers to breed. They seems to keep falling into the category of pathalogical pursuit of money.

BMO tries to put FMF behind it
Does leadership start 'at the back of the line?'

Bank of Montreal chief executive Tony Comper: One critic suggested that if BMO’s investment banking arm defines the FMF offering as a success, “what does it define as failure?’’

Barry Critchley
Financial Post

Thursday, January 12, 2006

With the value of their units down about 95% since last March, investors in FMF Capital Group can take some solace.

BMO Nesbitt Burns, the lead agent on the $197.5-million offering, has told angry and upset unitholders it did conduct "very thorough" due diligence on the issuer and the offering before setting it loose on the public.

The deal, which generated $11.4-million in underwriting fees, has achieved the dubious distinction of never having traded at issue price. And the deal has achieved another dubious distinction: It has become the subject of a class-action lawsuit filed recently in Michigan.

"BMO Nesbitt Burns has a long history of bringing quality companies to market. We conduct very thorough due diligence in each and every case, and did the same for the offering of FMF," said a letter sent to one retail broker who put a number of his clients into the offering that headed straight south after FMF -- a U.S. provider of sub-prime mortgages -- suspended distributions last November.

That move -- coming less than eight months after FMF went public and after the issuer had never missed a distribution -- caught the market and unitholders completely off balance. Prior to this, there had been no indication things were anything other than positive.

How positive?

Consider this: The analyst at BMO Nesbitt had an "outperform" rating on the stock immediately prior to the cut in distribution.

So was he a victim?

No, he was independent.

"With respect to the use of different comparables by investment banking and the research department, note that research coverage was initiated on Aug. 3, 2005. The research analyst's views were arrived at based on his own analysis, which is independent from investment banking," added the letter.

The letter does not explain why there were eight comparables -- four from Canada and the rest from the United States -- at the time of the offering.

For his part, the analyst used seven comparables, all of them from the United States. All were mortgage REITs.

It's worth noting that when the offering was being sold, the comparables had current yields of 8.2%, which was below the 10%-11% target range for FMF. When the analyst prepared his report, the comparable yields were about 12%-plus, the yield that FMF was paying at the time.

The BMO Nesbitt letter also made it clear that the prospectus detailed all the relevant risks.

With respect to the disclosure of risk factors, the prospectus emphasizes the risks associated with an investment in FMF. This section states "any of the following risks could result in a partial or complete loss of a purchaser's investment," noted the letter, which then pointed out that the brokers are responsible "to review the risks of an investment and determine whether it is suitable for his or her clients."

In effect, over to you, the broker. As one wag noted, BMO Nesbitt has taken the approach that "leadership starts at the back of the line."

Of course, based on comments from BMO Nesbitt at the time the FMF deal closed, the brokers had great reason to believe they were on to something great.

Here's BMO Nesbitt Burns' quote at the time of the closing: "Ultimately investors were attracted to FMF's strong and predictable revenue and cash flow, a compelling strategy for future growth and a dynamic and committed management team with a proven track record of success. We were delighted to lead this successful offering for FMF Capital, the first financial services company to go public through a cross-border IPS (income participating security) transaction."

Indeed, that quote was sitting in the head of the broker when he read the final paragraph of the letter. "In conclusion, although BMO Nesbitt Burns regrets the losses experienced by you and your clients, BMO Nesbitt Burns and its employees conducted themselves appropriately and in accordance with applicable professional standards."

As our wag noted, "If BMO defines FMF as a successful offering, what does it define as failure?"

While FMF's units now trade at about 50 cents, there may be some good news on the way.

This week, FMF announced it had terminated the currency hedge that was in place.

In a release that was short on rationale and shorter on what it means for unitholders, FMF said it received US$5.3-million as a result of terminating its rolling 60-month forward currency hedge arrangement with Bank of Montreal. Of that amount, FMF received US$3-million in cash collateral and interest and cash proceeds of US$2.3-million resulting from a gain on the hedge position.

While FMF gave itself the option of obtaining another foreign currency hedging arrangement in the future, the cash generated from terminating the existing hedge presumably belongs to unitholders and may be paid out at some future date.

© National Post 2006
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Postby admin » Mon Nov 03, 2008 6:44 pm

Is there a flaw in CIBC's DNA?
There's something wrong with this institution. On December 22, 2003, the SEC
fined CIBC US$ 80 million for its role in the manipulation of Enron
financial statements. On August 2, 2005 CIBC paid US$ 2.4 billion to settle
a class action lawsuit brought by a group of pension funds and investment
managers, including the University of California, which claims that
"systematic fraud by Enron and its officers led to the loss of billions and
the collapse of the company. They made headlines in the U.S. market timing
scandal and were fined US $125 million by the SEC for knowingly financing
customers' late trading and market timing, as well as providing financing in
amounts far greater than the law allows. On August 27, 2004 CIBC confirmed
that it would settle a class-action lawsuit on behalf of CIBC VISA
cardholders that alleged that the conversion of foreign-currency
transactions resulted in an undisclosed or inadequately disclosed mark-up.
On May 20, 2004 CIBC announced that it would refund $24 million to some of
its customers as a result of erroneous overdraft and mortgage charges which
were discovered in the course of an internal review. We've advised them
numerous times that their credit card statements are misleading.

They sent FAX's containing confidential information about hundreds of its
customers to a scrapyard operator in West Virginia for more than three
years, and he couldn't get them to stop. On April 18, 2005 the Privacy
Commissioner of Canada expressed disappointment in the way CIBC dealt with
incidents involving the bank misdirecting faxes containing customers'
personal information. CIBC Talvest disclosed in Jan. 2007 that a computer
hard drive being transported between Montreal and Toronto mysteriously went
missing containing the client names, birthdates, addresses, bank account
information, signatures and social insurance numbers of approximately
470,000 former and current customers of CIBC-managed Talvest Mutual Funds.
We're aware of a number of investor disputes that took an unnecessarily long
time to resolve. The CIBC Renaissance U.S. RSP Index fund is involved in
litigation regarding the fund's failure to provide promised currency
protection. In June 2007, CIBC was hit with a $600 million class-action
lawsuit regarding the lack of overtime pay to its customer service staff.
.Now we hear that the bank is facing a "multibillion-dollar" class-action
lawsuit alleging misrepresentations about the bank's exposure to the
American subprime mortgage market. And on July 26th, a column by the Toronto
Star's Ellen Roseman revealed a nasty situation regarding CIBC's efforts to
move selected VISA cardholders to a new high-end card with more benefits,
including some who don't want a new card. Arrogance, stupidity, a miswired
brain? Who knows? At this rate they'll soon need another injection of

I could add Global Crossing to the list of CIBC skeletons, which payoffs to senior CIBC execs should be looked into by those same folks who prosecuted Conrad Black. Add also the Markarian v CIBC case where CIBC is accused of fraud by the judge. Their behavior was closer to a crack addict seeking money for a fix, than that of a trusted financial institution. see markarian v CIBC under "cases section" at
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Postby admin » Mon Nov 03, 2008 6:43 pm

And so the circle of corporate expoitation is nearly complete:

Work your way to the top of any Canadian bank.
Engineer a financial compensation package of ridiculous proportion.
Allow this kind of "me first" thinking to pervade the entire organization, allowing the reputation of your 100 year old firm to decay.
Put as much money from the organization into your pockets with various forms of compensation schemes.
Be sure to walk away as soon as possible.
Let the public and the firm be damned, and collapse or be put up for sale. Who cares, you have got yours.
Great strategy. If you intend to support theories of corporate psychopathy.

CIBC sale best for investors: analyst
'Elegant Option'

Duncan Mavin, Financial Post
Published: Friday, February 01, 2008

Executives at Canadian Imperial Bank of Commerce should be considering an outright sale of the bank, which would be the best option for shareholders, said Dundee Securities analyst John Aiken yesterday.

The bank's shares have lost about a third of their value from 12-month highs of more than $100 because of massive subprime writedowns that hit earnings and left the balance sheet looking precarious.

"Best way to get back to $100? Sell the bank," said Mr. Aiken in a note. It is thought to be the first time an analyst has publicly supported the idea of selling CIBC since the bank's subprime woes began.

The analyst looked at how the bank's stock price might react under different scenarios, including a sale of the investment-banking unit or maintaining the bank's current course.

"An outright sale of the bank is the most elegant option as it generates the greatest value to shareholders," Mr. Aiken said.

There appears to be little political will to allow a merger in Canadian banking. But the benefits of a merger of two Canadian banks have been lauded recently by senior executives at Bank of Nova Scotia and National Bank of Canada, as well as by the Canadian Bankers Association.

There has been speculation the Canadian government could allow mergers in the financial services sector if it would prevent a Canadian bank from collapsing.

"Should the environment surrounding Canadian bank mergers or acquisitions become more palatable, it is our opinion that CIBC is now the Canadian bank 'most likely to be acquired,' " the Dundee analyst said.

CIBC's stock price hit a 12-month high of $107.45 before the credit crunch. It closed on the Toronto Stock Exchange yesterday at $73.25.

The bank's subprime-related writedowns already stand at $3.2-billion, and some analysts expect that number to rise significantly. The Financial Post also reported last week that CIBC has as much as $25-billion in other credit derivatives largely tied to the sputtering U.S. economy.

CIBC has responded to its crisis by exiting riskier business lines, including much of its investment banking business. But that has left the bank without a meaningful growth platform and it looks increasingly like a domestic retail banking one-trick pony.

"We do not see how the transition of CIBC from the 'low risk, low growth' to a 'no risk, no growth' bank will be sufficient to get it back to a premium valuation," Dundee's Mr. Aiken said.

The bank also arranged an emergency infusion of $2.9-billion in new capital -- including an investment from Manulife.

CIBC's shares got a temporary boost late yesterday when index fund managers bought more shares to rebalance their portfolios after the new equity issue. But the equity offering dilutes CIBC's shares by 12%, a shortfall it is unlikely to make up for a lack of earnings growth.

Mr. Aiken said other options for management, such as selling or spinning off the bank's investment banking unit, CIBC World Markets, would reduce risk but would not produce much incremental value above maintaining the status quo.

"We do not believe that the bank will actively pursue any of our scenarios in the immediate term," Mr. Aiken said.
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Postby admin » Mon Nov 03, 2008 6:42 pm


CIBC chief took home millions


January 31, 2008

Canadian Imperial Bank of Commerce chief executive officer Gerry McCaughey made $9.4-million in 2006, the bank disclosed yesterday in its shareholder proxy circular.

CIBC, which is the first of the Big Five banks to report compensation numbers this year, sets the CEO's compensation on a retroactive basis, and has not yet determined Mr. McCaughey's bonus or share awards for fiscal 2007, which ended Oct. 31.

His base salary remains $1-million, the bank said. In 2006, Mr. McCaughey was awarded a bonus of $3.07-million and restricted shares worth $4.23-million.

He became CEO of the bank in August, 2005, just as it took a $2.4-billion (U.S.) charge to settle legal matters related to Enron Corp.
In fiscal 2007, the bank took $777-million in writedowns as a result of subprime mortgage losses, and has since announced $2.46-billion in writedowns that are being booked in fiscal 2008.

The bank's compensation committee, "on behalf of the board, has full confidence in the leadership of the chief executive officer and his ability to execute on CIBC's strategy to deliver consistent and sustainable performance over the long term," the proxy circular states.

Meanwhile yesterday, a new report by independent analyst Diane Urquhart estimates nine top CIBC executives made at least $120.5-million (Canadian) from a special incentive plan created in 2000 to link executive pay to merchant banking investments. She believes the plan was likely related to the bank's lucrative investment in U.S. technology company Global Crossing Ltd.

Ms. Urquhart estimates former CIBC chief executive officer John Hunkin earned a total of $90.4-million between 1999 and his retirement in 2005, including $27.4-million on shares awarded under the special incentive plan.

She estimates current CEO McCaughey has made $102.9-million, including shares worth $22.3-million he received under the incentive plan that he still holds. Those calculations are based on valuations at the end of fiscal 2007.

Her analysis also estimates top executives at CIBC have reaped more than $500-million in compensation - including options and shares - since 1999, even though the bank has stumbled through a series of costly mistakes.

The report argues the compensation totals have been "egregious" given the "reckless risk-taking" that has hurt CIBC's share price, including the subprime mortgage crisis, Enron settlements and a writedown of the bank's investment in the Amicus electronic bank.

Ms. Urquhart calculates shares awarded under the special incentive program were worth about $92-million when they vested in 2003.

She used insider trading filings to calculate that the shares were ultimately worth at least $120.5-million by the time executives sold them. Some executives still own the shares or left the bank before selling them and no longer have to file insider trading reports.

She estimated the total gains for those individuals based on the assumption they still owned the shares as of Jan. 25 and had not sold them.

Also yesterday, Bank of Montreal said its CEO, Bill Downe, earned $5.83-million last year, not counting $3.8-million that the bank put toward his future pension costs.

It was Mr. Downe's first year on the job as CEO. In light of the bank's financial performance, and consistent with Mr. Downe's own recommendation, he did not receive a bonus, BMO said.

The bank's earnings per share fell 20 per cent in 2007, as it suffered hundreds of millions of dollars in losses from its commodity trading operations.
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Postby admin » Mon Nov 03, 2008 6:41 pm

The bank most likely to walk into a sharp object

Saturday, January 19, 2008 GLOBE AND MAIL

NEW YORK, TORONTO — The week before Christmas, a group of senior bankers gathered at the Toronto offices of Canadian Imperial Bank of Commerce to work out the details of an emergency funding effort.

For CIBC chief executive officer Gerry McCaughey, it had been both a miserable and taxing month, doubtless the most difficult of his 21/2-year reign atop the bank. The bank had taken $753-million in writedowns because of its entanglement with a spiralling subprime mortgage mess, and recently stunned investors with the acknowledgment that it had $10-billion worth of hedged exposure to that market.

What these investors didn't know was that CIBC was preparing to write down an additional $2-billion in a matter of weeks, enough to make it one of the costliest misadventures in Canadian banking history.

Mr. McCaughey, whose entire tenure to this point had been geared toward erasing the taint of previous scandals, methodically stripping away risk and rehabilitating the bank's maverick reputation, knew that he would have to make senior management changes, and was already in secret negotiations to recruit his close friend Richard Nesbitt, who runs the Toronto Stock Exchange, as a replacement for Brian Shaw as head of the gaffe-prone investment bank, CIBC World Markets.

Mr. Shaw, who probably suspected at this time that his days were numbered, nevertheless remained in Toronto while his family went to Mexico on vacation, helping to carry out one of Mr. McCaughey's imperatives: Defusing potential bombs by exiting whatever remained of the bank's structured product businesses. About 40 consultants had also been brought in to help CIBC clean up the debris.

The most pressing issue was the bank's balance sheet. Given the grisly prognosis for the subprime market, it had become clear that CIBC would likely have to take billions of dollars in additional charges to mark down the value of its holdings, a scenario that would erode the bank's capital levels and could put them dangerously close to minimum regulatory limits.

At a board meeting in December, Mr. McCaughey and his fellow directors agreed that the bank would have to approach private and public investors to raise close to $3-billion, and that it should do so as fast as practicable: Any delay could make the effort more costly, if not impossible, given that conditions were deteriorating almost daily.

On Dec. 18, Mr. McCaughey hired UBS as a financial adviser, in part because of the firm's strength in the banking sector, and in part because of his respect for Oliver Sarkozy, UBS's joint global head of financial institutions – and, incidentally, the half-brother of French President Nicholas Sarkozy. The two bankers had met when CIBC purchased an additional stake in FirstCaribbean International Bank in 2006, and had remained close since that deal, keeping in touch with regular telephone conversations.

The initial meeting, in Toronto, was supposed to last a half hour, but went much longer, thanks to an extended conversation about history between Mr. McCaughey and Mr. Sarkozy – surely no surprise to the CIBC contingent, who are well acquainted with their boss's tendency to digress.

When they did get down to business, Mr. McCaughey insisted that he would not merely issue a chunk of stock in a private placement to large institutional investors – he wanted a sizable piece to be sold to the public as well. The deal would also have to be straight equity: CIBC couldn't issue preferred shares, as many of its U.S. peers have done to bail themselves out of similar trouble, because the bank was already up against a cap on these securities.

Throughout the holidays – even on Christmas Day – the bankers finalized details of the plan, and kept in touch daily on 8 a.m. phone calls. As the New Year approached, they drew up a list of private parties who might be enticed to buy $1.5-billion worth of stock; an additional $1.25-billion would be sold in the market to regular investors.

The list included the Ontario Teacher's Pension Plan; Asian tycoon Li Ka-shing, once a major shareholder of the bank, and a customer dating back almost four decades; Canada Pension Plan Investment Board; insurer Manulife Financial Corp., once rumoured to be a possible merger partner for CIBC; the Caisse de dépôt et placement du Québec; and the Ontario Municipal Employees Retirement System.

On Monday, Jan. 7 – the first day back from holidays for many on Bay Street – the bank dropped the bombshell: Mr. Nesbitt would leave the TSX and replace Mr. Shaw as head of CIBC World Markets; Tom Woods, the chief financial officer, would be placed in charge of the faltering risk management operation, taking over from Ken Kilgour; David Williamson, a well-regarded former executive at life insurer Clarica, would be brought in as CFO; and Nick LePan, the past Superintendent of Financial Institutions, would join the board.

A few days prior to this announcement, CIBC had secretly begun to contact private investors, and initially the hope was to unveil the capital-raising effort in the second week of January. But there was a glitch. Teachers, which had contemplated taking a large piece of the deal, was demanding more stringent terms than CIBC was willing to offer. The bank balked, and Teachers left the table, forcing CIBC to bring in another investor.

Other than causing a small delay, however, this did little to upset the bank's plans; in fact, the participation was so strong – abetted by an offering price that was about 13 per cent lower than where CIBC's stock was trading – that another pension fund, the Public Sector Pension Investment Board, was refused a piece of the deal when it attempted to get in at the 11th hour.

But once news of the capital injection hit the markets, reaction was mixed. While some applauded Mr. McCaughey's prudence, and agreed that this would cushion the blow, others viewed it as a grim portent.

The bank could have absorbed the $2-billion it planned to write down in the first quarter of this year, but adding more capital was tantamount to an expectation – if not an admission – that more was to come.

New and improved CIBC

On the last day of May, 2007, a group of senior management at CIBC huddled in a boardroom and prepared to begin a conference call with analysts. It had been a good second quarter, for the most part. For more than a year, Mr. McCaughey had been painstakingly laying out his vision for the New and Improved CIBC: no more fumbling after Wall Street glory, no more over-the-top risk-taking.

This was a return to your grandmother's bank, a boring cash cow that catered to retail customers, lent money to Canadian corporate clients, managed financial wealth, and augmented this with a strong, but plain vanilla, investment bank.

So far, so good, investors seemed to be saying.

Of course, banks can't control the economy, and CIBC, like most in the industry, could see trouble on the horizon. In the previous few months, there were worrisome signs emanating from the U.S. housing market, which was suffering rising defaults among so-called “subprime” borrowers: that is, people with weak credit histories that had purchased a home at higher interest rates. Billions of dollars worth of these mortgages were bundled into complex securities known as collateralized debt obligations, or CDOs, and then sold off in chunks to large investors, including banks.

Smart investors were starting to ask questions. On the May conference call, a hedge fund manager, Mark Cicirelli, asked a seemingly arcane question about CIBC's exposure to a small CDO called Tricadia 2006-07, from which the bank had apparently purchased $330-million worth of securities backed by mortgages: How much money did the bank stand to lose if the mortgage market fell off a cliff, something that was now looking more and more likely?

Not much, replied Brian Shaw, head of CIBC's investment bank. He explained that Tricadia pooled together a series of reasonably good-quality CDOs, and the result was a security that was highly rated by the credit rating agencies.

“I guess I would just conclude,” he offered, “by saying in summary our risk in this space is not at all major.”

Mr. Cicirelli wasn't altogether convinced by the explanation. Nor, for that matter, was Mr. McCaughey.

‘De-risking the business'For the next few weeks after the call, Mr. McCaughey attempted to get the measure of CIBC's dealings with the worsening subprime market and, autodidact that he is, make himself an expert on the subject. Although he was not intimately aware of the bank's CDO activities, given they were such a small part of the bank's overall business, sources said the Tricadia question left him uneasy: History had long since taught him that if someone smelled smoke at CIBC, a fire was probably not far behind.

As June progressed, this smoke only thickened. A growing host of subprime casualties was appearing, headlined by a major blowup at a hedge fund operated by Bear Stearns, Wall Street's fifth-largest player.

Despite reassurances from some of his managers that the majority of these CDOs were not merely safe, but also insured, Mr. McCaughey began questioning everyone, from department heads to front-line traders. Often, sources said, he would request sheaves of information, take it home on the weekend, and arrive Monday morning armed with a series of questions.

The answers, it soon became apparent, were of little comfort, either to Mr. McCaughey or the board, which received a debriefing on the issue during the middle of the month.

CIBC, a bank whose mantra had become “de-risking,” was sitting on $1.7-billion worth of unhedged CDOs, much of which were backed by subprime mortgages – in other words, the bank had not bought protection from insurers to guard against the possibility of default on this portfolio.

A further $10-billion worth – a staggering amount – had indeed been hedged, but $3.5-billion of that amount was hedged with a single insurer. Normally, that kind of concentration would elicit concern, but Mr. McCaughey was told by some managers that there was little to worry about: These securities were rated triple-A – in other words, very safe and low-yielding – and on top of that, CIBC had purchased protection from an A-rated bond insurer.

“As we were de-risking the business, it was an area we didn't get to,” conceded one director. “We didn't think of it as high risk.”

By the time they did, it was all but too late – in the second week of July, the CDO market collapsed, leaving the bank with little means of offloading its holdings or buying further protection.

Two years after arriving as CEO, and working to overcome a $2.4-billion (U.S.) settlement with Enron Corp. investors, Mr. McCaughey was facing the possibility he might have to write down most of the value of his $1.7-billion worth of unhedged positions, leaving the bank with a punitive charge. Little did he know at the time, that that was the least of his worries.

A triumph of alchemyIt's logical to ask, given the bank's self-proclaimed focus on risk, just how CIBC could blunder into what one director described as “a catastrophe.” To be fair, a good portion of the problem was systemic, and any investment bank that had the misfortune of playing in this game has been savaged, as the examples of Citigroup, Merrill Lynch, UBS, and Bear Stearns, among others, have made painfully clear. So far, global banks have written off more than $100-billion in subprime-related mishaps, and the toll continues to climb.

So how could some of the shrewdest minds in the financial world be so horribly gulled?

The explosion of CDOs in recent years is a triumph of alchemy; financial engineers, looking to create a more liquid market for asset-backed securities, devised a way to repackage questionable assets in a way that won top marks from credit rating agencies.

The process is notoriously complex, and has several permutations, but a basic scenario would look something like this. An investment bank pools together various forms of debt, like subprime mortgages, into a CDO structure. The structure is then divided into layers, or “tranches:” The top portion, the most highly rated, would have the least chance of default but would pay the lowest interest. As one descends through the layers, the risk climbs, and so do the premiums to investors.

The theory behind CDOs was that they could diversify risk by slicing it up and dispersing it widely throughout the financial system. Of course, the appetite for these securities fuelled the need for more and more product, which meant that many people who shouldn't have qualified for mortgages – or who were likely to default once their payments increased – were approved for homes they couldn't afford.

Once the mortgage market collapsed, it triggered a domino effect in the financial system, decimating the value of CDOs, forcing banks to take charges, and threatening the stability of the very insurers from whom banks like CIBC bought protection.

The glaring flaw in this meltdown was the ratings: In retrospect, these subprime-backed securities look nowhere near as safe as the triple-A paper issued by the world's bluest of blue-chip companies. Yet many were rated as such, thanks to clever financial manoeuvring by the originators of these products – and, many would say, sloppy procedures at some of the world's top credit rating agencies.

Which brings us back to CIBC. The important thing about ratings is how they affect a bank's capital position. Banks are required by regulators to backstop their investments with capital; the higher the rating, the less capital required, since the security is perceived as a relatively low-risk investment. That also means a bank can amass a much larger portfolio of triple-A securities than it could with lower-rated investments.

One of the first things Mr. McCaughey did when he arrived at CIBC was reduce the amount of economic capital at his investment bank by 50 per cent, in essence, drastically reducing its risk profile and tilting more of the bank toward predictable retail earnings.

In theory, that kind of move would force CIBC out of undesirable businesses by putting a chokehold on capital.

In practice, something rather different happened. CIBC migrated to more highly rated securities, in order to ease up on capital, and saw an opportunity in the burgeoning CDO market.

The bank accumulated much of its $12-billion worth of CDO exposure over the past 18 months. Sometimes it would act as guarantor. Sometimes it would actually help structure the deals. And sometimes it would simply be a buyer.

“They acted as sales agent, guarantor, underwriter,” said one person familiar with the bank's involvement. “It was for information flow; you create a body of knowledge, and you become a player.”

Picture this. An investment bank originates a CDO, and asks CIBC to guarantee – or essentially insure – a senior tranche of triple-A-rated notes. The bank says fine, since the capital requirements would be minimal, and then, for added caution, takes out the equivalent of a reinsurance policy with another bond insurer. The bank collects a premium as a guarantor, pays out a smaller premium to the insurer, and pockets the difference. In other cases, when the bank was trying to help a deal along, it would take a chunk of triple-A securities onto its own books without buying protection: The irony is that these securities were seen as having such low risk – and consequently, paid such meagre returns – that it wasn't easy to offload them.

Even so, as several executives and directors have privately pointed out, taking unprotected positions in complex derivatives was antithetical to the strategy that Mr. McCaughey had been preaching for the bank: Focusing on core areas of strength, and exiting some of the more exotic areas where the potential for damage far outstripped the possible rewards.

Other Canadian banks largely steered clear of this structured product market, but not CIBC, which has shown an almost genetic predisposition toward following whatever the pack is doing in New York or London, usually with abysmal consequences (Enron and the U.S. mutual fund trading scandal being two of the more recent examples).

“CIBC was not in the business of – and should not have been in the business of – investing in these things for their own account,” said one senior source at the bank.

“Somebody on the business side, early in the year, should have seen that this was occurring. We ended up sitting on stuff we shouldn't have been sitting on. It's a management and accountability issue.”

The hedged book bites

Initially, CIBC appeared to emerge somewhat less scathed than had been expected. In August, the bank ended weeks of speculation by revealing publicly it would take a $290-million charge on $1.7-billion worth of unhedged exposure to CDOs underpinned by residential mortgages.

At this point, other than a few pockets of muttering, no one paid much attention to the hedged book. There was even some cautious optimism. In September, the U.S. Federal Reserve cut the benchmark interest rate by 0.5 percentage points, triggering a mini-rally that appeared to cauterize the bleeding in the subprime market.

But the optimism was short-lived.

By October, the indexes that measure the health of the subprime market were foundering again. At the end of the month, Merrill Lynch reported $8.4-billion (U.S.) in charges, and fired its CEO, Stan O'Neal. Citigroup, meanwhile, unleashed the first in a series of writedowns – $5.9-billion – and its embattled leader, Charles Prince, soon resigned.

On Nov. 5, CIBC parted ways with the head of its debt division, Phipps Lounsbery, who ultimately had responsibility for the CDO book (the same day, incidentally, that Mr. McCaughey unloaded his money-losing U.S. investment bank to Oppenheimer Holdings).

But the trouble was just beginning.

Two days after Mr. Lounsbery departed, ACA, the insurer with which CIBC had hedged $3.5-billion worth of subprime-backed securities, reported a massive loss, and cratered in the market. Standard & Poor's responded by placing ACA on credit watch negative, signalling a possible rating cut.

Such a move would be disastrous for CIBC: If ACA was pushed into default, and could no longer provide insurance, CIBC could be forced to write off billions of dollars. Suddenly, the $10-billion hedged book – up to this point regarded as relatively safe – was in serious jeopardy.

“You expect hedges to work,” one director said. “We wished we didn't have one [large] single exposure … but most of our focus was on the unhedged.”

From a risk-management perspective, the decision to hedge so heavily with a single insurer – and a shaky one at that – appears foolhardy. Sources said CIBC risk experts and traders would “work down the book,” meaning they would hedge with a triple-A-rated insurer for what they could, and then migrate down through the ranks. Others have posited that ACA may have given them more favourable pricing terms for such a large chunk of business.

Regardless of how safe the underlying investments appeared, executives and directors at CIBC acknowledge it was a serious mistake to rely so heavily on one counterparty, and that the risk systems were flawed in that respect.

As ACA teetered, CIBC held a board meeting, and Mr. McCaughey and the directors ran through their options. In the short term, they would signal to the market an additional $463-million in charges on their unhedged securities, which had further declined in value throughout the fall. Longer term, however, they realized they faced more drastic measures.

“We had to keep the bank on the track of refocusing World Markets,” explained one director. “And then there was the need to bring in new management. We felt we had to move quickly on that to restore confidence. When all is said and done, we needed a new management team to continue Gerry's strategy and execution.”

Elsewhere, some investors have wondered why Mr. McCaughey's own job was not imperilled by this costly pratfall, seeing how similar mistakes sealed the fate of banking CEOs in the U.S.

But several directors at CIBC, who spoke on condition of anonymity, said Mr. McCaughey continues to have their full backing. For one thing, they noted, these securities had received the imprimatur of credit rating agencies, and their collapse gored just about everyone in this area of the market. Secondly, given CDOs were a small and esoteric part of the bank's overall business, the directors maintained the warning signs would not have naturally risen to the CEO's office.

“It's clear he got let down in one part of the business that no one expected to be a problem,” a board member said. “This is a damn shame, because that strategy [of reducing risk] is a good one, and Gerry was well down the track.”

The popular guessing game now is how much more pain CIBC will have to bear. The bank seems to believe the worst is over, but some analysts remain skeptical, especially in light of news this week surrounding bond insurers, the firms like ACA that provide hedges on the CDOs.

On Thursday, credit rating agency Moody's Investors Service put the ratings of bond insurer MBIA Insurance Corp. on review for a possible downgrade. That came just a day after Ambac Assurance Corp. reported record losses and was itself placed under review, along with all of the securities it guaranteed.

It's not known how much, if any, of CIBC's exposure might be hedged with Ambac or MBIA. In early December, the bank said it had five triple-A-rated counterparties and two double-A-rated counterparties.

Even if the worst of the storm has passed, CIBC still faces a difficult test, not only in recapturing the confidence of investors, who have seen this movie one too many times, but in fixing a risk-monitoring culture that clearly did not function properly.

“The changes that they've made – two very senior and respected board members, plus new members of their executive team – we looked at pretty favourably,” said Peter Routledge, a senior credit officer with Moody's.

“But capital isn't a cure for risk-management shortcomings.”
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