Scoop has an Ethical Paywall
License needed for work use Register

Search

 

Cablegate: Enron Hits Canada: Cibc Pays Record $2.4 Billion

This record is a partial extract of the original cable. The full text of the original cable is not available.

101505Z Aug 05

UNCLAS OTTAWA 002413

SIPDIS

SENSITIVE

DEPARTMENT FOR EB/IFD, EB/OMA, WHA/EPSC, AND WHA/CAN
STATE PASS FEDERAL RESERVE BANK FOR CHUGH
STATE PASS SEC FOR JACOBS
TREASURY FOR WILBUR MONROE AND DAVID NAGOSKI

E.O. 12958: N/A
TAGS: EFIN CA
SUBJECT: ENRON HITS CANADA: CIBC PAYS RECORD $2.4 BILLION
SETTLEMENT

REF: OTTAWA 3433

1. (U) For official use only. Not for Internet
distribution.

2. (U) The Canadian Imperial Bank of Commerce (CIBC)
announced August 2 that it is paying US$2.4 billion to settle
the class action suit brough on behalf of purchasers of Enron
securities. The settlement, the largest ever paid by a
Canadian financial institution and beating the settlements
reached by Citigroup ($2 billion) and J.P. Morgan ($2.2
billion), does not include any admission of wrongdoing by
CIBC. According to newspaper reports, the SEC estimates that
CIBC earned a total of under US$40 million from its
questionable Enron transactions.

3. (U) CIBC lost 10% of its market capitalization the day
after the settlement was announced. Its shares fell 7.6%
(C$6.09) on the Toronto Stock Exchange, to C$74.55 and
analysts now expect CIBC to post an annual loss, rather than
a solid profit. CIBC's stock has not rebounded, with shares
trading this week in the C$71-73 range. However, the bank's
August 2 announcement specified that after "taking this
charge into account, CIBC expects that its Tier 1 capital
ratio will be approximately 7.5% as of July 31, 2005, above
the regulatory requirement of 7.0% for a well-capitalized
financial institution, but below the bank's objective of 8.5%
or higher." Third quarter financial results are due August
24. Canada's banks, including CIBC, have been enjoying
record profits in recent years and the settlement is expected
to temporarily slow but not topple CIBC.

Advertisement - scroll to continue reading

Are you getting our free newsletter?

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.

Where there's smoke?
--------------------

4. (SBU) The size of the settlement stunned analysts, but
the fact that the bank involved is CIBC evoked no surprise.
A banking expert, echoing press reports, told us "They've got
to be guilty as Hell. That bank is a scandal. If there's a
disaster, CIBC is involved. And it's all a reflection of
Hunkin." John Hunkin, who retired as CEO on July 29 with
C$52 million in stock and other securities, had earned $15
million in salary and bonuses since taking office in 1999.
Despite calls from investors to recover money from Hunkin,
conventional wisdom is that CIBC plans to put the issue
behind it.

Limited impact
--------------

5. (U) A U.S. banker told us that his firm's relationship
with CIBC continues as usual although they are "keenly
looking at" the situation, monitoring CIBC's credit rating
and trading in its equities and secondary bonds. Share
prices of the Royal Bank of Canada and TD Bank, who are also
in line for Enron settlements, dropped slightly on news of
the CIBC settlement. However, their payouts are not expected
to be as large and their shares are still trading within
recent ranges.

6. (U) The settlement is not expected to change the dynamics
of on-again, off-again bank merger policy in Canada (reftel).
The Minister of Finance recently announced that bank merger
policy may not be clarified before the end of the year but
yesterdays statement of qualified support from the NDP, a
party traditionally opposed to bank mergers, has put the
issue back on the front burner. Even before the settlement,
CIBC had been seen as a merger target, not an acquirer and
the loss of capital does not change that. Our bank expert
opined that with CIBC's systemic problems, the best thing for
the Canadian banking system would be for another bank to
purchase CIBC to get their name out of the market.

7. (U) Comment: The size of the settlement caught everyone
by surprise but there seems to be consensus that CIBC had it
coming. It has temporarily weakened that bank, but the slight
spillover to other banks does little to dampen a very
profitable sector. The activity of U.S. banks in Canada and
the outlook for bank mergers appear unchanged by the
settlement, but it does emphasize the extent to which our
financial markets are linked. End comment.

Visit Canada's Classified Web Site at
http://www.state.sgov.gov/p/wha/ottawa

WILKINS

© Scoop Media

Advertisement - scroll to continue reading
 
 
 
World Headlines

 
 
 
 
 
 
 
 
 
 
 

Join Our Free Newsletter

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.