Thursday, January 22, 2015

For Michael Wekerle, An Old Friendship Becomes A $1.3-million Feud

The Globe and Mail, Niall McGee, 22 January 2015

Former star stock trader Michael Wekerle is embroiled in a lawsuit with a long-time business associate who wants to push the CBC Dragon into bankruptcy.

Rohit Sehgal, a portfolio manager with Dynamic Funds, alleges in court filings that Mr. Wekerle owes him $1.38-million (U.S.) from the 2014 sale of a property in New York. He alleges that he has pursued payment from Mr. Wekerle for months and now wants him "adjudged bankrupt and that a bankruptcy order be made in respect of [Mr. Wekerle's] property."

"He has repeatedly promised to pay the [debt] and hasn't done so," said Catherine Francis, a lawyer at Minden Gross LLP in Toronto who is representing Mr. Sehgal.

Mr. Wekerle, who appears on the CBC-TV program Dragons' Den, has filed a notice of dispute, explaining that he intends to oppose the bankruptcy application: "The applicant [Mr. Sehgal] is attempting to use the bankruptcy process to collect an alleged civil debt."

"Mr. Wekerle has not committed an act of bankruptcy" and is "able to pay his debts as they become due," the notice reads.

In an interview, Mr. Wekerle said he will repay Mr. Sehgal - "a guy that I took care of for 30 years" - $1.1-million and "not a penny more" and hopes to have the matter settled by the end of the month.

"I'm very upset with the way he's acting. He's putting pressure to get an additional $200,000."

The dispute dates back to 2011, when Mr. Sehgal, Mr. Wekerle and Robert Sali, a resident of Singapore, teamed up to invest in a $2.4-million condominium in New York's fashionable Tribeca neighbourhood.

According to court filings, Mr. Sehgal and Mr. Sali kicked in $1.1-million each toward the purchase price. It isn't clear how much Mr. Wekerle contributed but the property was purchased without a mortgage. The title was assigned solely to Mr. Wekerle, as condo rules did not permit joint ownership, according to court filings. Mr. Sehgal alleges that Mr. Wekerle executed a promissory note to him and Mr. Sali valued at $1.1-million each to protect their financial interests.

Mr. Sehgal alleges that in May, 2014, he learned that Mr. Wekerle had taken out a mortgage on the property in violation of their agreement. He also alleges that the new mortgage exceeded the value of Mr. Wekerle's equity in the property. Then a month later, Mr. Sehgal alleges he found out that Mr. Wekerle had put the property up for sale at $4.6-million without his knowledge.

In court filings, Mr. Sehgal said once Mr. Wekerle repaid his mortgage, the remaining proceeds were insufficient to cover what was owed to Mr. Sehgal and Mr. Sali.

Mr. Sehgal headed to court, filing a lawsuit against Mr. Wekerle last summer and adding the bankruptcy application in November.

In an interview, Mr. Wekerle denied the allegations of bankruptcy. And he said the two had done property deals before.

"This is the second time I've carried Rohit on a property," said Mr. Wekerle. "I brought him into the property ... I did all the legal work myself. I didn't charge him anything on the fees."

Mr. Sehgal declined comment.Mr. Wekerle rejected any suggestion that he is running out of money. "One hundred and ten per cent incorrect. A lot of people like to talk about me. And it's malicious. If I was bankrupt I wouldn't have just flown to Europe in my own jet, which was about $100,000," he said.

In December, Mr. Wekerle was unable to meet a $2.5-million (Canadian) margin call from his broker, Richardson GMP, on debt securities he holds in his firm, Difference Capital. At the time, Mr. Wekerle explained that his money was tied up in illiquid investments, stating that he was "asset rich and cash poor."

During the same interview, Mr. Wekerle said his single biggest asset was his investment in Difference, the publicly-traded merchant bank he co-founded in 2012. He owns 23 per cent of the company's common stock, valued at approximately $8.4-million. His debt holdings are worth around $8-million. Shares in Difference have lost 81 per cent of their value since the company went public in May, 2012, and most of the company's early investments have performed poorly. Difference has also suffered from a slew of departures of management and board members in the past year.

Mr. Wekerle himself will be on the move soon. On Wednesday, he said he plans to vacate his exclusive Toronto neighbourhood, partly because he's become disillusioned with all of the gossiping. "I'm in the process of selling my house in Forest Hill," he said. "The crowd around here in Forest Hill are too Chatty Cathy. I'm going to move back to Bayview and Steeles, where my mum lives."

Michael Wekerle says he was unable to meet a December margin call because he was 'asset rich and cash poor.'


Thursday, September 12, 2013

Banks Short Interest, as at 30 August 2013

Scotia Capital, 12 September 2013

• Canadian banks continue to be heavily shorted relative to U.S. major banks (see our April 29, 2013 report Canadian Banks Short Interest Ratio Higher Than Prior to Lehman Collapse), based on the most recent data, August 30, by the TSX and NYSE.


• Canadian banks short interest ratio declined modestly in August to 9.4 trading days compared to 10.6 trading days in July. U.S. major banks short interest ratio remained flat at 1.2 trading days, well below the short interest levels of the Canadian banks.

• CM had the highest short interest ratio in the bank group at 11.8 days, followed by BMO at 10.7 days.


• Following the strong earnings beat from the Canadian banks in Q3/13, including dividend increases and new share repurchases, the short interest ratio declined a modest 0.3 trading days versus our last update (data as at August 15, 2013).

• Earnings could continue to surprise on the upside, especially if the net interest margin continues to stabilize and perhaps increase.

• Positive earnings momentum, housing market resilience and the high cost of carry is not expected to be short interest friendly.

• Maintain Overweight recommendation versus TSX, although we continue to recommend Overweight U.S. major banks (select and less aggressive) relative to Canadian banks.

Monday, August 19, 2013

Preview of Banks' Q3 2013 Earnings

Scotia Capital, 19 August 2013

Banks begin reporting third quarter earnings on August 27. We expect underlying operating earnings to increase 4% YOY and 3% QoQ. Our earnings estimates are in line with consensus. ROE 17.0% (18.0% excluding TD), RRWA at 2.25% (2.31% excluding TD).


• We expect Wholesale earnings to remain strong, up slightly both sequentially and YoY. Domestic/Retail Banking earnings are expected to remain resilient although growth is slowing, with Wealth Management earnings expected to be strong, aided by AUM growth. Wholesale is expected to be benefit from solid fixed income underwriting, strong equity underwriting, and continued strength in corporate lending.

• We expect TD, BNS, RY, and BMO to increase their dividends 4%, 3%, 3%, and 2%, respectively.

• Bank P/E multiples, we believe, are very attractive at 11.2x and 10.2x our 2013E and 2014E EPS. We believe housing concerns and short interest are muting bank valuations and P/E expansion. We expect Canadian bank P/E multiples to hit 15x trailing in 2015 as systemic risk continues to decline, housing concerns moderate, and investors chase banks' high dividend yields.


• We maintain our overweight Canadian banks versus the TSX and our overweight U.S. banks versus Canadian banks recommendations.

• We maintain CM as our FS; an SO rating on RY; SP ratings on TD, BNS, NA, CWB and LB; and SU rating on BMO.

Tuesday, April 09, 2013

Why Canada Can Avoid Banking Crises & the US Can’t

The Wall Street Journal, Victoria McGrane, 9 April 2013

Since 1790, the United States has suffered 16 banking crises. Canada has experienced zero — not even during the Great Depression.

It turns out Canada can thank the French for their stable system, according to a paper by Columbia University’s Charles Calomiris, presented at the Atlanta Fed’s 2013 Financial Markets Conference.

When it became a British colony, the majority of Canada’s population was of French origin — and the French inhabitants hated the British government.

So to keep the colony firmly within the Empire, British policymakers steered toward a government structure that would limit the power of the French-majority while also giving Canada more and more self-government. The eventual result was a highly-centralized federal government which controlled economic policy making and had built-in buffers for banker interests against populist forces, the paper argues.

That anti-populist political system — known in political science as liberal constitutionalism or liberal democracy — is a key ingredient in Canada’s stable banking track record, Mr. Calomiris contends in his paper, which is a summary of a much longer book he’s written with Stephen Haber due out in September. That’s because this kind of political system makes it difficult for political majorities to gain control of the banking system for their own purposes, the authors contend.

Populist democracies like the U.S., on the other hand, tend to create dysfunctional banking systems because a majority of citizens gain control over banking regulation that steers credit to themselves and to their friends at the expense of the citizens that are excluded from the banking system, he said.

The contrast between the U.S. and Canada was part of Mr. Calomiris broader argument that dysfunctional banking systems — which are by far the norm rather than the exception around the world — are the result of political factors.

“Whether societies have dysfunctional banking systems is really not a technical issue at all. It’s a political issue,” Mr. Calomiris said at the conference, introducing his premise as “we do know how to avoid dysfunctional banking but that we make political choices – you might even say consciously” not to have functional banking systems for most of the modern era in most countries of the world.

The history of the U.S. banking system is one in which the government forms partnerships with different interest groups at different points in history, and those coalitions jointly influenced the way the banking system was regulated, Mr. Calomiris argues.

“In populist democracies, such as the United States, the regulation of banking is used as a political tool to favor some parties over others. It is not that the dominant political coalition in charge of banking policy desires instability, per se, but rather, that it is willing to tolerate instability as the price for obtaining the benefits that it extracts from controlling banking regulation,” he writes in his paper.

Backing up their argument: Only six countries – including Canada — have been crisis-free and at the same time have banking systems that provide abundant credit. Three of these – Singapore, Malta and Hong Kong – are small, island-bound city-states where the homogeneity of the population makes it politically difficult to create losers. The other three – Canada, Australia and New Zealand – all share histories of liberal democracy.

Mr. Calomiris argues that in the U.S., a coalition that emerged in the 1990s of government, big banks and activist consumer groups came helped fuel the housing crisis. Regulatory changes opened the door to a wave of mergers and acquisitions that created today’s megabanks. But banks still had to get approval – usually from the Federal Reserve – to complete those mergers and outside groups were able to weigh in on the wisdom of the deal as part of the Fed’s decision-making process.

Community groups, with the Clinton administration’s encouragement, used the Fed’s approval process to extract binding concessions from banks to loosen underwriting standards for poor, urban communities – concessions to which the Fed agreed, Mr. Calomiris argues. The banks had to apply the looser standards to everyone. That helped fuel an explosion in poorly underwritten mortgages that contributed to the depth and severity of the housing crisis, he contends.

All in all, Mr. Calomiris’ theory is a bleak one for the ability of financial reform efforts to make much of a difference.

“Smart economists with their regulatory ideas are sort of dead on arrival,” he said. “Political coalitions will decide — not whether you’ve got the right VAR model — [but] whether a banking system is going to be set up with rules that will lead it to be stable and have abundant credit or not.”

Friday, April 05, 2013

TD Bank’s US Expansion Hasn’t Come Cheap

The Globe and Mail, Scott Barlow, 5 April 2013

The impending ascension of Bharat Masrani to the CEO chair at Toronto-Dominion Bank underscores the strategic importance of U.S. operations for the company as a whole, and provides an excellent opportunity to assess just how well TD Bank’s $17-billion (U.S.) foray into foreign territory is going.

The bottom line: It still faces considerable challenges. While U.S. expansion provides the bank with a useful counterbalance to its Canadian base, the venture is – for now – still a work in progress.

One question: can TD Bank maintain loyalty among its U.S. consumers? The Wall Street Journal recently published a brief report highlighting increasing customer dissatisfaction at its U.S.-based branches.

Meanwhile, return on equity (ROE), the most widely used measure of a bank’s profitability, has been running at about eight per cent per year on the company’s approximately $17-billion in U.S. acquisitions since 2004. This pales in comparison to TD Bank’s overall ROE of 14.8.

To be fair, the consumer data highlighted by the Journal is anecdotal and an ROE of eight per cent is perfectly acceptable for a relatively new expansion. But what does seem clear, with the benefit of hindsight, is that TD Bank paid a generous price for its primary U.S. assets.

The broader U.S. banking sector currently trades at an average price-to-book value of 1.2 times, according to Bloomberg data. TD Bank’s two major acquisitions south of the border, Banknorth Group Inc. in 2004 and Commerce Bancorp Inc. in 2007, were completed at far higher book value multiples of 2.6 and 2.8 times, respectively.

TD Bank spokespeople emphasize that the bank’s U.S. acquisition strategy is part of a long term initiative and that it was not trying to time the market when it made its U.S. purchases. Nonetheless, management can’t be thrilled with the evolution of U.S. book value multiples.

According to Brad Smith, analyst and head of research at Stonecap Securities, TD Bank’s U.S. operations have also required considerable financial support from the Canadian parent company. He estimates that TD Bank, N.A., the U.S. based holding company under which the bank’s U.S. operations legally sit, have required approximately $8.6-billion in loans – one assumes on favourable terms – from Toronto.

Mr. Smith also notes that the U.S. regulatory environment is likely to change. Foreign-owned bank holding companies south of the border are currently exempted from the U.S. regulatory system. But under the Collins Amendment, part of the Dodd Frank Financial reform bill, this exemption will end in 2015.

TD Bank spokespeople are correct in pointing out that rule changes will not be certain until the legislation is fully implemented. But under the Collins Amendment, TD Bank, N.A. would have to double its level of tier 1 capital to be considered “well capitalized” by U.S. regulators.

Mr. Masrani, who has been group head of U.S. personal and commercial banking, is well aware of all these issues, and he’s backed by a deep management team that has proven remarkably adept at running the bank’s Canadian operations.

Barring another financial-sector catastrophe, TD Bank N.A.’s balance sheet and its profitability are likely to improve as trust in the U.S. financial system is restored. The question is how high the upside is for the bank’s U.S. arm. To date, blind faith in the bank’s ability to repeat its domestic success in the U.S. appears misplaced.