Friday, May 26, 2006

How CIBC Got Caught Up in Enron's Wake

  
The Globe and Mail, Sinclair Stewart, Paul Waldie, with files from Andrew Willis, 25 May 2006

Two-and-a-half years ago, not long before Christmas, 2003, a group of lawyers and officials from Canadian Imperial Bank of Commerce filed into a Washington, D.C., conference room to meet with representatives of the U.S. Justice Department.

The two sides had come together to discuss a possible settlement over CIBC's alleged involvement in the demise of Enron Corp., although “discuss” would probably be the wrong word.

“It's a little bit like a game of chicken,” one U.S. source explained. “They know that we really don't like to indict public companies, and we know that they don't want to be on the brink of that indictment.”

They, being CIBC and its nervous executives, also knew who carried the bigger stick. To no one's surprise, the bank folded first, agreeing to an $80-million (U.S.) settlement with both the Justice Department and the U.S. Securities and Exchange Commission. This was a mere precursor to the record $2.4-billion CIBC paid last summer to settle a class-action lawsuit by aggrieved Enron investors.

Yesterday's guilty verdicts against the disgraced energy trader's founder, Kenneth Lay, and its former chief executive officer, Jeffrey Skilling, provide some closure to one of the most costly business collapses in history. Roughly $60-billion worth of Enron's stock market value was vaporized, as were $2.1-billion worth of pensions and 5,600 jobs. Yet with the crush of scrutiny on the individual convictions, it's easy to lose sight of the sheer breadth of devastation left in Enron's wake.

This damage filtered across the Canadian border, affecting the reputations of some of the country's biggest financial institutions, and shaking the foundations of CIBC, in particular, which was one of Enron's top lenders.

The bank has since rebounded, of course. Its former CEO, John Hunkin, resigned unceremoniously last fall, and was replaced by Gerry McCaughey, who has pared down the bank's risk profile. Corporate governance policies have been given more teeth, senior management ranks have been overhauled, and the balance sheet is regaining its health. But the effects still linger.

“The Enron fallout is now embedded in CIBC culture,” said one former employee of the bank. “They're afraid of ever getting into that kind of situation again. It brought a profound change in the way the organization looked at risk, at doing business in the United States. It influenced the type of leaders the bank embraced.”

Toronto-Dominion Bank and Royal Bank of Canada, who were also targeted by investors for their dealings with Enron, have set aside hundreds of millions of dollars in legal reserves, but have not yet settled the class-action suit. They could face litigation unless they do so by this fall. Investors claim that a number of the world's largest banks abetted a massive accounting fraud at Enron, helping the company to disguise its debt and artificially inflate profit. TD and RBC have denied any wrongdoing, and none of the allegations have been proven.

Nick Le Pan, the federal superintendent of financial institutions, was involved in the settlement negotiations between CIBC and the U.S. authorities, but played down any idea that Enron threatened the stability of Canada's big banks.

“Enron was a huge bankruptcy that did not cause direct financial harm to the banking system,” he said in an interview.

CIBC shareholders, however, certainly felt the pain: The bank's settlement with Enron investors represented more than 20 per cent of the bank's entire book value at the time, and caused more than a bit of nervous hand-wringing in the company's board room.

CIBC became involved with Enron in 1991 when it participated in an underwriting for a British power project that was co-owned by the Houston-based energy company. Over the next eight years, CIBC was involved in nine other Enron financings.

The bank's relationship with the company became much closer in 1999, at the invitation of Andrew Fastow, Enron's hot-shot chief financial officer. At the time, Mr. Fastow was already something of a legend on Wall Street for transforming Enron from a pipeline operator and into a global energy giant.

Enron designated CIBC one of its “Tier 1” banks in January, 2000, sparking celebration inside the bank, according to court filings.

In an e-mail at the time sent to several bank officials including Mr. Hunkin, Billy Bauch, then managing director of CIBC World Markets' oil and gas group, congratulated his own team on obtaining the designation.

But he noted that along with the prestige came “the burden and responsibility of participating in certain unattractive transactions.” CIBC officials have said the comment related to low-margin business and not to anything improper.
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