Saturday, May 27, 2006

Hunkin's Enron Retreat was Right Move for CIBC

  
The Globe and Mail, Eric Reguly, 27 May 2006

John Hunkin invited me to lunch about two years ago and we met in the sleek dining room atop the CIBC tower in Toronto. He was peeved because I had written a column called "Hit the road, Hunkin" and wanted to set me straight. The piece politely suggested he defenestrate himself because of the bank's run-ins with New York State Attorney-General Eliot Spitzer, in the mutual funds trading scandal, and the U.S. Department of Justice, in the Enron case.

Mr. Hunkin was gracious and funny nonetheless. Before we sat down, he gave me a quick tour of the executive offices. "Is that where Spitzer sits when he's here?" I asked, pointing to an empty desk. "No," he said, "we built him an office down the hall."

Inevitably, the conversation turned to Enron. Only a few months before, CIBC had reached a settlement with Justice in the Enron affair, which came to a sensational conclusion this week with convictions of Kenneth Lay and Jeffrey Skilling, the chairman and CEO team who oversaw the biggest fraud in U.S. corporate history.

In the autumn of 2003, the rumours said CIBC was in serious trouble with Justice, that it faced possible criminal indictments for its sordid dance with Enron. The rumours of possible indictments were forcibly denied by the bank, though Mr. Hunkin was obviously nervous. He went on a damage-control campaign and met with media executives. The message: Call off the dogs, don't print rumours, thousands of employees' jobs are at risk if the bank takes an unjust beating in the press.

CIBC settled with Justice that December while still denying that threats of criminal indictments forced it to run up the white flag. But the wording of the settlement made it clear CIBC had come close to the precipice. Justice said CIBC "has accepted responsibility for the criminal conduct of its employees in connection with a series of structured finance transactions with Enron." It added: "As long as CIBC abides by the terms of the agreement, the Justice Department has agreed to not prosecute the bank."

CIBC was required to pay $80-million (U.S.) to the Securities and Exchange Commission, exit the structured finance business in the United States and appoint an independent monitor to oversee the bank's compliance systems.

I asked Mr. Hunkin why the bank had settled. Intimidation was more or less the answer. He said arriving at Justice's offices was scary, because the walls are lined with pictures of Justice "kills," (like Ivan Boesky and Michael Milken, though he didn't identify the photos and said he hadn't been there himself). In the end, CIBC had no desire to become a piece of art.

Good call on his part. No financial institution had survived a criminal indictment. The memory of Arthur Andersen was painfully fresh. In 2002, Andersen, Enron's auditor, was convicted of obstruction of justice for shredding Enron documents. Three years later, the U.S. Supreme Court overturned Andersen's conviction. But it was too late. The Big Five accounting firm had been reduced to rubble.

If indicted, CIBC too would have faced eradication. In the months before the settlement, rival Canadian banks began to fear for their own health -- if Justice were to nuke CIBC, the fallout would hurt everyone. The federal Office of the Superintendent of Financial Institutions arrived to help broker a deal with Justice. The Federal Reserve Bank of New York probably got involved too, though its role has never been confirmed. The two regulators may have convinced Justice that taking out a big Canadian bank, one with a significant Wall Street presence, would cause more problems than it solved.

At the time, the settlement costs seemed relatively minor, the equivalent of a speeding ticket. But Justice left behind a time bomb. The settlement prevented CIBC from disputing its unsavoury conduct in the Enron affair, meaning it could not defend itself against shareholder lawsuits. The bomb went off last August, when CIBC settled a class-action lawsuit for $2.4-billion, a price greater than the ones paid by Citigroup and J.P. Morgan for their Enron sins.

Still, CIBC had done the right thing -- for the bank, its employees the shareholders -- by settling.

The Enron fiasco had a pleasant ending. It seemed to have convinced Mr. Hunkin that the United States was a dead end for the bank. Wall Street's Oppenheimer, bought by CIBC in 1997, was largely sold in 2002. Amicus, the electronic bank, failed and was put to rest. The dream that CIBC could make a splash in the U.S. market vanished.

Canada became the new focus. CIBC bought Merrill Lynch's Canadian retail arm and rode the income trust bucking bronco. Profits roared back. The shares have more than doubled to $80 (Canadian). Over four years, CIBC's shareholder returns have been better than Royal Bank's.

Mr. Hunkin was replaced as CEO last year by Gerry McCaughey. He took his fortune and disappeared from view. Mr. Hunkin will never go down as a bank hero. He will go down as someone who did his best to correct a horrendous series of mistakes made under his watch.
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