Tuesday, November 06, 2007

CIBC's Retreat from the CDO Business

Financial Post, Duncan Mavin, 6 November 2007

Canadian Imperial Bank of Commerce’s total losses on structured products are creeping up toward the three quarters of a billion dollar mark according to calculations by Blackmont Capital analyst Brad Smith.

The bank confirmed on Monday that losses from the investments, which are related to the credit-markets, are still rising.

“We now estimate losses to be $200-million to $400-million since early August,” Mr. Smith said. This puts the aggregate loss at $500-million to $700-million, he said. “Additional losses cannot be ruled out without fuller disclosure of the bank’s exposures, which management remains unwilling to provide,” he said.

CIBC’s latest revelations came during a conference call to discuss its retreat from the U.S. capital markets — the bank is selling most of its U.S. investment bank. The bank also said that its head of global debt capital markets will depart the firm. CIBC World Markets chief executive officer Brian Shaw will now oversee structured products.

Amid the investment banking changes and the credit market problems, Blackmont’s Mr. Smith is maintaining a “hold” recommendation on the bank, with a $103 target price.
The Globe and Mail, Boyd Erman, Tara Perkins, Sinclair Stewart, 5 November 2007

In the late 1990s, the New York office of Canadian Imperial Bank of Commerce's securities arm was the globe's top destination for investors clamouring to buy complex derivatives known as collateralized debt obligations. Today, as the subprime debacle has turned CDOs from the belle of Wall Street to the bane, the bank is all but shutting down the business.

Amid climbing losses from its own CDO and subprime exposure – analysts estimate that the red ink for the past fiscal year could top $500-million – CIBC yesterday parted ways with Phipps Lounsbery. As head of the debt division at the bank's World Markets securities business, Mr. Lounsbery paid the price for the ill-fated bets at a time when CIBC chief executive officer Gerry McCaughey is trying to make the company less risky.

Jayson Horner, CEO of CanDeal, said Mr. Lounsbery is “sort of a senior statesman in the industry, and many people feel that his efforts have been very much appreciated.

“Phipps has always been very approachable, very level-headed and always willing to take the time,” Mr. Horner said. “I don't think he's ever been one to advance himself ahead of other things.”

It has been a long fall for CIBC in the CDO business, where the bank now barely shows up in deal-making rankings. In the 1990s, after stealing bankers from much larger rivals, the Canadian upstart made itself into the world's busiest bank in the sector.

CDOs, customized debt instruments that give investors exposure to baskets of different bonds and loans such as mortgages, were wildly popular until holders realized they are tough to value and sell when markets tank.

“We've decided that the business prospects in that area are going to be limited,” Brian Shaw, who runs the securities division at CIBC World Markets Corp. and has taken on responsibility for fixing the problem, said on a conference call. “The focus currently is on management of existing risks.”

The pressure on banks that have exposure to CDOs and the U.S. housing market has increased immensely in the past week, as the fresh $8-billion to $11-billion (U.S.) writedown that's expected from Citigroup illustrates.

CIBC has already taken a $290-million third-quarter writedown on its $1.7-billion of U.S. mortgaged-related investments, many in the form of CDOs. CIBC's losses on subprime in the fourth quarter, which ended Oct. 31, were likely between $300-million to $500-million, CIBC World Markets analyst Darko Mihelic said in an interview yesterday.

People at CIBC who worked with Mr. Lounsbery said he was well liked, but that there was a sense of inevitability about his departure as the CDO situation worsened.

Mr. Lounsbery, a 24-year veteran of the firm, was a member of the CIBC World Markets management committee. He moved into the top debt job at the end of 2004, when Steve McGirr was promoted to president of the securities business. Mr. McGirr later became chief risk officer for all of CIBC, and left the bank this summer.

The pain may not be over for CIBC, as the value of mortgage-related securities has plunged further in the first five days of the first quarter amid concern that the U.S. housing market is rapidly worsening and that massive amounts of the investments may end up flooding the market as holders are forced to sell.

Even the supposedly safest triple-A-rated mortgage-backed securities have slumped, with an index tracking them falling from 92 cents on the dollar late last month to 80 cents this week.

CIBC's push into CDOs was part of a strong emphasis on expansion in the U.S. during the 1990s under then-CEO John Hunkin and David Kassie, who ran what is now World Markets. But success was short-lived. By 2002, the bank had dropped from first to 17th place for running CDO sales, according to Asset-Backed Alert, which tracks the industry.

Many bankers who were brought in to build the business departed. By the first half of this year, CIBC controlled only 0.2 per cent of the world market for CDO deals. There are currently fewer than 50 people working on the debt side of CIBC World Markets' structured credit business.

When CIBC announced yesterday it was selling the bulk of its New York securities business to Oppenheimer Holdings Inc. as part of Mr. McCaughey's attempt to make the bank less risky, the CDO business wasn't part of the deal. Analysts suggested that meant no buyer would touch it.

“It's not like CIBC looked at this business and said ‘No, we love this business so much we want to hold on to it,'” said Genuity Capital Markets analyst Mario Mendonca.

CIBC also announced yesterday that David Leith has been appointed deputy chairman of CIBC World Markets.