Friday, January 25, 2008

National Bank Bails Out Insiders of Their ABCP Holdings

The Globe and Mail, Janet McFarland, 25 January 2008

Executives, directors and other insiders at National Bank of Canada had $7.8-million worth of asset-backed commercial paper investments bought back from them by the bank after markets collapsed in August, the bank has revealed.

In a shareholder proxy circular issued Friday, National Bank said a previously announced program to buy back $2.1-billion of ABCP investments from clients also included buybacks from 48 bank insiders.

They included five members of the board of directors, including chief executive officer Louis Vachon, as well as three other senior executives: Ricardo Pascoe, who is co-CEO of National Bank Financial; Luc Paiement, the other co-CEO of National Bank Financial; and Michel Tremblay, who was chief operating officer of personal and commercial banking but has since left the bank.

Mr. Vachon had the largest personal holding of ABCP investments at $2.54-million. Mr. Tremblay held $1.44-million.

Most of the insiders, including Mr. Vachon and Mr. Tremblay, held their ABCP investments through the bank's mutual funds.

The bank said the decision to include the insiders in the buyback was made by a committee of independent directors who had no interest in the ACBP buyback. André Caillé, who chaired the independent committee, said the insiders “had to be included in the transaction” which covered all individual retail clients.

“They, too, are clients who entrust the bank with their savings,” he said in a statement. “They could not be treated differently from other retail clients and penalized for doing business with their bank.”

Montreal-based National Bank, which is Canada's sixth-largest bank, has been at the forefront of the turmoil in Canada's ABCP market, which has been frozen since August. It was the lead dealer for commercial paper issued by Coventree Inc. that was sold to National Bank clients.

The bank was forced to take a writedown of 25 per cent of its $2.25-billion worth of paper in the fourth quarter last year, leading to its first quarterly loss in 15 years.

National Bank announced in August that it would repurchase ABCP holdings from individual retail clients and from corporate clients with total holdings of $2-million or less who were not considered accredited investors under regulations.

That means, however, that many corporate clients are still holding their ABCP investments, which have declined significantly in value.

The proxy circular said five directors and three executives accounted for $7.13-million of the total repurchased from insiders, while 32 other employees held another $704,031. The directors who held ABCP investments were Gérard Coulombe, Nicole Diamond-Gélinas, Paul Gobeil and Jean Douville, who is also chairman of the board.

Another board member who held ABCP investments was not covered by the transaction because his holdings did not fall within the parameters for the buyback.

The board said the three executives who had their ABCP repurchased put the money into a trust account so they could work on the issue “without any appearance of conflict of interest.”

Also Friday, the bank reported Mr. Vachon did not receive a bonus last year because financial results “fell short of the objectives set at the beginning of the year.”

He did, however, receive a mid-term compensation payment of 22,284 stock units valued at $1.2-million. They will only vest after three years if he remains in the job and will be based on the value of the bank's shares at that time.

He was also granted 196,464 stock options estimated to be worth about $2-million based on a calculation of their potential future value.

The bank's proxy circular also includes 20 shareholder resolutions proposed for a vote at the bank's annual meeting on Feb. 29.

They include four resolutions related to the bank's ABCP problems. One asks the bank to review the performance of the CEO and another executive in light of the ABCP losses the bank has suffered, questioning why the bank was allowed to hold such large positions in the financial instruments. Another calls on the bank to hire an independent investigator to review the decision to buy back $2-billion in ABCP holdings.

The bank has recommended shareholders vote against those proposals.