Friday, September 26, 2008

RBC on US Regulators' List in Auction Rate Securities Probe

Bloomberg, Doug Alexander, 26 September 2008

Royal Bank of Canada expects an agreement "soon" with the U.S. Securities and Exchange Commission and other regulators on the lender's role in the $330 billion market for failed auction-rate securities.

``We have been in discussions with the SEC and other regulators since April and we hope to reach a conclusion with them soon,'' Chief Executive Officer Gordon Nixon said today at an investors conference in Toronto.

Banks have been settling claims stemming from an investigation into allegations they peddled auction-rate securities as investments that were as liquid as cash. The market seized up in February, when the credit crisis prompted banks to stop supporting auctions at which the long-term securities were bought and sold.

Royal Bank, Canada's biggest lender by assets, has ``significantly'' less than the $1 billion of auction-rate securities held in customer accounts in April, because much of the debt has been redeemed by issuers at par, Nixon said.

``We want to purchase the remainder from our retail investors and assist them with their liquidity difficulties, however we cannot do this until we complete our discussions with regulators,'' Nixon said.

A buyback of the securities would have a ``negligible'' impact on the lender based on the estimates of the difference between par value and current valuations, the bank has said.

Nixon also said Royal Bank has no plans to pursue large takeovers of investment banks, though the lender would consider adding consumer banks or money-management assets.

``We are, and have been, active in terms of exploring strategies and alternatives in both those sectors,'' Nixon said. ``Both remain of interest in terms of our growth plan.''

Opportunities could arise in the next year, both within and outside the U.S., Nixon said.

``Under the right circumstances we could strategically support a retail banking or wealth management acquisition, and we expect opportunities particularly, but not limited to, the United States to unfold over the next 12 months,'' he said.

Royal Bank fell 58 cents, or 1.1 percent, to C$50.92 at 4:10 p.m. in Toronto Stock Exchange trading.

Chief Risk Officer Morten Friis said Royal Bank had ``very small'' investments linked to Washington Mutual Inc., the Seattle-based thrift seized in the largest U.S. bank failure in history.
The Globe and Mail, Tara Perkins, 25 September 2008

Royal Bank of Canada approached U.S. regulators two weeks ago in an attempt to resolve an outstanding investigation with respect to auction-rate securities, a spokeswoman said Thursday.

Canada's biggest bank confirmed to The Globe and Mail in August that it was one of a number of financial institutions subpoenaed in the United States in April in connection with an investigation into the $330-billion (U.S.) market for auction-rate securities, which collapsed earlier this year as a result of the liquidity crunch, leaving many U.S. investors stuck with frozen securities.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, but the interest rates on the investments were reset at regular auctions, some as frequently as once a week.

The U.S. Securities and Exchange Commission and the New York Attorney General's office have been negotiating settlements with a number of banks which sold the securities, alleging that they were telling customers the securities were safer than they actually were.

"Two weeks ago we proactively approached them to resolve our case, and we are hoping to reach a resolution soon," a Royal Bank spokeswoman said Thursday.

Earlier this year, the bank's customers were estimated to have $1-billion in auction-rate securities, but the figure has fallen since that time.

Other banks that have reached settlements with regulators have been forced to buy back the securities from clients and to pay fines. Merrill Lynch & Co. Inc., for instance, agreed to buy back $12-billion of the securities and pay a $125-million fine. Goldman Sachs agreed to buy $1.5-billion and pay a $22.5-million fine.
Financial Post, Eoin Callan, 24 Sptember 2008

U.S. federal enforcement officials are turning their sights to the Royal Bank of Canada as they crack down on financial institutions amid mounting public anger over a plan to bail out banks exposed to the credit crisis at the expense of taxpayers, according to officials.

Canada's largest bank is at the top of the list for enforcement agents at the Securities Exchange Commission who are pursuing financial institutions implicated in the collapse of the $330-billion auction-rate securities market, according to two federal officials.

The collapse of the market in the spring left many Americans unable to access funds they believed would be there for them to pay for short-term needs like college tuition and medical expenses, according to the S.E.C.

The disclosure is the first time officials at the agency have acknowledged they are preparing a federal enforcement action against RBC, and follows a parallel probe being pursued by state authorities. The pending enforcement action would make RBC one of the first Canadian banks to be called to account for its role in the credit crisis.

The regulator is actively pursuing a case against RBC after previous investigations found firms dealing in auction-rate securities misled customers into believing the financial products were safe and highly liquid investments comparable to cash deposits, according to an enforcement officer.

A U.S. federal official said there had been a brief hiatus in enforcement actions amid the recent market panic that swept Wall Street, but authorities were redoubling their efforts after a bailout plan was proposed that leaves taxpayers on the hook for losses on complex securities that have gone bad.

An RBC executive said Wednesday the bank was working with regulators, and indicated management at the bank's capital markets operations expected to reach a comprehensive settlement with U.S. authorities.

The bank faces an estimated payout of $1-billion based on precedent-setting agreements negotiated with other U.S. and international institutions by state and federal authorities to buy back securities held by individual customers, charities and small businesses, and to reimburse those clients for damages.

RBC is also the target of a class-action law suit from customers of the bank alleging there was mis-selling of the securities pursuant to "top down management directives", according to a filing submitted to in a U.S. district court by law-firm Girard Gibbs.

The filing and the wider probe by federal authorities is also investigating the extent to which dealers continued to market auction rate securities as liquid investments even after it became clear the system for maintaining cash flows could collapse.

The focus of the investigation into RBC's activities is its treatment of individuals and families rather than institutional investors, reflecting a significant shift by U.S. authorities that have focused largely on bigger shareholder losses in recent financial crisis.

Auction-rate securities became a favoured form of financing used by dealers amid the credit boom, but when the market froze many customers were unable to access their money and some were left holding securities that will not mature for decades.

The focus of regulators has been on getting these customers their money back, though the SEC is now expected to zero in on the conduct of bankers after a fresh agency directive that investigations encompass the conduct of individuals as a deterrent to others.

RBC has already begun writing down its estimated $4.9-billion exposure to the auction-rate securities market and has been setting aside money for losses on U.S. credit markets.

But over the past decade the bank's American and capital markets operations have been a big contributor to earnings. Wednesday RBC underlined its continued commitment to its U.S. operations by dividing its capital markets empire between Toronto and New York, appointing co-heads in each city.

Mark Standish will stay on in New York and become co-chief executive of capital markets for RBC along with Doug McGregor, who will run investment banking operations out of Toronto. The promotions accompany the retirement of Chuck Winograd, the veteran bank executive who has led the dramatic growth in RBC's capital markets operations over the past 10 years, during which time it has seen it grow from under 30 offices to more than 75 worldwide with the New York operation overtaking the Toronto unit.
The Globe and Mail, Boyd Erman, 24 September 2008

Bay Street's biggest investment bank will now be run in part from Wall Street after RBC Dominion Securities Inc. announced that one half of its new chief executive officer tandem will be in New York, where the firm is concentrating its growth.

RBC Dominion, the securities arm of Royal Bank of Canada, Wednesday named Doug McGregor and Mark Standish to be the firm's new co-chief executive officers when Chuck Winograd retires next month.

Mr. Standish, 47, will run mostly trading-related businesses from New York, while Mr. McGregor, 52, will oversee the bankers who advise companies on matters such as fundraising and mergers, as well as stock traders, from Toronto.

The naming of a New York-based executive as co-CEO will give the firm a deeper connection to what is still the global financial capital, even after the carnage of the subprime meltdown. The seismic shifts on Wall Street over the past month have opened the door to smaller rivals, with two of the biggest independent firms disappearing from the scene.

“We have a lot of people in New York and we need leadership in that community,” Mr. McGregor said. “We need leadership with people who work for us, with the customers and the regulators.”

RBC Dominion already gets more than half its revenue from the United States after a long steady buildup of its investment banking and trading capabilities through hiring and acquisitions. The firm also employs more people in the United States than in Canada.

Mr. Standish and Mr. McGregor spent the past year and a half as co-presidents under Mr. Winograd while the firm prepared for the transition.

While the bank wants to grow in the U.S., it is unlikely to make big acquisition of a struggling rival in the investment banking business. Royal Bank CEO Gordon Nixon has said he doesn't want RBC Dominion to generate much more than about 25 per cent of the whole bank's profits, which basically rules out a large purchase and has kept RBC out of the mix as humbled rivals such as Lehman Brothers Holdings Inc. have sought buyers.

“Some people thought that six months ago an acquisition may have made sense, but you look back at it now and it clearly wouldn't have made sense,” said Mr. Standish. “In this environment, whatever business you're in, caution is an extremely important discipline to have.”

Instead, RBC will continue on the path of using hiring and small acquisitions to bolster its business. The firm has been nabbing bankers fleeing sinking rivals to buttress its American operations.

“We've been trying to grow in the U.S., and we've been accomplishing that, but I think we can probably accelerate it,” said Mr. McGregor. “Depending on what the market gives us in terms of opportunity to hire talent or do some small acquisitions, similar to what we've been doing, that would be a good opportunity.”

While Mr. Standish will actually sit in New York, his bailiwick and Mr. McGregor's span both sides of the border. The firm has about 1,500 employees in the United States, compared to about 1,100 in Canada, with more scattered through offices ranging from London to Australia.

The dual-CEO role is becoming more common in the securities industry as firms become larger and have ever more complicated operations. Rival Scotia Capital, for example, has long split the CEO job along similar lines, with one person overseeing investment banking and another handling trading operations.

“It would be an extremely talented person that would have the background to directly manage all the businesses that we are in,” Mr. McGregor said.
The Globe and Mail, John Partridge, 24 September 2008

Wall Street's meltdown has presented Canada's largest investment dealer with a rare chance to both grow by attrition and cherry-pick top industry personnel to expand its own businesses, its departing chief executive officer says.

“The biggest opportunity is just that there are fewer competitors,” Chuck Winograd said in an interview Wednesday, shortly after Royal Bank of Canada announced that he will retire Oct. 31 as chairman and chief executive officer of RBC Capital Markets.

“Our objective has been to be a top-15 investment bank on a global basis. We're not far away from there and, let's face it, a couple of the players have disappeared.”

But in contrast to the disappearing titans of Wall Street, RBC also remains strong and well capitalized and in a position to expand and “globalize” some of its businesses, not just in the United States and Europe where it has been concentrating, but also elsewhere in the world, Mr. Winograd said. And here, good people, not bricks and mortar, are the key.

“We don't want to make a large acquisition in this business, but we do want to bring on teams [and] this is one of the few opportunities I've seen to speed up your growth because talent is available,” he said, although he added that the firm may also make some small acquisitions.

Mr. Winograd is stepping down from RBC Capital Markets after seven years in the top posts and 12 years with the firm. He joined in 1996, when the bank took over Richardson Greenshields, the Winnipeg-based brokerage he had headed since 1987, having signed on as a research analyst there 16 years earlier.

He will be replaced by the current co-presidents, Doug McGregor, 52, who will become chairman and co-CEO, and Mark Standish, 47, who will be president and co-CEO.

Mr. Winograd turned 60 last January and said that the firm's policy is that the CEO retires at the end of the fiscal year following that milestone.

In fact, the handover has been under way since February of last year when Mr. McGregor and Mr. Standish were appointed co-presidents.

“We have done a transition over an 18-month period,” he said. “I have given up the hold I had on the place, and they have taken it on, so it's just natural that it should happen.”

Still, acknowledging the extraordinary turmoil that has led Washington to seek Congressional approval for an unprecedented $700-billion (U.S.) aid package to bail out Wall Street, Mr. Winograd said it “does seem strange to be getting off this particular roller-coaster at this particular time.”

Congress is seeking to attach conditions to any rescue, including restricting sky-high Wall Street CEO pay packages.

Mr. Winograd agreed there have been “excesses,” but warned that an over-reaction will do more harm than good. “It's in everybody's interest to have a lot of strong players in the marketplace [and] if you get regulation run wild, it will not help the economy,” he said.

Mr. Winograd has presided over a period of dramatic growth at RBC Capital Markets. For example, between 2001, the first year of his tenure as the firm's CEO, and fiscal 2007, its profit more than tripled, leaping to $1.29-billion (Canadian) from $349-million.

Still, its performance this year has been caught in the global storm. Its profit for the first nine months of fiscal 2008 came in at $586-million, down from $1.1-billion a year earlier.

Mr. Winograd's career has made him a wealthy man by Bay Street standards, although not, perhaps, by those of Wall Street.

It was not immediately clear how many Royal Bank shares he currently owns. However, rough calculations based on information in the bank's most recent management proxy circular suggest that at the current share price of just over $51, he is sitting on deferred share units and unexercised stock options worth more than $50-million.

“My family has been very fortunate,” Mr. Winograd said.

Royal Bank CEO Gordon Nixon praised the departing investment banker in a news release.

“Chuck has led the transformation of our capital markets business to a significant and growing global concern,” Mr. Nixon said. “He played a strong and effective leadership role in our decisions to pursue new markets and enter new businesses [and] has also overseen our premier domestic Canadian capital markets franchise that is stronger than it has ever been.”

As for Mr. Winograd's successors, Mr. McGregor has been in the investment business since 1979 and joined RBC when it bought Marcil Trust in 1990. As co-president, based in Toronto, he has headed the firm's global investment banking business, including corporate finance, mergers and acquisitions and equity sales and trading.

In his new incarnation, he will have the specific responsibility for the firm's client relationships, along with its investment banking, equity agency trading and credit business, RBC said.

Mr. Standish, meanwhile, has been an investment banker for 30 years. He joined RBC in New York in 1995, and, his co-presidential responsibilities have included running its global debt, financial products, fixed income, foreign exchange and municipal finance from that city.

In his new role, he will oversee sales and trading, financing, as well as what RBC described as oversight and management of its balance sheet.

Both executives will remain in their current locations, giving the firm “leaders in both Toronto and New York,” said Gillian Hewitt, a spokeswoman for the bank.