Good morning. We’re digging into TD’s terrible, horrible, no good, very bad summer – more on that below, along with Justin Trudeau’s East Coast cabinet retreat and the secret to enduring an ultramarathon. But first:
Today’s headlines
- Canada’s two largest railways resume full service today after a federal labour board imposed binding arbitration, forcing rail employees to return back to work
- The College of Physicians and Surgeons of Ontario has cleared a former emergency room physician for alleged gender-based discrimination for a second time
- Israel and Hezbollah trade their most intense fire in months, then pull back
A big bank debacle.Christopher Katsarov/The Globe and Mail
Business
TD’s dirty laundry
The news has not been especially good for TD Bank. First, The Globe reported that U.S. regulators spiked its multibillion-dollar bid for a Tennessee bank because TD was caught up in – oh dear – a global drug war. Then, a year-long investigation by Globe reporters uncovered a cultural transformation at TD that’s resulted in anti-money-laundering failures, strategic misfires, a leadership exodus and succession woes. Also, last week, it had to set aside about $4-billion to pay off looming penalties in the U.S. Oh, and it just posted its first quarterly loss in more than two decades.
To better understand what on Earth went wrong at TD, I spoke with James Bradshaw, the Globe’s institutional investing reporter, who covered the big banks for years and has been part of the team on this particular scandal since it broke. Here’s what he had to say.
Let’s go back a year, when the U.S. regulators blocked TD’s $13.4-billion acquisition of the Memphis-based First Horizon Bank. Did that seem strange at the time?
It was baffling. That acquisition was such a big deal for TD: It would have made TD the sixth-largest bank in the U.S., and also answered critics who felt it had been too conservative under CEO Bharat Masrani. It was mysterious because the termination happened less than two months after Silicon Valley Bank collapsed, which set off a crisis for U.S. regional banks. First Horizon’s value had taken a big hit in the aftermath and TD’s offer was looking very expensive. So people wondered, did TD really have a severe regulatory issue? Or was the bank taking a convenient way out? The clue that the problem was real came from First Horizon CEO Bryan Jordan. He explained that TD wasn’t able to assure him that it could get regulatory approval in 2023, or even in 2024. Regulators don’t typically hold banks in limbo for that long without a good reason.
Is that when The Globe got to work on this investigation?
As soon as the deal fell apart, we had several reporters calling sources and chasing details about what had gone wrong. Regulators are very secretive about a lot of their work, but plenty of other people wanted to talk – gossip was abundant and there was informed speculation. Pretty quickly, money laundering came up as a possible reason, and a few days later, the Wall Street Journal reported that anti-money-laundering lapses were the key sticking point. There were whispers about cartels and drug money – as well as other rumours that turned out to be untrue – and the race to uncover the full extent of the problem was on.
Wall Street banks have been caught up in laundering money for drug cartels. What makes TD’s crisis so eye-popping?
First of all, it’s a Canadian bank. Rightly or wrongly, the large Canadian banks had built a reputation for sidestepping most of the really egregious scandals that ensnared some U.S. and European banks. They were held up as the global benchmark for stability and trust after withstanding the 2008 financial crisis. Also, the sheer size of the expected fine – US$3-billion – is not common. It would be the second-largest penalty any bank has paid to settle this kind of problem with regulators. And it is hard not to be shocked by the conduct that slipped past them: bags of cash deposited at New York branches, front-line employees taking bribes to open dubious accounts and wave through transactions. Some of the laundered money was linked to fentanyl trafficking, which is a crisis claiming so many lives and a top priority for U.S. law enforcement.
A TD branch in Queens, NY.Stephanie Keith/The Globe and Mail
Right, I would think that accepting literal bags of cash suggests a certain comfort with risk – but TD had a reputation for being too conservative?
The fact that it was TD wrapped up in this was very counterintuitive. Years before Masrani was TD’s CEO, he was its chief risk officer, and his acumen was his calling card. He was part of the bank’s decision to dump its exposure to high-risk assets such as mortgage-backed securities ahead of the 2008 financial crisis, and that turned out to be a prescient move that spared TD a lot of pain. So Bay Street struggled to understand how the bank known for obsessing over risks could miss such a big one. Our reporting found that TD added layer upon layer of bureaucracy, controls and approvals on his watch that could bog down decision making and a sense of accountability. And at the same time, the bank’s technology systems weren’t up to the task against criminals who constantly probe any number of banks for weaknesses.
So now TD expects to shell out US$3-billion. Practically, what will that mean for the bank?
TD can afford this. Before these problems came to light, the bank pretty routinely made between $12-billion and $15-billion of profit annually. And after the First Horizon deal fell apart, TD didn’t pay US$13.4-billion to buy it, so the bank was flush with cash. But this is still a big financial blow – TD just reported its first quarterly loss in 21 years. It had to sell shares it owned in another company to help make sure it still had plenty of capital. It’s also already spending hundreds of millions of dollars hiring staff and buying new technology to revamp the bank’s anti-money-laundering systems, and that could be expensive for years. And TD has said it expects “non-monetary” penalties from regulators in addition to the fine, so investors are worried about whether that could restrain TD’s ability to expand its business and earn higher profits. If that is the case – and it’s a big if – it could ultimately matter more than the fine.
Will this whole drama affect Canadians who bank with TD?
In terms of basic day-to-day banking, probably not. Banks as large as TD are designed to keep operating smoothly when they face a shock to the system. But banks are constantly making decisions about which loans to grant to customers, what interest rates to charge, whether to open a new branch in a community, or how much money to invest in making a banking app or digital services better. With TD under such pressure, financially and otherwise, will it make some decisions differently? Maybe. The bank just finished a cost-cutting program that included cutting back some of its real estate. So could the branch on your street corner close its doors? It’s not likely – TD has thousands, and that isn’t going to change. But it’s not impossible.
This interview has been edited for length and clarity.
The Shot
‘You’ve got to be ready to suffer.’
Scott Cooper, high above Canmore, Alta.Gavin John/The Globe and Mail
This Friday in France, from the base of Mont Blanc, Scott Cooper will begin running – for 176 kilometres straight, with a total elevation gain that’s higher than Everest. The UTMB Mont-Blanc is the Super Bowl of ultramarathon trail running, and to endure its punishment, Cooper will need to figure out how to give that pain (so much pain!) meaning. Read more here.
The Week
What we’re following
Today: Justin Trudeau is halfway through his three-day cabinet retreat in Halifax, where he’s facing the same headwinds he did a year ago.
Today: The U.S. Open kicks off in New York, as defending men’s champ Novak Djokovic looks for his 25th Grand Slam singles title.
Tomorrow: BMO and Scotiabank release their earnings, with the National Bank and RBC – fighting back against its former CFO’s wrongful termination lawsuit – to follow on Wednesday. CIBC wraps things up the day after that.
Wednesday: The 2024 Paralympics begin in Paris with a parade of athletes down the Champs-Élysées.
Wednesday: Last year’s actors’ and writers’ strikes robbed the Venice Film Festival of much of its star power; expect the A-listers to make amends when the festivities begin with Tim Burton’s Beetlejuice, Beetlejuice that night.