February, the season of love, is becoming the month of the scraping, bowing, down-on-my-knees apology for the titans of finance.
On Tuesday, the former executives of failed British banks stepped up to a parliamentary committee for a few hours of grovelling ("We are profoundly and, I think I would say, unreservedly sorry," said one now-deposed chairman). Yesterday, U.S. bankers had their turn. Citigroup's Vikram Pandit showed up in Washington in a hair shirt and promised to cut his salary to $1 (with no bonus) until his bank is profitable. "I get the new reality," he said, "and I will make sure Citi gets it as well."
In Canada, there have been no bank bailouts, no public inquisitions, no tub-thumping politicians trying to humiliate bankers on TV. But that's not to say there haven't been a few embarrassed people on Bay Street performing their own acts of contrition. Consider the case of Bank of Montreal chief Bill Downe, who last week decided he would also cut his pay to $1, retroactively, for 2008 - by which we mean, $1 for every 13 seconds.
His new pay package, $2.4-million, is Downe-sized considerably from the $6-million he had already accepted, before discovering RBC and CIBC top executives had each forfeited many millions of dollars in pay. But even this understates Mr. Downe's self-sacrifice. Reading the company's disclosure, we learn the board originally wanted to "exercise some upward discretion" and pay him an added bonus that would have brought his pay to $6.5-million (he declined). Why the extra dough? Among other reasons, for "his leadership in strengthening the bank's risk management capability."
Well, that bears a closer look, because if there's one thing we've learned in the financial meltdown, it's that banking is all about risk. Those that handle it well can survive to lend again. Those that don't end up insolvent or, like Mr. Pandit's Citi, morph into zombie banks and wards of the state. And the strange thing is that while the board is saying BMO is managing risk splendidly under Mr. Downe, the market is saying something very different.
BMO is the only Big Five bank whose shares trade for less than their stated book value, or net worth. It's the only one whose dividend yield tops 9 per cent, a screaming measure of the worry that a dividend cut is possible. Despite the prop of that fat payout, it's the only one whose shares declined by more than 40 per cent last year. It's the only one to drop at least 50 per cent since August, 2007, the month the credit crisis began.
Stock markets are not perfectly efficient. (They've been awfully good at smelling dividend cuts at banks, though.) But the collective wisdom of investors is telling us that the balance sheet values can't be trusted, or - more vaguely - that an ownership stake in BMO is riskier than one in its four main competitors. This is a real shift; in past cycles, BMO was viewed as the most boring, low-risk bank. No longer.
But why? There was that little stumble in 2007 with "irregularities" in commodities trading, which cost the bank some $440-million that year, and which occurred in a part of the bank Mr. Downe used to run. That's history, though. What matters now is credit and one of the big fears is that BMO, through its Chicago subsidiary, Harris Bank, opened the vault at exactly the wrong time.
In 2004, BMO had a portfolio of about $12.2-billion (U.S.) in U.S. personal and commercial loans. Within four years, it grew to $21.2-billion. The bank made particularly big increases in lending in 2005 and 2006, just as real estate values were peaking. Don't misunderstand: Harris is not some crazy subprime mortgage company. But it sure appears to have had a sizable, um, participation in the U.S. consumer credit bubble. Genuity Capital's Mario Mendonca, combing through data from the U.S. Federal Deposit Insurance Corp., found that Harris's provision for credit losses had more than doubled in the fourth quarter.
So why does this land in the lap of Mr. Downe, given that he became CEO only in 2007? Because he had oversight of the bank's U.S. businesses since 2002, because he was the face of its U.S. division, and because he has remained planted in Chicago while commuting to Toronto. Mr. Downe's base salary is even denominated in U.S. dollars. If BMO has been Americanized - i.e., made riskier - he bears no small amount of responsibility.
Still, we can't blame the guy for initially taking $6-million (Canadian) of what he was offered, and unlike his fellow U.S. bankers, he doesn't need to prostrate himself before politicians and say sorry. But the board? "Exercise some upward discretion?" The board looks wildly out of touch.
- Report on Business Company Snapshot is available for:
- BANK OF MONTREAL