US embassy cable - 05OTTAWA2413

UNCLAS OTTAWA 002413 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR EB/IFD, EB/OMA, WHA/EPSC, AND WHA/CAN 
STATE PASS FEDERAL RESERVE BANK FOR CHUGH 
STATE PASS SEC FOR JACOBS 
TREASURY FOR WILBUR MONROE AND DAVID NAGOSKI 
 
E.O. 12958: N/A 
TAGS: EFIN, CA 
SUBJECT: ENRON HITS CANADA:  CIBC PAYS RECORD $2.4 BILLION 
SETTLEMENT 
 
REF: OTTAWA 3433 
 
1. (U)   For official use only.  Not for Internet 
distribution. 
 
2.  (U) The Canadian Imperial Bank of Commerce (CIBC) 
announced August 2 that it is paying US$2.4 billion to settle 
the class action suit brough on behalf of purchasers of Enron 
securities.  The settlement, the largest ever paid by a 
Canadian financial institution and beating the settlements 
reached by Citigroup ($2 billion) and J.P. Morgan ($2.2 
billion), does not include any admission of wrongdoing by 
CIBC.  According to newspaper reports, the SEC estimates that 
CIBC earned a total of under US$40 million from its 
questionable Enron transactions. 
 
3.  (U) CIBC lost 10% of its market capitalization the day 
after the settlement was announced.  Its shares fell 7.6% 
(C$6.09) on the Toronto Stock Exchange, to C$74.55 and 
analysts now expect CIBC to post an annual loss, rather than 
a solid profit. CIBC's stock has not rebounded, with shares 
trading this week in the C$71-73 range.  However, the bank's 
August 2 announcement specified that after "taking this 
charge into account, CIBC expects that its Tier 1 capital 
ratio will be approximately 7.5% as of July 31, 2005, above 
the regulatory requirement of 7.0% for a well-capitalized 
financial institution, but below the bank's objective of 8.5% 
or higher."  Third quarter financial results are due August 
24.  Canada's banks, including CIBC, have been enjoying 
record profits in recent years and the settlement is expected 
to temporarily slow but not topple CIBC. 
 
Where there's smoke? 
-------------------- 
 
4.  (SBU) The size of the settlement stunned analysts, but 
the fact that the bank involved is CIBC evoked no surprise. 
A banking expert, echoing press reports, told us "They've got 
to be guilty as Hell.  That bank is a scandal. If there's a 
disaster, CIBC is involved.  And it's all a reflection of 
Hunkin."  John Hunkin, who retired as CEO on July 29 with 
C$52 million in stock and other securities, had earned $15 
million in salary and bonuses since taking office in 1999. 
Despite calls from investors to recover money from Hunkin, 
conventional wisdom is that CIBC plans to put the issue 
behind it. 
 
Limited impact 
-------------- 
 
5.  (U) A U.S. banker told us that his firm's relationship 
with CIBC continues as usual although they are "keenly 
looking at" the situation, monitoring CIBC's credit rating 
and trading in its equities and secondary bonds.  Share 
prices of the Royal Bank of Canada and TD Bank, who are also 
in line for Enron settlements, dropped slightly on news of 
the CIBC settlement.  However, their payouts are not expected 
to be as large and their shares are still trading within 
recent ranges. 
 
6.  (U) The settlement is not expected to change the dynamics 
of on-again, off-again bank merger policy in Canada (reftel). 
 The Minister of Finance recently announced that bank merger 
policy may not be clarified before the end of the year but 
yesterdays statement of qualified support from the NDP, a 
party traditionally opposed to bank mergers, has put the 
issue back on the front burner.  Even before the settlement, 
CIBC had been seen as a merger target, not an acquirer and 
the loss of capital does not change that.  Our bank expert 
opined that with CIBC's systemic problems, the best thing for 
the Canadian banking system would be for another bank to 
purchase CIBC to get their name out of the market. 
 
7.  (U) Comment:  The size of the settlement caught everyone 
by surprise but there seems to be consensus that CIBC had it 
coming. It has temporarily weakened that bank, but the slight 
spillover to other banks does little to dampen a very 
profitable sector.  The activity of U.S. banks in Canada and 
the outlook for bank mergers appear unchanged by the 
settlement, but it does emphasize the extent to which our 
financial markets are linked.  End comment. 
 
Visit Canada's Classified Web Site at 
http://www.state.sgov.gov/p/wha/ottawa 
 
WILKINS