Will the Big Banks Step Up Liquidity? - Pre Announcement

Will the banks come through for the Committee, or their shareholders?
By: Ross Hendin, Hendin Consultants

The banks are caught between a rock and a hard place, and it’s one minute to midnight. The issue really focuses now on politics and nothing more. Will the banks bend to the muscle of the Bank of Canada and the Committee, or will they learn a lesson from Jean Coutu and National Bank and protect their shareholders by leaving both their clients and the Bank of Canada to face a potentially massive disaster?

Reasons why the banks would come through for the Committee and provide liquidity would be to repay the favor of the Bank of Canada stepping in with a cash infusion months ago, and to bail out the clients they sold the notes to (just as National Bank did with their clients). This, from an optics and political perspective is the best choice for the banks: its great PR, it pays back favors to the political heavyweights that it needs favors from in time to come, and it allows the banks to position themselves as heroes and then hope that people don’t remember they are a large part of the reason the market is in this situation in the first place.

The main reason why the banks wouldn’t come through for the Committee and provide liquidity is their accountability to their shareholders. Just as Jean Coutu has publicly chastised National Bank for bailing out their clients, so too to CEO’s of the big banks need to justify why they put further funds on the line to try and save the Committee’s structured rescue. At best, shareholders will see this as a needless risk that worked out well, but at worst it puts substantial funds into needless risk – a surefire way to make sure you go from the top of the heap never working on Bay St. again.

This has to be one of the hardest weeks in all of the CEO’s lives, as there is no right answer here. What’s better: paying a favor to the powers that be, or avoiding risk for shareholders and shielding from further exposure to dangerous assets? Either way, a powerful lobby is going to have your job and your reputation at the top of their hit list.

As in so many other places in the world, I’d imagine that CEO’s would be speaking to their spouses, confidants, lawyers and their PR people about this. If I were advising on the right course of action, I would do what’s right for the bank’s clients over anyone else. Canadian’s today have more choice than ever in their retail and commercial needs – HSBC, ING etc. are all going to be able to take advantage of massive fallouts between clients and their “trusted” institutions. Shareholders will see their stocks rebound and then some if the CEO’s are perceived to be concerned about their client’s needs. If they put shareholders first, the negative public sentiment may take a long time to forget. Look at the Exxon Valdeez or the McLibel suit, and compare it to the JetBlue groundings and BP calling themselves “beyond petroleum”.

The best move for a CEO is to put their client’s first, and themselves second. It’s the best way to make sure they maximize PR for the bank and make the Bank of Canada and Mr. Crawford look like heroes – all things that will help make the frown on shareholder faces turn upside down faster.

A CEO that puts their shareholder’s needs today above their client’s needs risks lowering shareholder value tomorrow. The CEO that puts good PR and saving the minority note-holders above the needs of the shareholder today, will see both groups much happier tomorrow.