Wednesday, February 6, 2008

Is TD Bank's decision not to participate good or bad? - Two Perspectives

By: Daryl Ching, Ross Hendin

On Monday, Mr. Crawford’s Committee issued a press release and hosted a conference call stating that they had an agreement in principle with four of the Big 5 banks, subject to conditions. I suspect a key condition will be an opinion that the banks have full immunity from potential investor lawsuits. One of the conditions for the restructure is that the various parties involved are released from any liabilities that result from losses on the notes.

Back in December, the Bank of Canada pressured the Big 5 to facilitate the ABCP restructure by contributing to the margin facility. TD Bank issued a response immediately declaring that they had not been involved in the non-bank ABCP market and therefore did not feel the obligation to participate. This opened up a can of worms, as a simple “everyone put up $500 million” would have been a simple solution. Now the exercise turned into “Let’s figure out how involved you were in the non-bank ABCP market and allocate your contribution from that.” To date, there has been no confirmation of the commitment amount from each bank, and a resolution has only been reached in principle, subject to conditions.

Daryl's Opinion

To my surprise, TD Bank is not participating in the margin facility. I thought this was one of those PR exercises where they pound their fist to let the world know that they were not involved in the non-bank ABCP market. I thought they would then come to the table with a nominal amount (less than the other banks) and say “See, we’re supporting the Canadian market. This is all goodwill.” In principle, I think this is the right move standing behind your convictions. However, in today’s current political environment of back scratching, TD Bank’s decision will have ramifications.

Undoubtedly, the Big 5 continue to prosper in Canada because they are protected by the government. The Bank of Canada further supports the big banks through different means such as overnight lending, which we saw a lot of starting in August when the market turmoil started. David Dodge flew to Toronto to meet with all the bank CEOs and asked them to participate in the margin facility to help out the Canadian market. By refusing, TD Bank has slapped Dodge in the face. The next time TD Bank needs a favour from the Bank of Canada, they may not be so willing to help out.

Let’s also think about all the parties involved. The other four banks now have to put up more money for the margin facility due to TD’s reluctance to participate. I am certain that virtually all the investors currently holding the paper and waiting out the restructure have some form of relationship with TD, even if it is just a checking account. The other foreign bank counterparties that have all contributed to the facility will be disappointed with the decision. The general public in Canada who is watching this carefully and does not want to see a meltdown will remember that TD Bank did not step up to help out with the greatest financial crisis in Canada when all the other banks did. The only party that is happy with this decision is TD Bank’s shareholders, but it is a very near-sighted happiness. Is it really in the best interest of the shareholders in the long-term that TD Bank has now created negative will with all the external constituents that they do business with? Would a contribution of $100 million to the margin facility really have hurt the bank that much?

I am a guest student in the GettingItDone™ course at the Rotman School of Management. In class I learned that Peter Drucker said "the purpose of a business is to create and keep a customer". Shareholders provide a financial means for corporations to achieve their objectives, but without the client, there is no reason for a business to exist. As a general rule of thumb, I have always believed that corporations can only prosper if they put their clients first.

Another perspective from Ross:

But to look at this from another perspective, yes, another $100 million would have hurt the bank because we are not just talking about this facility. We are talking about the opportunity cost of not participating in the ABCP market for the years when times were good. TD has always said that they did not want to take profits from this market for a number of reasons, and they have missed out on untold millions for their shareholders as a result of the decision. It turns out that they were ultimately right in predicting the meltdown, and as such, why should they have to pay a penalty for abstaining from making money when everyone else participated and profited? That’s not a very free-market approach to problem solving.

And from a PR perspective, I have to say that only time will tell if their move is going to be taken positively or not. While I can see that TD’s not playing ball won’t please the Bank of Canada or the other banks, the reality is that for better or worse, TD is in the inner-circle and is a keystone in the Canadian financial scene. They can’t just be kicked out of the circle, and they don’t have to worry about ramifications that are too strong or bias, because after all, we are living in a place with a rule of law. In Canada, we are supposed to be free of Government entities penalizing companies when they have broken no laws, and so the Bank of Canada may not have any legal way to penalize TD for making this decision.

The TD bank has already paid a very high cost for abstaining from investing in ABCP, and aside from taking a tough stance politically they are not doing anything wrong by staying away from the restructure. They are in bed with the Bank of Canada for better or worse, and in time, this issue and this decision will be behind them. All that will remain is Mr. Clark’s (TD CEO) reputation of being a tough fighter for his convictions and his shareholders.

1 comment:

windyfield said...

So the TD claims no complicity in the "non-bank" ABCP fiasco I see that Canada Trust is the Issuer Trustee for at least one of Coventrees ABCP investments, there is a Canada Trust signature on the SIT III trust which can be viewed on Coventree's website at this link.....
Download the IM and see Page 9....
Maybe W. Edmund Clark forgot about this part....