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.

Eerie silence into mid-January

By: Daryl Ching, Clarity Financial Strategy

We are 20 days away from the standstill period deadline and there has still been no confirmation from the big banks to step up for the margin facility. One can only assume that this negotiation is as difficult as we had suspected back in December. It is very difficult to determine to what extent each bank was involved in the frozen ABCP market. Banks could have participated in several ways: provide liquidity, provide hedging for traditional securitization deals, selling ABCP and acting as counterparties for CDO transactions. With TD Bank clearly announcing their reluctance to participate due to their non-involvement in the market, this has opened up a can of worms as the banks start pointing the finger at the negotiation table, arguing about who is more responsible.

In a blog that I posted on January 2, I pointed to several articles written by the Star, National Post and Globe and Mail that identified the “mystery banker” backing the margin facility. During Mr. Crawford's conference call on December 24, he announced that a foreign bank would be willing to step in with approximately $2 billion to top up the required amount for the margin facility in the event that we have a shortfall from the Canadian banks. At that time, the Committee refused to identify the banker. The bank was later identified to be JP Morgan by the press. Furthermore, the Committee was criticized for the potential conflict of interest, as JP Morgan is the financial advisor negotiating the size and the fee of the margin facility and the only party with access to the data.

Mark Boutet, a spokesperson for the Committee responded by saying, “If there is one, JP Morgan has committed to look the world over to find financing for this and to deliver the market for it.” As it is January 11, and we still have not received a commitment from the big banks, I certainly they hope that the Committee has fulfilled their promise and reached out to other global institutions that may be less exposed to CDOs. I also hope that they are providing sufficient data to these institutions to help them get comfortable with the risks of the margin facility. The deadline is fast approaching and we are running out of time.

TD - Standing Proud, Standing Alone - But Why?

By: Ross Hendin, Hendin Consultants

The Globe and Mail contributes an important fact and insight in today's article on the ABCP issue: TD breaks ranks on frozen ABCP. It's an article worth reading.

Standing Proud, Standing Alone

Ed Clark, head of the TD Bank, has signaled that he is going to stand tall on the ABCP issue, and not expose his bank or shareholders to any ABCP risk. As he stood alone and didn't reap the benefits of the ABCP products when they were rolling well, he now stands alone as the one person who is not on the hook to run with the Crawford Committee's request for liquidity. I'm sure both his clients and his shareholders will breathe a sigh of relief. I'm also sure that the other heads of the banks, and the Committee, realize it means more investment and more risk than the other banks want to provide.

TD has been in the best position of all banks, but in saying that this can't be an easy time for any of them. I applaud Mr. Clark for making this choice and having the conviction to do it properly and from the outset while there must be a very strong lobby to have him change course. I can't help but wonder though if this decision has something to do with TD's international posture, even more than their domestic profile...

I still believe that most of the banks probably will sign on to support this accord. It's better to win friends in Ottawa and win the affection of clients than to save a few dollars for shareholders in the short term. Now that there is a potential financial incentive through a truce of lawsuits, what the Committee has offered banks really makes the Accord much more attractive. The banks now have strong legal, PR and financial incentives to risk the money and provide liquidity.
It makes me wonder just how high the risk to the banks really is if they won't sign onto this Accord even with all of these incentives... if the other bank's CEO's are keeping quiet because they know they are heading for litigation and they STILL aren't signing on the dotted line, the market should take note of that. The banks not signing on, combines with the lack of transparency in the Accord's progress, to signal something very bad. It makes me think that there are issues much bigger than the market expects that may come to light if the data room is opened and transparency is given. If that's the case, as I've said before, it's better to face the music now than keep the world in suspense.

Why?

Coming back to why TD would take this stand, the obvious answer is the one I am sure they will give to the market. But nobody has exposed or discussed the new, international element of the ABCP situation, and I think it's a critical insight into this TD decision and what the other banks may do in the days to come.

The world markets and savvy investors have been quietly following the story for months, but the world's major and most respected media are noticing this and giving their readers what they want - a close account of the situation in terms of trading the ABCP, and more and more the political fallout that is coming from the way the situation is being managed in terms of PR (everyone I know agrees that Mr. Crawford is doing nothing short of making miracles, and everyone agrees that if the Accord fails or not, he has done an outstanding job of trying to find the Win-Win situation). The situation is becoming increasingly radioactive by the day. With the world watching, everyone needs to be on their best behavior as they can't get away with what they could have otherwise.

TD has a number of companies outside of Canada that it needs to consider in all of this. TD Asset Management, TD Waterhouse, TD Ameritrade and TD Banknorth are probably the most important ones. There is a TD Waterhouse on High Holborn in London just a block away from an office I used to work in. With TD's global ambitions and the potential for disaster that they have seen and continue to see in the market, steering clear of ABCP may lose TD popularity at home with the other banks, but they no longer need to worry that their clients abroad will hear that they had anything to do with this. They must be concerned with their global image, not just their Canadian image, and that image will look much cleaner if they can take the high road on a looming political and financial disaster.

Ross Hendin is CEO of Hendin Consultants, and is a Senior Advisor to the Canadian office of a leading multi-national PR firm. With strategic communication experience in more than 20 countries around the world, Ross specializes in litigation, financial and political strategic communication. He has worked in the ABCP niche since 2006. Hendin Consultants is in Toronto and London, UK, and is on the web at http://www.rsmediacorp.com/. Email Ross at mailto:rhendin@rsmediacorp.com.