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Saturday, March 01, 2008 1:40 PM


Bank of Montreal Misses Margin Calls


On February 19th the Bank of Montreal Took C$325 Million in Writedowns.

Bank of Montreal, Canada's fourth- largest bank, will report writedowns of about C$325 million ($323.9 million) in the first quarter and replace its chief risk officer after combined trading losses and other costs topped C$1 billion over the past year.

The costs stem from debt transactions with bond insurer ACA Capital Holdings Inc., as well as trading losses and a writedown on investments in two Canadian asset-backed commercial paper trusts administered by Bank of Montreal, the Toronto-based bank said today in a statement.

The new costs will reduce earnings per share by about 70 cents for the quarter ended Jan. 31, or almost half its expected profit for the period, based on a Bloomberg News survey. The writedowns add to the C$440 million recorded last year for natural-gas trading losses, and about C$260 million in debt writedowns and other costs in the fourth quarter.

Bank of Montreal also said it will provide financial support capped at $11 billion for the structured investment vehicle Links Financial Corp., and as much as 1.2 billion euros ($1.77 billion) for Parkland Finance Corp. The assets of both SIVs, which sell short-term debt and invest the proceeds in higher-yielding securities, have been reduced since July 31.

"Rather than putting the SIV issue behind it, today's announcement sets the stage for it to migrate onto BMO's balance sheet over time," Blackmont Capital analyst Brad Smith said today in a note, in which he downgraded the stock to "hold" from "buy".

"This action increases the potential for additional losses should asset sales prove more challenging than currently anticipated."
Margin Calls Missed

On February 28 Bank of Montreal Commercial Paper Trusts Were Cut by DBRS
Two Bank of Montreal commercial- paper funds were downgraded to junk by DBRS after the funds failed to meet margin calls for collateral, raising the prospect of more writedowns for the bank.

DBRS, the Canadian credit-ratings service, downgraded notes of the Apex and Sitka trusts to R-5, its lowest short-term debt rating, and CCC, its fourth-lowest speculative long-term rating, after the bank said Apex failed to find buyers for all of its notes that came due. DBRS said a default by Apex would result in a default by Sitka.

Bank of Montreal, Canada's fourth-largest bank, has said it would face additional pretax writedowns of about C$495 million ($506 million) if the funds aren't restructured. Bank of Montreal has been in talks with several companies on "restructuring alternatives" for the two trusts, the Toronto- based bank said Feb. 19. The lender has already taken C$210 million in writedowns related to Sitka and Apex, the bank said.

"The total amount of collateral that is due is significant," DBRS said in a statement today.
Trust Writedowns Looming

On February 29 the Bank of Montreal Starts Talks to Avert Trust Writedown.
Bank of Montreal had its biggest one-day decline in more than six years after the lender said it's in talks to restructure two of its commercial-paper funds to avert a C$495 million ($505 million) writedown.

The bank repeated it will write down its investments in the Apex and Sitka trusts if efforts to restructure them fail, adding to the C$210 million writedowns already taken, according to a statement today.

The potential writedowns may force the Toronto-based bank to withdraw support for a plan to restructure about C$33 billion in non-bank commercial paper that hasn't traded since August, the Globe and Mail reported today.
Impossible To Avoid Writedowns

Regardless of what kind of "restructuring talks" the Bank of Montreal is in, or who those talks are with, further writedowns are coming.

I want to know is: How the heck did the Bank of Montreal keep this hidden for so long? Was this a misguided prayer that this garbage was somehow going to catch a bid? Of course MBIA (MBI), Citigroup (C), Lehman (LEH), Morgan Stanley (MS), and countless other financial institutions kept stuff hidden off the books in the United sates. The same is going on in Germany and the UK right now. In this case, it's hard to keep a missed margin call quiet.

Frozen ABCP Recap

Before we get to latest news on frozen paper, let's recap the story for those not familiar with it. Flashback September 27, 2007: Global Credit Crisis Canadian Style
Canadian Credit Crisis in a nutshell
  • $40-billion in ABCP is frozen.
  • The Québec Pension Plan (Caisse) and the Ontario Teachers' Pension Plan are on the hook as are 40 other trustholders, mining companies, paper companies, etc all of which thought they were buying short term easily marketable notes.
  • What they were really buying was toxic waste from troubled mortgage loans in the U.S.
  • A workout plan called the Montreal Accord was originated by Caisse. The proposed solution was to convert short term debt to long term debt some of which stretches out all the way to 2015, just to break even.
  • While this may suit the needs of Caisse, some companies need money now to fund mine operations and the like. Those companies do not want their money tied up for years.
  • "Most noteholders [still] don't know what they're holding."
  • Uncertainty over the frozen $40-billion ABCP is spilling over into the rest of the credit market in Canada, driving down demand and forcing companies to cancel projects because of the soaring costs of funding.
The Unfrozen North

Flashback November 15, Commercial Paper In The Unfrozen North. "The Canadian ABCP market was a $40 billion market. Judging from the preliminary results, it is perhaps now a $20+- billion market."

The Abandoned Baby

FlashForward February 29, 2008: Bank of Montreal may abandon debt rescue.
Facing new writedowns of more than $500-million, BMO is considering quitting group that is restructuring frozen ABCP market.

Bank of Montreal has signalled it may pull out of an effort to restructure $33-billion in stranded asset-backed commercial paper, as mounting woes in the global credit market leave the bank facing margin calls of more than $500-million on two of its own ABCP trusts.

According to sources, bank officials recently advised the group of ABCP investors seeking a fix for the market, known as the Crawford Committee, that BMO may no longer be able to honour its commitment to contribute to a $14-billion line of credit.

That credit line is the centrepiece of a plan to swap the frozen notes into new long-term bonds.

BMO's problems are particularly acute, with the bank last week announcing $490-million in writedowns and this week facing as much as $495-million more because of the unravelling of two trusts that it runs.

"We are no longer in the same world that we were in December," said a person familiar with the discussions between the banks and the committee.

"We are struggling to hang on."

BMO's troubles are a vivid illustration of how the disintegration of so-called structured products like ABCP is undermining the financial industry's ability to cure its ills and aid clients stuck with foundering investments. More and more banks are finding that they don't have the capital because all available money is tied up plugging holes in their own balance sheets.

BMO is facing a stark choice. On the one hand, if BMO decided to save its own trusts by anteing up to meet the collateral calls, it would avoid a $495-million writedown. That option comes with a heavy cost, because it would leave the bank with less capital to lend to its clients and for the liquidity line desired by the Crawford Committee.

If, on the other hand, BMO declines to save its own trusts, more money will be free to help the Crawford Committee bail out ABCP sold by smaller, non-bank companies such as Coventree Inc. This move would expose the bank to criticism that it sacrificed its own customers to aid those of other players.
Inability and unwillingness to lend have now gone global, even affecting commodity countries said to be "immune" from a global slowdown.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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