The week before Christmas, a group of senior bankers gathered at the Toronto offices of Canadian Imperial Bank of Commerce to work out the details of an emergency funding effort.
For CIBC chief executive officer Gerry McCaughey, it had been both a miserable and taxing month, doubtless the most difficult of his 21/2-year reign atop the bank. The bank had taken $753-million in writedowns because of its entanglement with a spiralling subprime mortgage mess, and recently stunned investors with the acknowledgment that it had $10-billion worth of hedged exposure to that market.
What these investors didn't know was that CIBC was preparing to write down an additional $2-billion in a matter of weeks, enough to make it one of the costliest misadventures in Canadian banking history.
Mr. McCaughey, whose entire tenure to this point had been geared toward erasing the taint of previous scandals, methodically stripping away risk and rehabilitating the bank's maverick reputation, knew that he would have to make senior management changes, and was already in secret negotiations to recruit his close friend Richard Nesbitt, who runs the Toronto Stock Exchange, as a replacement for Brian Shaw as head of the gaffe-prone investment bank, CIBC World Markets.
Mr. Shaw, who probably suspected at this time that his days were numbered, nevertheless remained in Toronto while his family went to Mexico on vacation, helping to carry out one of Mr. McCaughey's imperatives: Defusing potential bombs by exiting whatever remained of the bank's structured product businesses. About 40 consultants had also been brought in to help CIBC clean up the debris.
The most pressing issue was the bank's balance sheet. Given the grisly prognosis for the subprime market, it had become clear that CIBC would likely have to take billions of dollars in additional charges to mark down the value of its holdings, a scenario that would erode the bank's capital levels and could put them dangerously close to minimum regulatory limits.
At a board meeting in December, Mr. McCaughey and his fellow directors agreed that the bank would have to approach private and public investors to raise close to $3-billion, and that it should do so as fast as practicable: Any delay could make the effort more costly, if not impossible, given that conditions were deteriorating almost daily.
On Dec. 18, Mr. McCaughey hired UBS as a financial adviser, in part because of the firm's strength in the banking sector, and in part because of his respect for Oliver Sarkozy, UBS's joint global head of financial institutions – and, incidentally, the half-brother of French President Nicholas Sarkozy. The two bankers had met when CIBC purchased an additional stake in FirstCaribbean International Bank in 2006, and had remained close since that deal, keeping in touch with regular telephone conversations.
The initial meeting, in Toronto, was supposed to last a half hour, but went much longer, thanks to an extended conversation about history between Mr. McCaughey and Mr. Sarkozy – surely no surprise to the CIBC contingent, who are well acquainted with their boss's tendency to digress.
When they did get down to business, Mr. McCaughey insisted that he would not merely issue a chunk of stock in a private placement to large institutional investors – he wanted a sizable piece to be sold to the public as well. The deal would also have to be straight equity: CIBC couldn't issue preferred shares, as many of its U.S. peers have done to bail themselves out of similar trouble, because the bank was already up against a cap on these securities.
