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david milstead

We are rightly proud of Canadian financial institutions' strength and resilience during the previous decade's financial crisis. There's a downside, though: Canadians don't have a lot of recent experience with lenders who run into trouble.

Thanks, Home Capital Group, for changing all that. The alternative mortgage lender has been doing its best to convince the markets there are no long-term impacts to the Ontario Securities Commission's decision to charge current and former members of management with misleading investors in 2015.

On Wednesday, however, Home Capital was forced to admit it is not succeeding. The company signed an "agreement in principle" to get a $2-billion loan on onerous terms, to protect against the possibility of more cash withdrawals by customers with deposits. In doing so, it had to withdraw the cheery financial guidance it provided the market as recently as Friday.

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There is a chance Home Capital can turn this around and regain the market's support. There is also a chance the crisis of confidence will grow for a company that, a few weeks ago, was considered by many a quality player in Canadian financial services.

Home Capital's leaders have no one to blame but themselves for their troubles.

Oh, for sure, the company's advocates will point the finger at others, at least privately and maybe publicly, as has happened in similar situations with other financial institutions.

They will blame the media. If there were not so many blaring headlines about the company's issues, depositors and business partners would have more confidence in the company. My only regret is that I didn't hit them harder, sooner, when their bogus disclosure was apparent in 2015.

They will blame the short-sellers, who profit when stocks fall and who have been rooting against Home Capital for some time.

U.S. short-seller Marc Cohodes, who has been actively campaigning against Home Capital since 2015, has been an object of scorn. He is now in the catbird seat.

They may even blame the OSC, as the company's stated position is still that the claims are "without merit." If regulators had examined Home Capital's 2015 disclosure and decided it "satisfied applicable disclosure requirements," as Home Capital still insists, the company would keep plugging along.

Let's review the timeline once again, as outlined in the OSC complaint. In June, 2014, Home Capital became aware of irregularities in the mortgage applications it was receiving. Specifically, some brokers were submitting documents with phony details about the applicant's income. In August, it launched an internal investigation that lasted several months. From about November, 2014, to January, 2015, it terminated brokers and brokerages that had generated $881.4-million in mortgage originations in 2014, about 10 per cent of the company's total. The investigation concluded the company needed to make major changes in its internal controls so as to prevent a similar problem from occurring in the future.

All this was known to the company by Feb. 10, 2015 – the day before it filed its 2014 annual financial statements. But in the management discussion and analysis that accompanied them, Home Capital blamed its decline in mortgage originations not on the problems it had discovered and the termination of the brokers, but on things such as macroeconomics, seasonality and competition. The first-quarter report, filed on May 6, was no better, with weather taking a share of the blame as well.

Instead, it took until July 10, 2015, for Home Capital to tell its investors of the investigation and the broker firings.

I set this out in a column last Friday in which I said company founder Gerald Soloway, who was still on the board, and Robert Morton, still the company's chief financial officer, should leave in light of the OSC charging them individually. By Monday, Home Capital announced their resignations.

Call me churlish for being dissatisfied with this result, but it reinforces my view that Home Capital may not have quite figured out how much trouble it's really in. Mr. Soloway's resignation is not effective immediately, the company said, but rather "when a replacement with recognized expertise in financial services is named." How long will this be?

Mr. Morton remains with the company, with responsibility "for special projects outside the financial reporting group," which at least takes him out of the mix of representing Home Capital's numbers to the investment community. But his successor, Robert Blowes, was his predecessor as CFO, from 2012 through December, 2014, a period that includes the broker investigations. He returned to Home Capital's board of directors on May 13, 2015, after the company's failure to disclose the broker situation in either the February or May reports.

In announcing Mr. Blowes's appointment, Home Capital says: "During the period from his retirement until his May 2015 election to the board, he was not involved in the operations or financial management of the Company." He knew, however, what the company did when he was CFO in 2014 and what the company had not disclosed to investors before he joined the board.

Bonita Then, interim chief executive of the company, in 2014 and 2015 was vice-chair of the board's audit committee, which Home Capital says is "responsible for the oversight of the quality and integrity of the Corporation's financial reporting to shareholders." Three other members of the audit committee from that period, including chair Robert Mitchell, remain on the board.

The board's chairman, Kevin P.D. Smith, remains in his position. And the company's corporate counsel and chief compliance officer from that period remain in their positions, according to the company website.

In short, there are a whole lot of people whose conduct may not have been worthy of the OSC alleging a breach in securities law, but whose performance falls short of what should be expected of directors and officers of a TSX-listed financial institution. That they remain with Home Capital is the surest sign the company deserves the lack of faith the markets are now showing.

Banking, more than any other business, is built on trust and stability, and when those attributes are lost, there's not much left to salvage.

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