When bond insurer ACA Capital was put on watch for a possible rating downgrade by Standard & Poor's in early November, Canadian Imperial Bank of Commerce CEO Gerry McCaughey knew his problems had just become much worse.
He had already been caught off guard in May when it emerged his investment bank, the once-celebrated CIBC World Markets, had brought it more than $10-billion (U.S.) worth of exposure to the risky U.S. subprime real estate market. Worse yet, $3.5-billion of it was hedged with one single shaky bond insurer, ACA Capital, whose financial condition was deteriorating.
CIBC's investment bank had wandered so far off the course Mr. McCaughey knew he had to shake up senior management. Yesterday, he pulled the trigger, parting ways with two of his top lieutenants to clear the way for some new recruits with reputations for being staid and able to make tough decisions.
Leaving are chief risk officer Ken Kilgour and Brian Shaw, who has been running CIBC's investment banking division. CIBC's current chief financial officer, Tom Woods, is taking over as chief risk officer.
Coming in are Richard Nesbitt, the head of the TSX Group Inc. and one of Mr. McCaughey's best friends, and David Williamson. They will be made head of CIBC World Markets and chief financial officer respectively.
Mr. McCaughey will be staying in his role despite the pressure he's been facing. He took the top job at CIBC in 2005, just as it was cleaning the slate on its Enron exposure.
He has staked his reputation on making it a less risky bank and thought he'd largely accomplished the task before the subprime issue arose.
Analysts had previously decried the lack of internal candidates for the CEO's job at the bank, and some were speculating yesterday that Mr. Nesbitt might one day be a contender.
Reaction to the management reorganization was generally positive, although some analysts noted that it will not solve the bank's brewing subprime issues.
CIBC suggested in December that it might have to take a $2-billion writedown this quarter as a result of its exposure to the U.S. subprime mortgage market, in addition to $978-million (Canadian) in charges it has already announced.
"CIBC needed to bolster its management team following the bank's [subprime]calamity, and we believe the addition of material 'external' bench strength will allow the bank to move beyond its current trials," BMO Nesbitt Burns analyst Ian de Verteuil wrote in a note to clients.
The changes show that the board is not taking the current situation lightly, wrote Dundee Capital Markets analyst John Aiken, adding that they do little to change the current predicament the bank faces.
Yesterday's shakeup wasn't the first move Mr. McCaughey has made in recent months in an effort to prevent a recurrence of the bruising the bank is taking on subprime. He scaled back CIBC's structured credit operations, replaced the head of debt markets, began exiting European leveraged finance and sold CIBC's U.S. investment banking division.
Genuity Capital Markets analyst Mario Mendonca said the current problems won't dissipate until CIBC fences in its subprime exposure by either entirely hedging it or writing it down, and also stated that its future earnings power has not been significantly eroded.
In addition to the new executives, CIBC said yesterday that is nominating Nick Le Pan, the former head of Canada's banking regulator, and Bob Steacy, a retired chief financial officer of Torstar Corp., to its board.
Bob Astley, who was the CEO of Clarica Life Insurance when Mr. Williamson was its CFO, said yesterday that CIBC's new CFO is "one of the most straightforward and trustworthy people I've ever met.
"He has a very restrained ego, he's not a big ego kind of guy," Mr. Astley added.
Toronto securities lawyer and corporate governance specialist Peter Dey hired Mr. Williamson as chief executive of Atlas Cold Storage Income Trust after the company was hit by an accounting scandal.
"I think he's a terrific guy, and I think it's a terrific appointment [at CIBC]" Mr. Dey said. "David is a guy that, I think, responds to a challenge, and clearly CIBC has some challenges."
Mr. Dey added that these new additions to CIBC's team "will raise the tone at the top."
Stop the bleeding: CIBC witnessed big changes in its upper ranks a few years ago in the wake of the $ 2.4billion ( U. S.) Enron settlement. Now, facing an even larger writedown over U. S. subprime mortgage exposure, itís saying goodbye to the head of CIBC World Markets and its chief risk officer.
THE NEW CEO:
Richard Nesbitt, a friend and former colleague of CIBC chief Gerry McCaughey, was chief executive officer of TSX Group Inc. until yesterday morning. His new job? Steering the brokerage clear of the troubles that continually undermine the parent.
THE NUMBERS GUY:
Accountant David Williamson, 47, is the new chief financial officer. Companies he turns his hand to ñ including Atlas Cold Storage and Clarica Life Insurance ñ tend to be coveted by others and taken over.
M R. GOVERNANCE TO T HE BOARDROOM
Nick Le Pan, 56, is the former head of the Office of the Superintendent of Financial Institutions, which regulates the banks. But he most recently made headlines as the author of a report highlighting the shortcomings of the RCMPís ability to investigate securities fraud cases
ANOTHER NUMBERS GUY FOR THE BOARD
Rounding out CIBCís bid to keep an eye on the details is Robert Steacy. He is an accountant who toiled for 25 years at Torstar Corp. before retiring as CFO in 2005.