Ed Clark, CEO of TD Bank, has gotten himself into a little trouble over some remarks made at the RBC Capital Markets Canadian Bank CEO Conference, Jan. 8, 2009, in Toronto.
He began by deprecating TARP:
I think we have the capital, but, as I said when I do the little arithmetic, that’s an issue. As you know – I mean, I have strong views on this. The United States comes along and it puts this TARP in and adds three points to the Tier 1 ratio. If we were in the United States today, our Tier 1 ratio would be about 12.5%, so you sit there and you say this is just a con game, a five-year retractable pref we’re going to call common equity, because the US government says, Basel was an interesting thought, but we overrule Basel. And so if we look at Wells Fargo, USB and PNC, our tangible common equity is 40% or 50% bigger than theirs. And that’s the way I run the bank, is everything starts with tangible common equity, and then you leverage that up in different structures and that’s – so you get that and then you try to maximize your return on risk-weighted assets, which means you maximize your operating ROE.
… which was interesting enough, but his comments on the safety of TD preferred shares – and by implication, other Canadian banks – have attracted attention:
I think Mr. Bernanke’s going to win. He’s going to say to the market, I’m going to make it so expensive for you to hold riskless assets that you will finally wake up and say you can take some risk.
And that’s really what happened in our preferred share issue, is that the average consumer sat there and said, well, this is 6.25%, but it’s actually 8% pretax, effectively government guaranteed, maybe not explicitly, but what are the chances that TD Bank is going to not be bailed out if it did something stupid? And so where else do I get 8% government investments right now? And I think suddenly the retail market came back in January and said, give me more of this, and so when we did our issue, they said, could you give us some more of this piece of paper?
And so I do think that we are going to be able to emerge out of this and say the Canadian bank will not only redefine Canadian banking, I think it will redefine Canada as to say, somehow you guys did it right. It’s not obvious, you don’t look that smart when we look at you, but somehow you stumbled your way through here and did this right.
And so, I think that’s worth fighting hard for, and if that means that when the shorts from the US arrive in Toronto and swagger down Bay Street and say, we’re going to short all the Canadian banks and teach you guys a lesson, we’re going to put you out of business, you have to take them seriously, fight back. But you don’t fight back by going on the market. And so if that means we have to raise non-common Tier 1 ratio to look pretty, I’ll do that. It’s stupid, but it’s good to the interests of my shareholders.
It’s an interesting passage. I certainly agree with the characterization of Bernanke’s strategy for fighting the credit crunch. I have recently highlighted the enormous build-up in excess reserves in the US, that are currently held at basically no interest at the Fed; a hopeful sign is a recent shrinking of the Fed’s balance sheet; and if the Fed keeps spreads where they are – or follows my recommendation to slowly increase them – then at some point greed will overcome fear.
The last part of the passage deals with the eternal financial markets question: lucky or smart? He obviously has a conflict of interest in being so firmly in the “smart” school and buttresses it with a little nationalist swagger; I’m going to retain my opinion of “lucky”. But you never really know.
It’s the middle piece of the passage, where he states in so many words that there’s an implicit government guarantee on TD’s (and presumably the rest of the Big 6) preferred shares.
It’s a shockingly irresponsible statement; one may hope that at the very least he has a highly uncomfortable meeting with the regulators (he won’t, of course, but it’s always pleasant to hope).
I will go so far as to agree that at this particular time, if any of the Big 6 disclosed that they were far too close to insolvency for comfort, there would almost certainly be a bail-out (although I’m less certain that preferred shareholders would get off scot-free). I think the global response to the Lehman insolvency has convinced policy makers that now is not the right time to apply doctrinaire free market principles.
But. But! These preferreds Mr. Clark is flogging are perpetual. Interest rate may be mitigated – with corresponding increase in reinvestment risk – but the credit risk is perpetual. Twenty years ago, Mr. Clark’s smart bank was on the verge of insolvency, having hired too many MBAs to accumulate More Bad Assets in Mexico, Brazil and Argentina.
Could it happen again? Why not? Even if we allow Mr. Clark’s assertion that TD is very smart, I’m reminded of an investment aphorism (source unknown, at least to me): Only buy businesses that an idiot could run, because eventually an idiot will.
If, ten years forward, TD Bank does something stupid at a time when the collapse of a rinky-dink little Canadian bank will not have global systemic implications … it could fail. And I will remind investors that Tier-1 eligible preferred shares are perpetual, and the word “perpetual” includes “ten years forward”.
So anyway, he’s been taken to the woodshed by a bravely anonymous “government official”, reports Bloomberg:
Toronto-Dominion Bank Chief Executive Officer Ed Clark was “absolutely wrong” to suggest the bank had the implicit promise of a bailout under any circumstances, a senior Canadian government official said.
There are “no guarantees” for companies that make “stupid decisions,” said the official yesterday in Ottawa, who spoke on condition he not be identified.
… or, at least, as close to the woodshed as we’re likely to get.
Why isn’t Spend-Every-Penny making this statement? Why aren’t the regulators demanding an instant and grovelling retraction?
The quote on an idiot running a company is from Warren Buffett