18 December 2008

Commonwealth Bank dribbles a bibful

What do bankers get paid for again?

Yeah, I know there's an element of schadenfreude in commenting further on this parochial little cock up by the Commonwealth Bank in fumbling its $2 billion excluded-offer equity placement to institutions on Tuesday afternoon, but it truly shows again how "experts" can stuff up.

What is it that all those thousands of spectacularly highly paid executives, lawyers, corporate governance consultants and compliance advisers at Merrill Lynch and the Commonwealth Bank do for a living when a mistake as fundamental as this can occur during a placement of this size in a market as skittish and as vulnerable as we have at present?

As I understand it from the press:

On Tuesday afternoon, with CBA stock still being traded on the ASX at around $29 a share, Merrill Lynch received acceptances to place $2 billion of CBA shares from institutions at $27 a share. This placement was apparently to top up CBA's tier one capital adequacy levels to bring it in line with its major Australian banking peers, so as to keep perceptions of its stability in tact in the current international credit crisis. The placement seems to have been completed at around 4.30pm after the ASX market close at 4pm . At around 7.30 pm CBA announced a successful $2 billion placement in a media release. The release also had tagged on to it disclosure of a material downgrade in CBA's bad debt provisioning for 2009 (apparently partly arising from its contemporaneous decision to continue to extend credit to the struggling Centro Property Trust).

All hell then apparently broke loose amongst the institutions who had taken shares in the placement during that afternoon, without knowledge of impending material change in CBA's bad debt provisioning. Overnight a significant number of them withdrew from proceeding with the placement on the basis that there has been a material change in circumstances not disclosed to them. At some point overnight Merrills advised CBA that they were not proceeding with $1.6 billion of the placement (approx $400 million was locked in).


On Wednesday morning the CBA board , understandably, had an emergency meeting and UBS (who had previously unsuccessfully tendered for the placement) were, amazingly, on hand to offer an alternative placement for $1.6 billion at the lower price of $26 a share. UBS apparently successfully placed the CBA stock with institutions at this lower price during Wednesday morning.

At this point all you can say is "shit", what a stuff up, and "boy", how lucky were CBA that UBS could step into the breach and raise $1.6 billion in such a short time?

But here's where it really gets interesting for a ghoul like me, looking at the entrails of this near catastrophe after the event. Sure Ralph Norris the CBA CEO is hunting for culprits for this monumental stuff up, but it is possible that he is directly implicated in what may be the biggest stuff up of all here. This is not the astonishing failure to disclose the market sensitive information before the placement. That was indeed an act of stupidity. But worse, in pointing the finger of blame at Merrills after the event this is what CBA apparently said: ...

"Merrill Lynch did not inform potential investors of the various disclosures made by the Bank in its announcement to the ASX at 7.30 pm on Tuesday", it said. "The Commonwealth Bank is disappointed Merrill Lynch did not meet its obligations."

Is this an admission by CBA that CBA actually knew what it disclosed at 7.30 pm on Tuesday, earlier in the day when Merrills were putting the placement away at $27/share, and expected Merrills to tell the institutions this news then? It sure looks like it. If so then CBA appear to be saying that it had planned for the institutions to apply for shares at a price below the prevailing market price, with different and materially adverse information about CBA, that CBA had not disclosed to the market. Who knows? I'd have thought their easiest defence to allegations of impropriety by CBA would have been for them to claim it did not know the adverse position on bad debts 'til after the market closed and the Centro financing had finalised. But they seem to have taken that line of argument away from themselves by suggesting that Merrills had already been told the bad news by CBA, and CBA expected Merrills to pass that bad news on to the instos, when pitching the placement to them.

Although you may be forgiven for thinking otherwise, my experience is that, thankfully, this not how private securities placements are normally done on the Australian market.
Selective disclosure of market senstive information by or on behalf of a listed company to potential placees of its stock whilst the market is open is not customary and is seldom if ever admitted to.

The biggest stuff up therefore may, yet again, lie in the attempted cover up. The haste with which CBA have decided to place the blame for the absence of disclosure on their broker, may have seen them stumble even deeper into hole that they are digging for themselves.

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