When US$330 million of subprime becomes US$1.7 billion at CIBC

The news could have been so much worse for CIBC (CM:TSX), but an anticipated windfall from the VISA initial public offering dampened any earnings damage that might have come CIBC’s way with the recent revelation that there are more subprime snakes in their bag than were acknowledged earlier. Putting the VISA lift (even if the IPO hasn’t closed) in the same release as the second subprime writedown was a stroke of PR genius; lucky, lucky, lucky. (How one books a gain on an IPO that hasn’t closed is a topic for another day.)

With much finesse and deft timing, the smart people at CIBC have taken a hard look at their subprime exposure and concluded that it wasn’t worth what they advised the market just a few weeks ago. The recent $463 million writedown followed a $290 million charge last quarter. In total, $753 million of their US$1.7 billion residential CDO/Residential Mortgage Backed Security portfolio has been flushed.

You may recall CIBC’s denials to the Barron’s article in July (see post “It’s all about ‘alchemy’“, July 21-07) about a “$2 billion exposure” to U.S. subprime assets. One line in the Barron’s piece was particularly curious, and merits repetition:

“CIBC has acknowledged ownership of around US$330 million [of subprime assets], though some observers say the figure could be more than US$2 billion.”

As a U.S.-listed institution, it would be interesting to understand how the US$330 million number was calculated, now that we understand the figure is actually US$1.7 billion, and the writedown exceeds more than twice the ENTIRE exposure circa July. The Sarbanes-Oxley Act is meant to prevent such things from slipping away like this on shareholders and the bank’s Board of Directors.

Let’s assume this isn’t an accounting thing (see post “Subprime infection spreads to Germany“, July 30-07 and “BNP Paribas plays the canary role“, August 9-07), where the risk managers couldn’t find an appropriate price for the portfolio, and had to wait until two weeks ago when Citibank et al decided to use the ABX credit index.

Isn’t it a disclosure issue? How does “US$330 million” in July become “US$1.7 billion” in November?

MRM