Thursday, December 13, 2007

The incredible shrinking investment bank

CIBC World Markets is becoming the incredible shrinking investment bank as it moves this week to shut down its European leveraged finance operations.
Fifty staff learned on Monday that they are likely out of work as the division is closed. The logic is that while lending on European buyouts can be lucrative, it was a business that saw the investment bank taking on large credit exposure without much prospect of getting other fee-generating work from the clients.

In simple terms, European leveraged finance was relatively high risk, and risk is a four-letter word at parent CIBC these days.

The pull-back in London - where there are still 320 investment banking, foreign exchange and equity trading employees -comes on the heels of CIBC World Market’s decision last month to sell its 700-employee U.S. investment banking group. That sale, which played out for pocket change, reversed a decade-old U.S. expansion strategy.

CIBC World Markets is also exiting the structured credit business, most of which is U.S.-based, after taking a pounding on these derivatives. The bank said last week that it still faces the potential for “significant losses” on what was supposed to be a $9.9-billion (U.S.) hedged credit portfolio. A number of counterparties on these positions are bond insurers, and they are in deep financial trouble. Analysts expect the bank faces $2-billion in writedowns on these positions.
In addition to the steady downsizing of foreign operations, CIBC World Market is seeing some of its domestic operations moved to new homes in the parent bank. CEO Gerry McCaughey pulled the commercial banking sector out of the investment dealer on Monday, and placed the unit in the retail banking division that’s run by Sonia Baxendale. Like Mr. McCaughey, her roots are in wealth management.

Moving to this structure was billed as being consistent with other banks, and part of a two-year push to bring related client activities under one roof. But it also marks a further loss of horsepower at the dealer, the engine that drove the bank until Mr. McCaughey’s arrival in the corner office.

The sense at CIBC World Markets is that more cuts are coming - a marked contrast to a domestic rival such as RBC Dominion Securities, which is building global capabilities. Mr. McCaughey got the top job on a promise to eliminate the unpleasant surprises in CIBC quarterly reports, and produce a dependable stream of profits. The CEO, who ran CIBC World Markets for 18 months before moving to the parent bank in August, 2005, is still on a search-and-destroy mission for any business that puts that strategy at risk.

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