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Interesting story about CBA..
CBA's profit haunted by dimissal tale
ON a Monday in mid-August, Commonwealth Bank chief executive Ralph Norris summoned treasury and markets high-flyers Marten Touw and Vincent Hua to his level two office and summarily dismissed them.
It was clinical, brutal and all over in a few minutes, as these things generally are.
More than two months later, though, as CBA shareholders prepare to celebrate the bank's prolonged economic sunshine at Wednesday's annual meeting, the departure of Hua and Touw is still creating an unwelcome shade.
Forensic accountants and lawyers have been swarming over a mass of transactions connected to Touw, the ex-global markets and treasury boss, and his gun trader Hua.
PricewaterhouseCoopers and law firm Freehills are helping to retrace the myriad financial steps of the duo, once feted at the most senior levels of the bank as they led an open-eyed CBA on a profitable journey up the risk curve.
Touw and Hua, through generous bonus schemes, also did very well -- probably well beyond any fantasies they might have indulged as young migrants.
As Southern Cross Equities institutional dealer Charlie Aitken memorably said, it was a case of out with the "grey cardigans" at CBA's Martin Place headquarters and in with the Zegna suits.
Or so it seemed.
Norris's decisive move that Monday could yet signal the return of the grey cardigans.
It could also cause further instability in CBA's senior management.
Since August there have been reports, rejected by no less an authority than Norris himself, of $50 million in trading losses in the month of June alone.
More recently, Chinese whispers have focused on supposed irregularities in CBA's internal transfer pricing system -- the rate at which treasury borrows from the wholesale markets and on-lends to the business units.
A rival banker comments: "Marten and Vincent were pretty aggressive and they know how to play hardball, but I never saw any evidence of inappropriate behaviour.
"In an organisation like CBA, there's not too many places to hide. It seems to me like rationality has gone out the door and now it's all about hate and revenge."
Other than to say there was a "fundamental difference of opinion" over the direction of the markets division, the bank has steadfastly refused to comment on the circumstances surrounding the departure of the two men.
A spokesman dead-bats a query about the internal transfer pricing system.
"In regard to your request for comment from the bank, we do not comment on market rumour or speculation," he says.
"Nor is it appropriate for the bank to comment on its former employees."
Touw and Hua, for their part, have told associates they are yet to receive a satisfactory explanation for Norris's dramatic intervention. They say they have nothing to fear from anything CBA might choose to throw at them. In fact, they clearly regard legal action to enforce what they see as their contractual rights as the best form of defence.
On September 3, law firm Deacons filed separate NSW Supreme Court claims seeking damages for breach of contract, interest and costs.
The consecutively numbered court files, which are unavailable for public inspection before a November 9 court mention, include seven-page statements outlining the basis of each summons.
The bank says the case will be "vigorously" defended.
In 2006, Touw's remuneration was published for the first time, apparently against his firmly expressed wishes.
He was paid $7.1 million, a healthy premium to Norris's $4.1 million stipend for his first nine months at the bank, up from $3.4 million in 2005.
Hua's undisclosed pay is believed to have been in the same range.
The difference between the Commonwealth's offer of settlement and the damages claimed by the two men is said to resemble a gaping chasm, rather than a bridgeable gap.
Conceivably, it could run to many millions of dollars.
With neither side willing to comment, it is unclear what to make of internal reports that forensic accountants are "crawling all over the place, not just in treasury but in the business units as well".
The reports may simply be a measure of the bank's determination to parry the legal thrust of Touw and Hua, or they could point to issues requiring detailed investigation.
The whispered allegations about manipulation of the bank's internal transfer pricing system suggest that bonuses, linked to revenue and profit targets in treasury, were inflated.
As with all banks, the Commonwealth's treasury operates like a bank within a bank, taking its own margin on funds that it borrows in the wholesale market and then on-lends to the business units.
While higher treasury earnings from a transfer pricing ruse could result in fatter bonuses, the overall profit outcome for the group would be broadly neutral due to offsetting slimmer margins in the businesses.
Another senior banker describes Touw as aggressive, skilful and capable.
"I'd be surprised if he has done anything underhand. It's more likely he has been smarter negotiating a transfer price and people haven't twigged," he says.
Also, unlike a decade ago when the secrets of asset and liability management were kept in a "black box", the system is now more open and transparent.
The internal price of funds for, say, the retail bank is agreed after negotiations between treasury and the business unit. Any dispute at the Commonwealth over the establishment of a transfer price is understood to be adjudicated by Norris or the bank's asset liability committee.
Such issues will no doubt be fully ventilated in the Supreme Court if the bank returns the legal fire of Touw and Hua.
In the meantime, the two have won an early skirmish in the court of public opinion by securing employment at Grange Securities, acquired by Wall Street firm Lehman Brothers earlier this year.
Touw has taken the role of fixed income head, while Hua will be head of liquid markets trading for Lehman in Sydney.
Touw, a tall, 51-year-old Dutch migrant, hooked up with Hua in the late 1990s at Shinsei Bank in Tokyo.
Stuart Grimshaw, the Commonwealth's chief financial officer at the time, who now heads the premium business services unit, lured him to the bank in 2002 to be group treasurer, with a brief to overhaul the unit and make it more commercial.
One of his initial moves was to hire his Shinsei mate, Hua, an aggressive 39-year-old trader who arrived in Australia in a leaky boat in 1986, apparently after 17 unsuccessful attempts to flee Vietnam.
Hua's grim determination to find a new home was inspired by the communist government's expropriation of the family home and his father's small business.
Soon after Touw's arrival, David Murray, the bank's chief executive at the time, moved Grimshaw into the operation, appointing him head of wealth management.
In March 2006, however, he and Touw were reunited when new chief executive Norris appointed him head of the sprawling premium business services division, which includes treasury and the premium retail, corporate and institutional banking operations.
Grimshaw and Touw set about working on a plan to bring the treasury and markets divisions together, believing there were good risk management synergies between the two groups.
Both Norris and the bank's board backed them in May last year and the strategy was applied the following month.
Whether or not the bank fully accepted it at the time, it had just signed on for a major cultural upheaval. The likes of Bank of America and Barclays might have aggressive markets operations, but for the Commonwealth, barely out of its privatisation diapers and with a proud retail banking heritage, this was more revolution than evolution.
A senior banker comments: "When you combine treasury and markets, you are putting a lot of eggs in one basket and it raises a pretty fundamental question -- are you running a balance sheet or a trading operation?
"I'd query whether the organisation was ready to ramp up its risk profile."
Hua, meanwhile, had consolidated his reputation as perhaps the nation's most aggressive trader.
Dealing in complex credit derivatives, bonds and currencies, he acquired the somewhat startling reputation of being one of the biggest counterparties to global bank Deutsche.
It is difficult to know exactly what former PwC audit partner David Craig made of all this when he walked through the doors at Martin Place for the first time in September last year, after Norris had announced his appointment as chief financial officer in July.
Craig, described by an associate as a "conservative, focused CFO not prone to bullshit", had devoted an entire career to management of risk rather than an ardent embrace of it.
For Tuow, moreover, publication of his salary for the first time in the 2006 annual report, almost coinciding with Craig's arrival, only served to fan the flames of internal resistance to his aggressive approach.
Says one insider: "Marten's salary became a debating point. People would ask why he was getting paid so much and say we don't do things like that here."
In January, Hua and his family were lucky to escape death in a car accident in Tasmania. He reportedly spent a week in Royal Hobart Hospital before a transfer to Sydney for operations on his right leg and a crushed foot.
Norris is said to have sent flowers to his ward and discussed some trading positions, leading to Hua checking himself out two days later, arriving at the office in a wheelchair and helping to trade away some losses.
From May this year, the markets division became a focus for three external reviews.
The regulator, the Australian Prudential Regulation Authority, conducted a regular review, raising some concerns about Hua having both a management and trading role, while finding nothing untoward.
A PwC review of the trading room floor, performed under legal privilege, reported to former chief general counsel John O'Sullivan.
Finally, First Manhattan was engaged to advise on treasury.
The consultant's role is understood to have been split, with the treasury policy aspect of the review reporting to Craig and the rest reporting to Touw.
The writing was clearly on the wall for the bank's two high-flyers.
On August 8, The Australian Financial Review ran a lengthy piece on Hua under the headline "Where's Hua? CBA's star trader missing in action."
It said he hadn't traded for a week despite manifold opportunities in the extreme market volatility of the time.
Inside the bank, there was a tectonic struggle under way.
The bank said Hua wasn't trading because he was taking a management role.
Unnamed sources, on the other hand, said he had wound back his role due to the bank's desire to split his management and trading functions.
Touw, meanwhile, was fighting a rearguard action to keep treasury and markets together.
Ultimately he failed, and the separation process began.
While discussion had also started on Hua's package under the new structure, the summons to Norris's office fatefully intervened.
Two weeks later, long gone from the bank, Touw would be wrongly blamed for leaking a story to The Weekend Australian about the bank's aggressive tax planning through a growing presence in the Mediterranean tax haven of Malta.
The Touw-Hua conflagration remains pregnant with implications for shareholders.
Goldman Sachs JB Were, which has a sell recommendation on the bank, says the outlook for it is "somewhat more challenging given the recent departure" of the duo.
There are those who say, as well, that the highly regarded Grimshaw has been shaken a little loose by his active promotion of the two men.
Whichever way investors choose to look at it, the whole affair has been an unfortunate blot on the bank's relatively pristine record under Norris's stewardship. An aggressive restructure of a key division has been reversed amid great acrimony and all in the short space of 14 months.
As one senior banker comments: "I don't know what the politics are, but gee, shit happens." |
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