Has the US Subprime Meltdown Made Its Way North?

Date: Friday, July 13, 2007
Author: Lenny Broytman, Riskcenter.com

It seems as if the US subprime mortgage market has been dragged through the mud for months now but according to published reports, this domestic problem may be inching it’s way overseas… well, across the border anyway.

A July 9 Reuters article about the effects of the US subprime meltdown focused primarily on the Canadian Imperial Bank of Commerce (CIBC), an entity which was said to have acknowledged ownership of around $330 million (Barron’s). The same Barron’s article mentioned that some ‘observers’ estimate that figure to be somewhere in the vicinity of $2 billion. The article added that this estimate “would constitute a substantial chunk of the bank’s approximately $13 billion in shareholder equity.”

CIBC’s spokesman, Rob McLeod, noted that the figures the bank released just last month via the Globe and Mail newspaper are still accurate. Stephen Forbes, another one of the bank’s spokesmen, stated that Grant’s Interest Rate Observer article, which speculated that the bank’s exposure to the subprime market was around $2.6 billion, was “simply not true”.

"As we have commented previously, our exposure to the subprime market is indirect through our participation in structured credit transactions," said Forbes. "The majority of this exposure is rated triple-A. Our direct exposure is well below what the report suggests."

BMO Capital Markets analyst Ian de Verteuil noted that CIBC’s “most material” exposure was suffered as a result of a $330 million senior secured tranche of an underwriting that experienced difficulty last April. "It appears as if the bank already took some charges in its second quarter for the deterioration in the subprime sector," de Verteuil wrote to clients.

"We believe that CIBC has good processes to ensure that unhedged trading exposures are prudent and limited. While losses can and do occur in any trading operation, we believe the impact of the meltdown in subprime in the U.S. is limited for CIBC," he added.

The US subprime meltdown began sometime in late 2006 and has continued into the present day. Fueled by a dramatic rise in foreclosures and subprime mortgage defaults, the situation has caused several subprime mortgage lenders, such as New Century Financial Corporation, to either shut down or file for bankruptcy.

According to Christopher Dodd, Chairman of the US Senate Banking Committee, a lot of the fault lies not with the public, but instead, with the lenders and their predatory practices as well as a lack of effective government control on the issue.

Just yesterday, Benchmark ABX indexes opened lower after Wednesday’s sudden sell off and record low close. This came after several agencies began to cut ratings on $17.3 billion of subprime mortgage securities. Some of the agencies responsible for the sharp sell-off were Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. The fallout from this also weakened the dollar, causing it to strike a record low against the euro as well as a 26-year trough against sterling.

As of Monday, the bank’s stock shot down 44 cents on the Toronto Stock Exchange to C$94.87.

The true effects of the US subprime situation are still up for debate as the meltdown continues to unleash its influence across the financial sector.