BMO Burn Gets Worse

BMO Financial (BMO) got burnt worse than it realized by last month's natural gas options trading blowup.

The Toronto-based investment bank upgraded its estimated losses from the trading snafu to 680 million Canadian dollars, or U.S.$618 million. Two weeks ago, the company put its pretax losses on the bad trades at $313 million to $404 million.

The bank's natural gas hiccup translates to a loss of 64 cents per share. It is expected to restate its first quarter 2007 earnings as a result.

A BMO spokesman declined to comment.

The blowup at Canada's fourth-largest bank is linked to a relationship with commodities brokerage firm Optionable(OPBL).

A Deloitte & Touche forensic audit of BMO's natural gas trading operation highlighted questionable risk management procedures. The independent auditor also described discrepancies in mark-to-market pricing it had seen in BMO's natural gas options book -- which brought into question the reliability of the quotes it received from its broker Optionable.

The bank has since suspended its relationship with Optionable. In its statement today, BMO says it has let go traders involved in the natural gas trades, including David Lee.

In a statement, BMO CEO Bill Downe said, "Since our initial announcement on April 27, BMO and our external advisors have continued to investigate this matter. This has provided additional insight into the current circumstances, helped guide the actions we have taken and those we will take going forward. BMO has reduced the risk in this portfolio by approximately a third from its peak."

Accounting for about 30% of its revenues, BMO is Optionable's largest client. The loss of the BMO relationship, combined with a series of lawsuits and a revelation that its departed CEO Kevin Cassidy is a convicted felon, has crushed Optionable's share price over the past week and a half.

Calls to an Optionable spokesman were not returned immediately.

For its part, BMO has moved quickly to uncover the heart of its natural gas trading woes and implemented measures to try and correct its problems. The bank says it has assigned a new team of trading professionals to its natural gas portfolio, which it says is reduced by a third from its peak.

Shares fell 43 cents to $62.69.

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