BMO Says No 'Fire Sale'

Strength in underwriting, mergers and corporate banking fees helped BMO Financial (BMO) overcome big losses in natural gas.

Despite a $327 million after-tax blowup in its commodities trading business, the Bank of Montreal parent pulled off a relatively solid quarter, saying second-quarter earnings rose 3.1% from a year ago.

CEO Bill Downe focused some of the afternoon earnings call on the Toronto-based bank's moves to remedy gas pains brought about by bets tied to former trading employees David Lee and Bob Moore and BMO's relationship with energy brokerage Optionable(OPBL)

Downe said BMO has implemented a number of measures to beef up its risk management. He added that it has hired law firm Sullivan & Cromwell to investigate whether Optionable is at fault in providing pricing information, which it believes contributed to the "incorrect valuation of the commodity portfolio which masked the escalation of risk," the chief executive explained.

The gas-trading losses translate to a 65-cent-a-share hit, which has been spread out between BMO's restated first quarter (47 cents) and the second quarter (18 cents).

Information obtained from a single source, namely Optionable, was at the heart of the financial institution's trading problems, Downe said. He added that in addressing that issue, BMO has moved to price its trading book against multiple contributors to ensure that it obtains better quotes.

"Having already reduced the risk we will continue to do so," said Downe, who warned that the company might see additional paper losses and gains as it settles its commodity platform.

"We are in the business of managing risk. [That includes] those with formal risk management roles and those who run businesses and work in them," he added.

The chief executive also said the company does not plan on selling its natural gas portfolio.

"A fire sale is not necessary and is not on," he commented.

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