Financial institutions and Wall Street investors have had subprime on the brain over the past several months. And for a good reason.
But Canadian financial institution
, known also as Bank of Montreal, proves that the tried-and-tested wrong-way bet on natural gas can cause just as much
The Toronto-based bank has revealed that it took a loss of 350 million to 450 million Canadian dollars, or $313 million to $404 million, from natural gas trading. Similar bets last year took down Amaranth Advisors, the onetime haunt of trader Brian Hunter, as well as hedge fund MotherRock, run by Bo Collins.
Heads might be rolling. CEO Bill Downe described the losses as unacceptable.
In a statement, the chief said "commodity trading losses were the result of decisions that did not adequately recognize the vulnerability of the portfolio to changes in market volatility."
BMO said the losses will be recorded on pretax basis in the second quarter of its 2007 fiscal year. The impact of this to BMO Financial Group's second-quarter earnings, which will be announced on May 23, estimated in the range of 45 cents to 55 cents per share.
"We are conducting a thorough review and actions have been taken to address the current situation and reduce the likelihood of a recurrence," Downe said in a statement.
Natural gas can be a volatile commodity, particularly in the spring when traders are readjusting trades and preparing for changes in demand. Such volatility allows investors to make bets on the prices using derivatives.
Dabbling in commodity trading is usually within the remit of brash hedge funds with monster balance sheets or white shoes such as
BMO could see future losses as it looks to unwind its trades, it said.
Calls to its media relations line were not immediately returned.
Shares of BMO dropped 83 cents Friday to $62.70.