Canada in the Dock at the Enron Trial

William Krehm

After 4.5 years of sleuthing the US Department of Justice has finally managed to convict the two highest Enron defendants. Kenneth Lay, founder and CEO, has been sentenced to 165 years in prison and Jeffrey Skilling, who headed the so-called "partnership" operation, to 185 years. Eric Reguly, columnist of The Globe and Mail, describes Enron as the biggest fraud in US corporate history (27/05, "Hunkin’s Enron retreat was the right move for CIBC"). "In the autumn of 2003 the rumours said CIBC was in serious trouble with Justice, that it faced possible criminal indictments for its sordid dance with Enron. The rumours of possible indictments were forcibly denied by the bank. In the course of describing the luncheon he had with Mr. Hunkin, CEO of CIBC, at the time, Reguly remarks: ‘He was on a damage-control campaign and met with media executives. Call off the dogs, don’t print rumours, thousands of employees’ jobs are at risk if the bank takes an unjust beating by the press.’

"CIBC settled with Justice that December while still denying that threats of criminal indictments forced it to run up the white flag. But the wording of the settlement with the US Justice Department made it clear CBIC had come close to the precipice. Justice said CIBC ‘has accepted responsibility for the criminal conduct of its employees in connection with a series of structured finance transactions with Enron." It added: ‘As long as CIBC abides by the terms of the agreement, the Justice Department has agreed to not prosecute the bank.’

"CIBC was required to pay $80,000,000 (US) to the Securities and Exchange Commission, exit the structured finance business in the US and appoint an independent monitor to oversee the bank’s compliance systems.

"I asked Mr. Hunkin why the bank had settled. Intimidation was more or less the answer. Because the walls are lined with pictures or Justice ‘kills,’ like Ivan Boesky and Michael Milken. If indicted CIBC, too, would have faced eradication. In the months before the settlement, rival Canadian banks began to fear for their own health – if Justice were to nuke CIBC, the fallout would hurt everyone. The [Canadian] federal Office of the Superintendent of Financial Institutions arrived to help broker a deal with Justice. The Federal Reserve Bank of New York probably got involved too, though its role has never been confirmed. The two regulators may have convinced Justice that taking out a big Canadian bank, one with a significant Wall Street presence, would cause more problems than it would solve.

Dept. of Justice Leaves Behind a Time Bomb

"At the time, the settlement costs seemed relatively minor. But Justice left behind a time bomb. The settlement prevented CIBC from disputing its unsavoury conduct in the Enron affair, meaning it could not defend itself against shareholder lawsuits. The bomb went off last August, when CIBC settled a class-action lawsuit for $2.4 billion, a price greater than the ones paid by Citigroup and J.P. Morgan for their Enron sins."

But what responsibility does the Government here bear for the sins of its banks? The answer is "plenty." We came out of the Second World War with the lessons of the Great Depression very much to the fore. The Roosevelt government in the US had led the way: the banks whose speculative activities at home and abroad had contributed vastly to both the 1929 bust, to the Depression, and to the war it led to, were put under strict controls. The US Bank Act of 1935 confined them strictly to banking. They were not able to take over stock brokerages, insurance or mortgage companies. Ceilings were set on the interest they could pay for their money or charge. Two main levers were given the central bank with which to control the economy: not only could it raise or lower its benchmark interest rate to cool or stimulate the economy, but the banks had to redeposit with the central bank a modest portion of the deposits they themselves took in from the public. The purpose of that was to be able to cool an overheated economy or encourage a recessed one without depending wholly or even at all on interest rates that hit anything in the economy that moves or stands still. All that was needed was to increase or lower the rates of the statutory reserves, which loosened or tightened credit. One of the reasons for these reserves being interest-free was not to throttle the purpose of these reserves. If they earned interest, that would reduce the response to their movement up or down. Besides bank statutory reserves were the successor to the ancestral sovereign’s monopoly in coining precious metals – his "seigniorage." Within the confines of the restriction on the money supply in force, it gave the government the free use of more of the money the central bank created.

But in the 1980s the banks throughout the non-Communist world, having been extensively deregulated, stepped up their gambles in areas they knew little about, and indeed were incompatible with banking. And, as critics foretold, they lost their capital. To bail them out the Bank for International Settlements, a central bankers’ organization that discouraged anybody related to a government except central bankers from attending its sessions, brought in the "Risk-Based Capital Guidelines" in 1988. That declared debt of developed countries risk-free, and thus requiring no additional cash to acquire. Because of it immense quantities of bonds were pulled out of the central banks where the interest they carried had returned substantially to the government, and thus were virtually interest-free loans. Now the private banks – to replace their lost capital – loaded up with them, and kept the interest they paid.

Without the surrendering of access to the public treasury on an ongoing basis, without explanation to parliament, let alone debate, the CIBC could never have gambled its way to the verge of crime and bankruptcy bringing shame on the very name of Canada.

William Krehm

– from Economic Reform, June 2006