Bank of Montreal, stung by the biggest trading loss in Canadian history, said Thursday that the debacle will cost at least 50 percent more than originally forecast and started an investigation into potential “irregularities.”
Canada’s fourth-biggest bank, the parent of Chicago’s Harris Bank, now says it will record pretax losses of $618 million from trading natural gas. Two New York-based bankers involved in the trades have left the firm.
The revised loss underscores the risks of a deposit-taking bank making bets in the natural gas market just seven months after the collapse of hedge fund Amaranth Advisors LLC. The bank said it might post additional gains or losses as it scales back the natural gas trades.
“BMO needs to take the time to get the story straight once and for all,” said Pat McHugh at MFC Global Investment Management in Toronto. “This is not Harry Potter. We don’t want any more installments.”
The bank said the losses were bigger than it originally forecast after it adopted a different pricing model to better assess the value of its natural gas options contracts. The change also reflects “increased concerns” about the reliability of quotes from its main broker, Optionable Inc. Chief Executive William Downe, who took over the top spot March 1, said in a statement that the bank has taken steps to reduce the risk of the commodities portfolio by a third from its peak.
The announcement adds to the challenges facing Downe, 55, who worked in Chicago for about 14 years and in 2002 was charged with overseeing all U.S. operations, including Harris. He declined to comment further Thursday.
“BMO had a reputation of having strong risk control. It looks like we were misguided,” MFC’s McHugh said.
The bank said it hired outside auditors in February to study the natural gas trades, and they reported to the bank in mid-April. Bank of Montreal also suspended its relationship with Optionable, which counted the bank as its biggest customer. Bank of Montreal accounted for 30 percent of Optionable’s first-quarter revenue of $9.1 million.
