My dear Edmund

My dear Edmund,

I have just received my TD Bank (TD:TSX) 2007 annual report. Your picture looks great, and I continue to be delighted by the success you’ve had there. Not that I’m surprised, of course. You always had what it took to succeed. Who knew how lucky you were when former Prime Minister Brian Mulroney allegedly made you the first public servant to be fired when he won the 1984 federal election. Who’s laughing now?

For all of your success at TD, I felt that, as your Aunt, I needed to put something on the record. Now our family isn’t known for confrontation, but I’ve been reading the newspapers of late and I am worried that your Board of Directors have absolutely no idea how lucky they are to have you as their Chief Executive Officer.

Just think of what you accomplished last year alone: TD Banknorth continues to grow, you stared down those guys in the U.S. online brokerage industry, you saw the opportunity to leap at Continential Bank when they got into trouble with the SEC, and you didn’t lay your clients out with that Coventree (COF:TSX; see prior posts ending with “Coventree shares defy logic” February 7-08) asset-backed paper nonsense. Then there’s the leading role you earned with Teachers & BCE in Canada’s largest leveraged buyout ever – which made me a tidy sum in my RRSP I’ll have you know (you’re not the only one in our family with the midas touch)! But the icing on the cake has to be your foresight to completely avoid this U.S. subprime debacle.

I read the other day that US$250 billion has been written off so far in that market alone. And another US$50 billion more could be in the offing. Bear Stearns, BMO, BNP, BofA, CIBC, Citibank, Credit Suisse, Lehman, Merrill Lynch, National Bank, Soc Gen. The list of wounded banks is almost as long as that one in the book my cousin gave me for Christmas: 1000 Places To See Before You Die.

Only you and Goldman Sachs got it right – and Ben Stein says Goldman was shorting the stuff on their trading desk, even when their investment bankers were still selling it to Chinese banks and County Treasurers.

Here at home, I see that you’re continuing to resist the lobbying from your local banking friends to come to their rescue on the ABCP nightmare. $40 billion of trapped cash sounds like a whole peck of money to me.

Why is this your problem? You didn’t spawn Coventree, that’s what the Caisse de Depot did. They were the biggest shareholder before the IPO. Had the stock gone to $20 a share, rather than zero, would they have shared their winnings with us TD shareholders? We both know the answer to that question.

Now that they’re sitting on $15-$20 billion of illiquid paper, they want you to backstop Purdy Crawford’s master plan? And tie up capital that you could be using to close the pending BCE deal. Or buy another U.S. online brokerage firm now that Schwab and others are in hot water over their mortgage divisions. Stick to your guns. You’ve shown how special you are over these recent months of international financial mayhem.

And this is the part that bothers me. Not to sound money-hungry for you, but have you looked at your 2007 pay details? I recognize that you’ve been traveling a great deal. And that you’ve played so little golf of late that your handicap is stuck in the high 20s; but you need to read the proxy circular.

According to TD’s proxy, you were paid $14.2 million in 2007, up $2.2 million from 2006. I know it sounds like a lot of money, and a pot full more than the $245,000 you’d be earning in Ottawa if you were still a Deputy Minister, but it still boils my blood.

Between 2006 and 2007, TD�s adjusted profit grew by $815 million (about 25%), and your comp grew only 18.7%. You might think that sounds almost fair, but have you had a look at what your competitors were paid last year? It made my heart sink.

Right across Bay Street, your friends at CIBC (CM:TSX) were at it again last year. Having fallen on live grenades with Olympia & York and Enron, they couldn’t help themselves and plowed headlong into this subprime stuff. Initially claiming that they were exposed to the tune of “just” US$330 million (see prior post “When US$330 million of subprime becomes US$1.7 billion at CIBC“, November 13-07), they eventually wrote off $3.5 billion.

CIBC’s profit for 2007 grew to $3.3 billion versus $2.6 billion in 2006. But in December, a few weeks after posting these results, CIBC warned that $2 billion would get wiped out in Q1. In reality, had they been able to price their book correctly, 2007’s profit would have been cut by two thirds during the fiscal year, and not a few weeks thereafter.

CIBC fired some senior fellows and hired some new ones in the hopes that this is the absolutely last time anything bad is allowed to ever happen again there. But CEO Gerald T. McCaughey still earned more than $10 million ($1 million salary, $7.5 million SAR grant using CIBC’s disclosed black scholes value, $1.25 million other comp., $345k pension; and that’s before they’ve decided on his variable comp for the 2007 fiscal year), not much different than his 2006 number of $9.4 million (plus the black sholes value of another 750k SAR grant). And profit was down by almost two thirds.

Do you get the hint yet?

Your board saw fit to pay you just $14.2 million, even though you kept clear of disasters that no one else in the banking world seemed to be able to avoid. Had you lost Citibank or Merrill Lynch tens of billions of dollars you’d have been paid $100 million to go home and focus on your lackluster golf game. Instead, your reward for unqualified success is a relative pittance. You grew the franchise and built the brand in new markets. The rest? Lambs to the slaughter.

Lucky for them, there was no shortage of lemmings. As a result, most bank CEOs will keep their jobs. Misery loves company, after all.

But you can’t deny that this pay package is a slap in the face. Everyone else got paid about the same as you. For what?

Only your Aunt cares about you enough to tell you the unvarnished truth. Maybe this is just the kick in the pants you need to cash out and replace Stephane Dion when the Liberals turn their knives on him, sometime next year.

Just look how far Mitt Romney’s millions have taken him. And if TD’s shareholders don’t appreciate all that you’ve done for them — it’s time to move on. Don’t forget, you’re not 39 anymore. And the Nation needs you.

MRM
(with apologies to Dr. Clark’s dear aunt)