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Why CBA 'dropped' Merrill Lynch
Australian Financial Review Jul 9 2017 11:45 PM
Tony Boyd
David Craig says the low point of his 11-year term as chief financial officer of the country's biggest bank was the capital-raising debacle in the midst of the global financial crisis.
Craig has no compunction in saying the entire blame rests at the feet of the underwriter, Merrill Lynch.
CBA successfully completed the $2 billion capital raising after sacking Merrill Lynch and employing UBS. However, in order to appease angry investors CBA had to cut the price the shares were issued by $1 a share or $608 million.
Almost 10 years after that incident the wounds are still raw for Craig. To this day he believes the broker's lack of disclosure about CBA's loan book put a cloud over the integrity of the bank and Craig himself.
Cloud cast a long shadow
He never forgave Merrill Lynch and that was obvious from the fact that he never used them again in a capital markets transaction. His explanation of what happened raises questions about what exactly was going on inside Merrill Lynch at that time.
"We were doing an institutional placement and we needed to issue a cleansing statement," Craig says.
"We drafted and issued a stock exchange release giving an update. At that time, loan impairment expenses were a critical focus for all investors because it was in the middle of a downturn and losses were occurring.
"We provided the stock exchange release to Merrill Lynch and instructed them to advise each shareholder to provide them with that stock exchange release as part of them saying: 'And by the way, they're raising shares at this price are you interested in investing?'
"Unfortunately they didn't actually give that stock exchange release to the investors.
"So investors committed to the capital raising without knowing about the cleansing statement which, as it happened, wasn't material in the sense that it sort of basically said what most people would have expected.
"The point was we said it was really important the investors understand the status."
'Apologise, explain to that that you guys have failed'
Investors who bought shares through Merrill Lynch capital markets stuff were stunned when they saw the ASX announcement.
"I didn't hear till late that night that investors were seeing on the ASX the stock exchange announcement," he says.
"But they hadn't had that shared with them at the time they committed to the capital raising.
"So, I said to Merrill Lynch; 'You're going to have to let them off the hook. Go back to them, give them the thing, apologise, explain to that that you guys have failed in what you said you would do.
"Every one of their people was to give that ASX announcement to each investor and say: 'Do you still want to be in it or not?' "
Craig was already angry. But it got worse the next morning.
"We then discovered the next morning – another investment bank told us and then we confirmed with shareholders – that actually instead of doing what we told them they were going back to shareholders saying: 'Oh this was a total shock to us. We knew nothing about this ASX release. We're as shocked as you are. Isn't it awful?'
"That was when we sacked them and got another investment bank to do the capital raising because they were just misleading our investors.
"I mean that was the low point from my point of view because I stand for integrity and dealing squarely with investors. So I was horrified that they were being dealt with that way."