BMO and Barings

by Mike Holman

I decided to make Bank of Montreal (BMO) the first stock that I bought for my leveraged investment portfolio. I also own small amounts of BMO in various mutual funds but the 100 shares of BMO I bought recently represent the first time I’ve directly owned part of a company.

The reasons I bought BMO were mainly because it was one of the big five banks with proven dividend increases and it had the highest dividend yield of the banks. In my mind it is a very safe investment because it’s unlikely that any of the big banks will ever fail.

Having said that, BMO recently just lost $680 million from commodity trading losses, which sounds like there might be some fraud involved. This sort of debacle raises the question, are the banks really as safe as we think they are?

In this case, BMO had no problem coming up with other earnings to make up for the huge loss so I’d say they are still pretty safe, although I’m guessing there was some fancy accounting footwork going on to be able to still increase their profits.

I was reminded of another bank that had some trading losses not too long ago. Barings Bank of London failed in 1995 because of a rogue trader named Nick Leeson who lost $1.4 billion speculating on futures contracts. This is roughly $2 billion in today’s Canadian dollars which is a lot more than the $680 million BMO loss. I don’t know how big Barings was in comparison to BMO but I do know that it was the oldest merchant bank in London (est. 1762). Apparently Leeson was a regular back-office worker who managed to trade large sums of money on the banks behalf. He eventually got caught and served time in jail. You can find out what he’s up to now on his website. I’m not sure if he has a personal financial blog as well :)

I think the important thing to learn from Barings & BMO (and Enron and so on, and so on) is that diversification is important. It doesn’t matter if you own the best stock in the world, all it takes is one big fraud and your losses could be significant.

Be Sociable, Share!