$2bn Slip Up By ... Which Bank?

COMMONWEALTH BANK is blaming Merrill, Merrill is blaming Commonwealth. One thing is certain; the bank's abortive $2billion share placement that fell apart on Tuesday night was more redolent of a tin-pot minerals explorer than a major bank.

CBA was forced to cancel its placement after an emergency board meeting at 7am yesterday. UBS stepped quickly into the void and got the issue away late in the morning, although the high drama over the canned placement dragged on through the day.

Institutional investors had jacked up on Tuesday night when they learned via the official CBA announcement at 7.15pm that the bank was admitting to a deteriorating loan book. Merrill Lynch, the broker organising the placement, had already raised the $2billion after a phone around that had begun in the late morning. The money was in the bag, but news of the bad loan position was still unknown.

Analysts subsequently downgraded CBA by 10 per cent on the revelations.

The mood among institutions was incredulous. "Stuff up ... heads will roll," said one.

The forecast impairment charges were far higher than analysts expected, and not even clearly disclosed. How could the bank possibly put the hat around for fresh capital and then come out afterwards and downgrade the outlook on problem loans?

"It's the sort of thing you'd expect from a $20million explorer, not a top 100 company," said one institutional investor.

"I've never seen a bigger joke in a supposed blue chip than what occurred here. It beats NAB's aborted move on AMP via Citigroup," said another.

According to CBA, it "had terminated the share placement agreement with Merrill Lynch International Australia on the basis that Merrill Lynch did not inform potential investors of the various disclosures made by the bank in its announcement released to the ASX at 7.30pm yesterday".

According to Merrill, "Merrill Lynch does not accept CBA's characterisation of events".

There are a few explanations for what went wrong. The bankers are supposed to get the client to sign a due diligence committee form,which should have disclosed anything such as a looming announcement on higher impairment charges, as was the case.

Either CBA did not disclose to Merrill about the pending admissions on debt, or it did and either Merrill did not pick up on it, chose to ignore it, or there was a breakdown in communication between Merrill's bankers who teed up the transaction and its dealing desk, which flogged the new CBA shares to institutional clients.

The latter is the most likely explanation. Even so, it would not get CBA off the hook entirely as the bank had already been selling shares before disclosing the deal to the market.

The timeline:

CBA has been selling stock for days in the market.

At 11am on Tuesday, institutions were offered large licks of stock at $28 a share.

At midday, they were told the raising would be just over $1billion. A range of top institutions committed to take stock at $27. CBA shares rose all afternoon to close at $29.15.

The "successful" deal was announced to the institutions at 4.30pm after the market closed. It was priced at a 5 per cent discount to five-day volume-weighted average prices (VWAP).

The public announcement was made, however, at 7.15pm, with a sneaky downgrade buried in the detail. Merrill Lynch dealers, who had sold the placement, were soon battered with calls from angry clients.

Emergency CBA board meeting at 7am yesterday.

Deal pulled at 9.40am.

UBS seized the initiative, rang the bank's CEO, Ralph Norris, and had the deal done by lunch.

The question is: when did CBA executives and directors know of the downgrade? And why did CBA's other 200,000 shareholders not get the information that was supposedly meant to have been disclosed to institutions via Merrill as part of the placement deal?

The aborted capital raising follows a recent backlash against National Australia Bank, its board and its executive director, Ahmed Fahour, after Fahour had sold personal shares just days before NAB itself declared a capital raising. Questionably, the NAB board said it had given Fahour permission.

Given the banks enjoy the luxury of a Federal Government guarantee with no brakes on their preposterous executive salaries they are not exactly covering themselves in glory these days.

So far this year, amid the global credit crisis and the trend to repair balance sheets some $10billion in equity has been raised. There will be more

next year, probably in equal dimensions.