THE most senior levels of the Commonwealth Bank - including former chief executive Ralph Norris - were appraised of the bank's exposure to City Pacific's operations during 2008, including receiving papers on "brand risk" to the bank as it looked to get its loans repaid.
The Commonwealth Bank's chief credit officer, Ross Griffiths, who sat on the three member executive risk committee with Mr Norris, was questioned yesterday at a public hearing in the NSW Supreme Court.
City Pacific, which was the responsible entity for the Pacific First Mortgage Fund, suffered impairment losses of more than $500 million and a halving of the unit price to investors, whose funds have remained frozen.
The hearing was told on March 31, 2008 - as the GFC took hold - the fund suspended redemptions after requests rose to $283 million, and did not have the cash flow to repay its indebtedness to the bank.
Under questioning by Tony Martin, SC, for the new responsible entity, Trilogy Funds Management, Mr Griffiths agreed the bank was comfortable with the security it had with the mortgage fund, and that even in the event of a liquidation its exposure was covered.
However, its exposure to other parts of City Pacific - especially a development at Marina Cove the bank was told would breach its borrowing covenants -were in the "troublesome and impaired" category and had been referred to the executive risk committee.
Mr Martin said the bank's potential loss to the City Pacific Ltd entity alone was $59 million.
Mr Griffiths was asked about a report prepared by PPB Advisory, which was appointed by the bank to look at its City Pacific exposure. Mr Martin said one of the options was for the bank to increase its lending to the mortgage fund, from the existing $125 million to more than $200 million, in return for the mortgage fund taking on the bank's exposure in Marina Cove.
"One of the downsides [the paper said] was CBA 'brand risk' ... the CBA may be accused of deviously improving its own position and that is a concern that PPB had in relation to option one," Mr Martin said.
"That is what this document suggests, " Mr Griffiths replied. "I am not sure that the word 'devious' is appropriate. I thought there were enough safeguards and governance issues."
Mr Martin said the PPB report recommended the brand risk was too great for option one to be pursued. Mr Griffiths said that was not his view.
The hearing continues.