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.
Frequently Asked Questions about this Article…
What brand risk warning did Commonwealth Bank (CBA) receive about its exposure to City Pacific?
A PPB Advisory paper flagged a potential 'CBA brand risk' if the bank pursued an option that might be seen as improving its own position — specifically increasing lending to the Pacific First Mortgage Fund so the fund would take on the bank's Marina Cove exposure. The report warned this could leave the CBA open to accusations of acting deceptively; bank executives, including senior leaders, were appraised of that brand-risk concern.
How large were City Pacific's losses and what happened to investors in the Pacific First Mortgage Fund?
City Pacific suffered impairment losses of more than $500 million. The Pacific First Mortgage Fund saw its unit price halve and investor funds remained frozen after the fund suspended redemptions.
Why did the Pacific First Mortgage Fund suspend redemptions on March 31, 2008?
As the global financial crisis took hold, redemption requests rose to $283 million and the fund did not have the cash flow to repay its indebtedness to the bank, so it suspended redemptions on March 31, 2008.
Which parts of City Pacific did the Commonwealth Bank consider most risky or 'impaired'?
While CBA said it was comfortable with the security behind the mortgage fund and that its mortgage-fund exposure was covered even in a liquidation, other parts of City Pacific — notably a Marina Cove development that the bank had been told would breach borrowing covenants — were classified as 'troublesome and impaired' and were referred to the executive risk committee.
What lending option did PPB Advisory propose and why was it controversial for CBA?
PPB Advisory suggested one option was for CBA to increase lending to the mortgage fund from the existing $125 million to more than $200 million in exchange for the mortgage fund taking on the bank's Marina Cove exposure. PPB cautioned that this option posed significant brand risk because the CBA could be accused of deviously improving its own position, and the report recommended against pursuing that option.
Who at Commonwealth Bank was involved in discussions about the City Pacific exposure and who was questioned in the court hearing?
Senior CBA executives, including former CEO Ralph Norris, were appraised of the exposure. Ross Griffiths, CBA's chief credit officer who sat on the three‑member executive risk committee, was questioned at a public hearing in the NSW Supreme Court.
What was the reported potential direct loss to the Commonwealth Bank from the City Pacific Ltd entity?
The hearing was told that the bank's potential loss to the City Pacific Ltd entity alone was $59 million.
What role did Trilogy Funds Management play and what is the status of the hearing about CBA's City Pacific exposure?
Trilogy Funds Management is the new responsible entity for the fund; Tony Martin SC represented Trilogy and questioned Ross Griffiths at the NSW Supreme Court hearing. The hearing is ongoing.
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