Gas Pains at BMO Financial

There will be plenty of explainin' to do when BMO Financial Group releases its second-quarter earnings this week.

The company, parent of the Bank of Montreal and Harris Bank in Chicago, said last week that it was a bit off in estimating the damage suffered by a disastrous proprietary trading operation.

Instead of losing $320 million to $415 million, as the company said last month, BMO's natural gas traders have actually lost something closer to, ahem, $624 million.

The company explains that the losses stemmed from an unusually illiquid market for natural gas, where volatility had dropped to "historically low levels."

Oh, that and what the company described as "a refinement" in its approach to estimating the market value of its portfolio.

There, apparently, is the rub. BMO said it had suspended two of its traders earlier this month, and now says that "these two individuals are no longer employed by the company." The company identified neither trader, nor said whether they quit or were fired.

BMO, however, did say it is continuing to look into the facts and circumstances surrounding the losses "including a review to determine whether any potential irregularities in trading and valuation took place."

The company says the losses are "modest" in light of its "strong" balance sheet. Perhaps. But the Financial Times reports that Standard & Poor's has placed the bank's ratings on review. S&P says the loss is "disproportionate" to BMO's trading revenue, and does not reflect its strategy of being a "low-risk bank."

One thing is for sure: BMO has stopped doing business with Optionable, a U.S. brokerage that performed the mark-to-market valuations that turned out to be off the mark.

Nymex, the energy futures exchange in New York, is a major shareholder in Optionable.

by Mark Stein