The Decibel - What’s going on at TD Bank?

Episode Date: August 28, 2024

Last week, TD Bank released its quarterly earnings. For the first time in 21 years, they reported a quarterly loss – largely because they set aside US$2.6-billion to cover penalties in the United States related to failures in their anti-money-laundering program. All of this has people wondering … what is exactly going on at TD? How did a bank with a once-sterling reputation begin facing all these problems?Tim Kiladze is a financial reporter and columnist for the Globe. He’s on the show to talk about what he and his colleagues have learned about TD’s culture shift that contributed to the company’s anti-money-laundering troubles, a leadership exodus, and questions around the company’s future.Questions? Comments? Ideas? E-mail us at [e-mail]

Last week, TD Bank reported its first quarterly loss in 21 years. This comes after the bank has put aside billions of dollars in anticipation of paying fines over money laundering issues. All of this has people wondering, what's going on at TD? Tim Kalatz is a financial reporter and columnist for The Globe. He's here to talk about how a shift in TD's culture has changed things, and what this means for the bank and its investors. I'm Mainika Ramanwelms, and this is The Decibel from The Globe and Mail. Tim, great to have you back on the podcast.

Happy to be here as always. So TD Bank reported its quarterly earnings last week. Tim, what did we learn about how much money they've actually put aside for these fines? So on one hand, the bank is performing somewhat normally. You know, its day-to-day operations had no major surprises. On the other hand, there was a huge $2.6 billion US charge or provision is the formal term related to its US anti-money laundering failures. And this has been hanging over the bank for over

a year now because we knew that there had been a probe from the Department of Justice and from, you know, big banking regulators in the US tied to money laundering and drug trafficking. But no one kind of knew exactly where it would shake out. And now TD has kind of disclosed this is how big it's going to be. They'd already pre-disclosed a US $450 million fine a little while back. And so put together, it's about 3 billion US, which is about 4 billion Canadian current exchange rates, which is a lot of money. And it really signals that TD had some major failings. The trouble right now, though, is that we still don't know the full details. Those are supposed to come out by calendar end.

But the sum of the money alone signals TD got in some deep, deep trouble. Yeah. Can we just put that fine into context? I mean, that seems like a lot of money. How does that compare to other fines that other banks have faced? It's up there. The biggest fine that I can remember from a U.S. regulator is when it went against Wells Fargo a number of years ago. It wasn't tied to money laundering. It was kind of bad business practices.

And that came in at about $8 billion U.S. So TD is much lower than that. But if my memory serves right, they're now the second largest. Just after TD would be, JP Morgan took a huge fine tied to the Bernie Madoff Ponzi scheme, for those who remember that from the 08 financial crisis. There's been a European bank that's taken a $2 billion charge. HSBC has taken a $2 billion charge. So TD now has set a bit of a major case is maybe the best way to describe it. And just to be clear, TD has set aside this amount of money for the potential fine. They

haven't actually been given a final number yet, but this is kind of the amount that they're anticipating they're going to need to cover it. Tim, do we have any sense of the kind of impact that this could actually have on TD? Maybe the best context would be that its U.S. retail operation, which is where these failings took place, usually makes around $4 billion Canadian a year. So I think of it as about one year of earnings. But they're still going to make billions of dollars as an entire bank because the Canadian Bank is very profitable. It has other divisions like capital markets, et cetera.

So, Tim, as you touched on there, these fines that TD is facing stem from issues around money laundering in the U.S., which we are going to touch on. But I think it's helpful, Tim, if we kind of back up a little bit and look at how TD got here, really. Because, I mean, for a long time, TD had a pretty positive reputation, right? Absolutely. You know, I don't want to oversell it because, you know, no bank is a saint. But they were always out front on things like social issues,

which, again, might bother some people. But they kind of touched on the Canadian zeitgeist, is the way that I would put it. And so a big one is that they were big on the environment for more than 15 years. And, you know, there's a story that had been told to me that we didn't get into the piece. It was someone who was tied to kind of their environment program was fearful that, you know, we were so out front on this issue that it might actually cause problems. And at the time, TD CEO Ed Clark basically took the stance, it's okay, I'll handle it. And so they weren't scared to kind of push the limit. At the same time, they also ran a very

profitable and good bank. So yeah, so it seems like, as you said, like zeitgeisty kind of issues paired with good management of a bank. So this was a pretty positive reputation that this bank had. Totally. And maybe the best metric for this, to judge this in a sense, is that other banks were secretly very jealous of what TD had built. Even their arch rival, which is RBC, would quietly acknowledge like TD's really got something. They figured it out. And I think that has changed over time. And what we really set out to tell was AML in a way and AML failings. Anti-money laundering. Yes. Were a symptom of this culture change. And culture stories are very hard to tell because

culture is intangible. But over time, the degradation of culture can really impact how you function. So when did you start hearing about, I guess, changes at TD Bank then, Tim? Honestly, it was pre-pandemic, but for a long time, it was really hard to prove. There had been so much kind of going on with the banks. They all took major restructuring charges about a decade ago, eight to nine years ago. So there was just a lot happening and you can never tell kind of what was attributed to what. Then the pandemic happened and that consumed all of us for so long. But it was around, I'd say 2021, that you started to hear these whispers of, you know, TD has lost its

fastball, which is a baseball analogy. But, you know, TD was scared to stick its neck out, might be the best way to describe it otherwise. And then it kind of manifested into the TDs become risk averse. But it was really hard to prove because the numbers were actually still okay. Like their profits were still fine. It's partly because we literally flooded the world with money during the pandemic. And so it was like almost impossible to not make good money. You know, we had a huge housing boom here in Canada, right? That we all know about now. Well, the banks made huge amounts of money off of that. But around 2022, it reached this kind of like point where the bank couldn't hide from it anymore. And so what it did is it went

out and it was like, all right, you want us to be more aggressive? We're going to go buy a big U.S. bank. So it went out and offered to pay 13 billion U.S. for a company called First Horizon, which is based in Memphis, Tennessee. And this was kind of meant to, you know, the bank has never said this, but it was like a listen, we got it. We're going to grow. Don't worry. And this was kind of meant to, you know, the bank has never said this, but it was like a, listen, we got it. We're going to grow. Don't worry. And it made a lot of sense. You know, TD in the U S over the last 20 years has really expanded more in the Northeast and the mid Atlantic. So think about like Philadelphia area up through Massachusetts, and then it has this kind of portion in Florida, which is also pretty big. So this would have connected the bank all

along the Eastern seaboard. They'll have to say that. So it made sense. And it was like, okay, here we go. Well, it turns out this one deal is what in a way exposed all of TD's problems to the public, at least because what ended up happening was about a year later, the deal got killed. We later found out because regulators were worried about money laundering. Right. So I think this was May 2023, right, when we found out that the deal with First Horizon was not going through. It was kind of mysterious at first, but then, yeah, eventually it came down to this money

laundering stuff. Exactly. And so there was a few leaks that came out that it was tied to money laundering. But again, no one really knew. And then it was exactly one year ago, last August, during the quarterly reporting season, when TD disclosed there was a DOJ probe. We're likely to face financial penalties. And all of a sudden it was like, oh, my God, like this is actually happening. It's real.

DOJ, of course, Department of Justice probe. So big deal. Big deal. Exactly. So let's dig into that because you started, Tim, kind of talking around the culture of the bank and how things may be changed there. So what do we know about the changes that happened kind of within the institution? I would boil it down to one thing to start, which is that under the previous regime, and I don't want to pin this on like one specific person because Ed Clark, who was a previous CEO, he handpicked the current CEO, Barrett Mizrani, as his successor. And Barrett was a top official.

He used to run the U.S. division under Ed. So Barrett was very much part of this. It wasn't like there was this huge shift, right? Like not some outsider who came in and imposed some brand new thing. But one of the core differences was that Ed believed in the kind of frank talk is how I would describe it. When it came to just, you know, investor communications, communications with the media, TV under Ed Clark, they would answer your questions. Same thing with investors. It was kind of like treat people with respect,

treat people like adults, and it builds goodwill so that when something goes wrong, people know you're not lying to them. They may be mad at you and say you have to fix this, but they trust you that you're going to fix it. Under the current regime, it's basically been say nothing. Barrett Masrani has been CEO since 2014. 2014, yes. So it's been 10 years now. So we must have a pretty good sense of his management style,

how he's running the place. What do you know about that, Tim? It's this idea of we don't have to say much because we there's so many layers of like risk and compliance and lawyers who have to sign off on things about like, you know, will this hurt the bank's reputation? Will this affect our brand? You know, like where are we at risk on financial performance, et cetera. And I remember I ran that anecdote by someone else tied to the bank and they said, oh, it's not 30, it's 50 people who need to say yes wow and all it takes is one person to say no and the whole thing can die and so another person described it

to me as like a drift sets in bringing this back to aml though you know there's a lot that we still don't know and i want to make that very clear because you know to td's credit they haven't been able to say much because u.s regulators are still you know probing the bank even though we now know how much money has to be paid, there could be a lot more that comes out in terms of limiting TD's growth and actual details of what went on. But one example that was given to me around how decisions get made is with some money laundering problems that actually got raised internally inside the bank, they got sent kind of up the chain and then they disappeared into what I'll call TD's ether. And there's less accountability. There's less direct understanding of like, I can just go to this person and get an answer. And so over time, people just, you know, you probe a little bit and you don't get answers and you learn, okay, stop probing.

And again, multiply that over years and people kind of throw their hands up. We'll be back in a minute. So Tim, some of the cultural changes you mentioned, things like issues getting sent up the chain and then not being dealt with over time, is this maybe how some of the problems like money laundering got so bad? Totally. And the third leg of this is this idea of accountability, which people in the bank talk about as this big problem of people leave the bank and you never know, like, have they been fired? Have they left on their own? Have we seen a lot of people leave the bank and you never know, like, have they been fired? Have they left on their own? Have we seen a lot of people leave the bank? That has been a really interesting development.

And to be honest, is what really triggered looking into the culture side of things. We knew that there were problems with AML because of the deal that got killed. But in 2021 or so, you started to see some senior people that I would call TD blood who started leaving.

So there was someone who everyone thought was going to be the next CFO Manjeet Singh left for Sun Life. A year later, someone named Nori Campbell left. And these people were kind of like flag bearers inside the organization. It really picked up though last year in the fall effectively the three leading people in canadian banking which is td's big money maker all left the most important being michael rhodes who was the head of the division he was also going to be a ceo succession candidate or he wasn't going to be he was a candidate and he left in the middle of like a department of justice probe just, it was like the worst thing that could have happened. And all of a sudden, that's when everyone said,

what is going on inside TD? So what does all that signal to you, Tim? Like all of these departures and done in this way, what do you get from that? It felt a lot like frustration on the inside. It's like any crisis, you know, you have a few mini problems that, that crop up over time, people leave and management tries to kind of just forge ahead, you know, like we'll keep a lid on it. The problem is this spring, the lid kind of like popped off. It's like a dam broke, a real frustration started brewing inside the bank because more people were leaving. And yet the same lines are being delivered internally, which are the same lines that we hear externally, which is TD's been around for 150 years. TD will

survive the next 150 years. TD's the bank that you can trust. And people were saying to me, have you seen our stock price? We can't deny it anymore. It sounds crazy, but people actually want an acknowledgement of the problems because there's a feeling that the only way to fix it is to, you know, first have acceptance that something has gone wrong. So this frustration that you're talking about, how is the current leadership, like, I guess, especially the CEO, Ms. Rani, how has he responded to all of that? It's been very nothing to see here is how I would describe it. And it's the same thing from the board of directors. People around the bank, I always say kind of the TD family, broadly speaking, have said like, you know, one thing that they themselves can't figure out is one of TD's major AML problems cropped up in New York, in Queens, New York. The lead person in this criminal ring pled guilty in early 2022.

We actually had a whole other episode where we talked about the details of this. Exactly. Because there was a lot going on. There was a lot, exactly. And the bank's global head of anti-money laundering wasn't replaced until late last year. So almost two years later, call it. I think it's like 20 months later. So the person kind of, you know, the go-to person who would have been responsible was kind of sticking around for quite a while after this all came to light.

Yes. And I think part of it, and understandably so, to be frank and be fair, is that every bank faces money laundering problems. These criminal rings have become so sophisticated. So I think there was a sense internally of like, listen, we are TD. This was a major, major failing, major major lapse but we will fix it but then more and more problems kept cropping up there were examples that other branches from other criminal rings that have been had been breached basically and on top of that td until very very recently kept giving these kind of very bland public lines about how like this is not the td way and we

will address these problems and you know i've been at the globe for 15 years now i've seen like a fair share of crises and like over time you realize that there is a way to they call it issues management you manage the crisis you number, number one, fire somebody. You acknowledge the problem and you set a path forward. You know, it's like, that's the secret to PR, to be honest. And TV wasn't doing any of it, is how I would describe it. And so there were all these questions around, like, whose head's on a platter? Like, who's taking ownership for this?

Which, again, ties back to the idea that, you know, from what we could see from the outside, nobody had kind of been replaced in the department. That has all now changed. We have a new global head. They recently replaced their chief compliance officer, which is tied to AML, but also risk in general. In an interview I did with Barrett for our big story, the CEO, he very much said, I own this, we own this, we will fix this. So the tone has very much changed. But it hasn't changed when it comes to culture. If anything, there's been pushback.

It's more like, I don't see what you're talking about. I think you're getting bad information is effectively the message. Companies like TD, the board of directors is a significant player here too. So what role has the board played in all of this? That's been one of the big mysteries through it all because TD also historically had a strong board. It's felt like the board has basically been said, we have this one issue in the U.S. that we're going to fix and we're going to move forward.

And when we move forward, we'll be fantastic. And the problem is that so much time has passed now that people have just gotten extremely frustrated, again, that there's been no acknowledgement. But two, it's dovetailed with all these cultural issues. And there's this saying that was part of a big report like 30 years ago here in Canada. And the title of the report was, where were the directors? And you're hearing that now about TD, like, where were the directors? And Canada's banking regulator has also talked about the board, right? Canada's banking regulator has said that it's starting to look at non-financial risks, like actually the board members themselves, the character of the board members. That seems like, I don't know, is that normal, Tim?

Or what do we know about that? It's a really new development. And I would argue it's really relevant. It's like the banking regulator has said, without using these exact words, that they want to start monitoring what they call non-financial risks, because non-financial risks can become financial risks. So an egregious example might be, you know, a bank brings in somebody who's a big risk taker and wants to go out and win business and you know they're kind of your typical not to be too gender normative or whatever your typical alpha male pounds his chest you know and hires people around him that are the

same mentality and they're the kind of people that you know don't take criticism well and they're just always kind of out saying like my way is the only way and it can work for a while because maybe they deliver great results but five years in you know there's a recession there is economic downturn there's a pandemic something right and all of a sudden their business blows up because all those risky things really had major risk in bad times you know and so the the regulators basically said we need to monitor more things to make sure that we don't have these scenarios pop up because particularly in canada the banks are vital to our economy they have a huge element of economic stability is the best way to describe it. And so if you have a bank that kind of blows up in a way, it's a hit to kind of the Canadian

image. And an important note to this is that, you know, during the 2008-2009 financial crisis, Canada's banks were like heralded globally as these champions of, you know, the right way to do business. And it became the source of like national pride. And I think a lot of that halo has now faded. And the regulator feels like, you know, we can't expect or think that the banks will just always be good corporate citizens. And so we need to kind of be able to keep a check on them in a different way. We've talked a little bit about how this is playing out in Canada, how Canadians perceive TD.

But I wonder, how is this playing out in the U.S.? Because TD has a big presence there now, too. Yeah, TD now, depending on how you rank it and what banks you include, they're definitely top 10 in the U.S. And they were going to get even bigger with this first horizon deal. They were going to vault into sixth place, which is directly under kind of the four major global banks like jb morgan so i'd say a lot of the pain and cultural hit our reputation hit has been felt more in canada what is really important though for people to understand is though even even though they've settled this um financial penalty and it's huge, but they can kind of absorb it. We don't know yet if they're going to be constrained to put on its growth in the US. And that's a big element of

TD's future because about 20 years ago under Ed Clark, they said that we're going to go and we're going to build out a franchise in the US. Canada is just too constrained for growth in the long term. And so they bet heavily on the US. And they've done a decent job of building that franchise. But they're at a point where they kind of, to really make it work, they need a bigger one. So if TD wants to keep competing at the level that they have been, Tim,

how do they come out of this? Again, it comes down for me to this idea of acknowledgement, which may not be the best word because it sounds a little bit boring, but just saying like, we're not where we want to be and we've made mistakes, you know? I think everybody understands that on some level, you know, with AML, for instance,

these criminal rings are really sophisticated. And on top of that, there's been a huge influx of fentanyl into the US and other opioids. Like we have it here in Canada too. This was tied because drug money essentially was tied to the AML issue. So yeah, it's all related. Exactly. You know, even talking to regulators or like, you know, speaking through the media or speaking through investor calls to regulators, because that's kind of how it works. Acknowledge that this was a major problem that then that, you know, like you're embarrassed by it because TD has had issues in the past with AML. A lot of banks have, and this is something that came up in our reporting, but they showed embarrassment,

you know, they showed that they were going to fix this and they, they took a very direct plan to do so. This time around, it's just felt so much different. I think they need to also explain to investors, explain to the broader public why they're worth the TD premium. The way that I would describe it for kind of the average person is that this goodwill that they had built up for more than a decade, it had real financial consequences in a good way. At the end of the day, the TD premium came down to trust. It was investors trusted you that even

if you messed up, you were going to fix it. It's a measure of confidence in leadership. They have chewed through so much of that goodwill for various reasons and over time. So it's not like it was just something, this one AML issue is what's caused it. I would argue that the current management team still views themselves as having that goodwill, that trust from people. And the street investors are saying to them, you don't, so prove it.

And they're going to need to. Tim, thank you so much for your reporting and for taking the time to be here today. Always happy to. That's it for today. I'm Mainika Raman-Wilms. Our producers are Madeline White, Rachel Levy-McLaughlin,

and Michal Stein. David Crosby edits the show. Adrienne Chung is our senior producer, and Matt Frainer is our managing editor. Thanks so much for listening and I'll talk to you tomorrow.