US blogs speculate BMO going down. Credible?

When the storm hit last autumn, Bank of Montreal has $6.9 billion in cash. At the same time it had an obligation to pay, on demand, $65 billion to business and government for deposits, and another $65.5 billion to folks like us.

Taking into account the cash the bank also had on deposit with other banks (including the Bank of Canada) plus cheques which had not yet cleared the system, BMO could muster a quick $21.1 billion. But, added to the money it owed Canadian depositors, it also owed another $115 billion to American customers.

In short, deposit liabilities of $397 billion. Cash assets of $21 billion.

It doesn’t take long to see why a run on a bank is certain death.

Puts beat calls 13-1, but no collapse

If enough people believed the bank was in trouble, and only 5% of the deposits it had taken in could be repaid tomorrow in cash at the wicket, queues would appear in an instant. That’s just what happened with Northern Rock in the UK last year, as it did with IndyMac in California. In both cases, the banks were taken over by government to avoid public panic.

Over the last few days rumours have been circulating, fed by breathless US financial blogs, that Beemo is going down. The point of ignition is supposed to be Tuesday, when quarterly results are announced. According to the current merchants of fear, BMO will announce it’s missing a fat dividend payment of $1.5 billion. That will cause the stock to drop like a stone, and start a cascade of cash exiting the bank.

The words being used to hype this event are worth noting. This is from Stockgumshoe.com:

On Monday, August 24th, at noon, Dan Amoss will expose the biggest banking lie of the past 64 years. Given the past 21 months of market action — that’s no small claim. If recent mainstream headlines make you believe that banks have weathered the storm. You better think again. Dan’s caught another major bank he thinks is lying about being able to pay their massive $1.5 billion dividend scheduled for 2009. He believes this bank’s using every shady accounting trick possible to hide losses from their shareholders.

Amoss adds this, on Pennysleuth.com:

If you think Canada escaped the downward trend in U.S. banking, think again. While the country may not have plunged headfirst into subprime mortgages, it did dip heavily into risky derivatives. The leverage it took on generated impressive returns on equity in good times, but that same leverage is set to wipe out equity today.

Shareholders in one “safe” Canadian bank will have to rethink their loyalty. Its looming solvency crisis practically guarantees a dividend cut. And that’s our catalyst for this month’s short play action – offering us a chance for 200% profit potential.

Accounting secrets have not yet obliterated Canadian bank earnings – like those of U.S. banks – because the Canadians have not yet accounted for the coming tsunami of mortgage, consumer loan, and corporate loan losses. Here’s how they loaded those loan books with hidden risk.

A Canadian bank failure would, of course, be global news, coming just months after our financials were touted as being among the best capitalized and most secure in the world. American stock bloggers are salivating over this story since the US banking sector has been shattered in the past year, and come close to de facto nationalization. As you might imagine, a collapse of one of the Big Five – even a run on its stock, let alone its assets – would be ruinous for Bay Street, for the federal government, for shareholders, bondholders and the value of the dollar. In short, we’d all be reamed.

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So, what are the facts?

Without a doubt BMO’s been stressed by the financial tsunami we’re living through. Its last quarterly results showed that – net income of $358 million was down a massive $284 million from the same period a year earlier. The money it had to set aside for doubtful loans shot up by over $220 million to a whopping $372 million.

And since then, it’s believed the situation has worsened – for all the Canadian banks.

When earnings flow this week, analysts expect the saddest numbers in some time with BMO down another 14%, CIBC off 16% and Royal lower by 20%. It’s widely believed we may see the bottom of the earnings curve for all these guys, thanks largely to commercial real estate. Since that sector sucks up huge bank loans, and lags the residential market, the impact of empty offices and cancelled condo towers is just now hitting balance sheets.

So should you worry if you own BMO stock, or have an RRSP sitting there?

I guess we’ll see on Tuesday.

But I’d say this web ‘alert’ is crap. BMO has managed to stay within about 6% of its year-ago performance and still earned a pre-tax return of half a billion in the last reporting period. It (and CIBC, the other bank with large US exposure) has been scoped continuously by the Bank of Canada and the Finance Department guys. The banks have sold bushels of stock in recent months to bolster their capital positions and, as you know, received tens of billions in cash for swapping CMHC-insured mortgages with the feds.

The odds of BMO crumbling are akin to Stephen Harper asking me over for a beer. Just ain’t gonna happen in this lifetime.

In any case, do your own research.

Here is the bank’s latest annual report. It is required by law to be as transparent as Paris Hilton.

Here is the transcript of the conversation between senior bank execs and Bay Street analysts following release of its last quarterly.

And here is how you can monitor the situation in real time this week.

Finally, ask yourself why guys like Don Amoss and sites like GumShoe and PennySleuth engage in this kind of stuff.

Right. They ran out of US banks.