Home Capital Group – The cliche about smoke and fire applies

Home Capital Group (TSX: HCG) fired its CEO today.

The manner that it did suggests that there was a considerable disconnection between the information the Board of Directors was receiving and what management actually knew about the situation (or over-boasted about its damage-control abilities).

My guess is that the final straw was the dealings concerning the Ontario Securities Commission alluded to in the March 14th press release.

Home Capital Group is notorious in my mind for having a very high cost to borrow shares for shorting – it is the biggest proxy used by most people to bet against the fortunes of the Canadian real estate market – right now it would cost you about 22% to borrow to short. Those short sellers will probably be most happy to cover some of their holdings tomorrow (or depending on their risk horizon, add to their shorts!).

2 thoughts on “Home Capital Group – The cliche about smoke and fire applies”

  1. Company has bad headlines and CEO – but with HCG at 1.1x book, is it a case of just paying off some potential big fine / lawsuit. Or there is so much fraudulent stuff underneath or one cannot estimate how much fraudulent stuff there is that one should avoid even if they become a significant discount to book value?

    Philosophically, I have a tough time buying financial institution at anything significantly over book value.

  2. Clearly there are probably less than credit-worthy individuals on the books, but the question then becomes how much liability will HCG take when they securitized the debt and got CMHC or Genworth to buy portfolio insurance on the frauds?

    I’m guessing the nature of the fraud is grossly over-exaggerating either income or solvency ratios and eventually this will come out in the form of defaults. However, when Toronto real estate is seemingly rising 20% a month, there’s no way this gets out into the woodwork since they can just re-finance…

    So the primary liability (short of any real estate crash which would take the stock down anyway) would be from the subsequent lawsuits on the mortgages that got securitized and sold. How much would damages be? Will it be material to HCG? Are those assets on their balance sheet subject to compromise or some sort of re-adjustment?

    No positions, but curiously watching. Borrow rates are at 21.38% today to short stock.

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