Dec. 13 (Bloomberg) -- Canadian Imperial Bank of Commerce has a big skeleton in its vault. And the bank's executives are doing a ham-handed job of trying to keep it there.

CIBC's lightly guarded secret is the name of a ``U.S. financial guarantor'' that faces a possible downgrade on its A credit rating and is ``not necessarily rated by both Moody's & S&P.'' That's how CIBC last week described the company that is insuring $3.47 billion, or about a third, of the collateralized- debt obligations it holds that are tied to U.S. subprime mortgages.

The company's identity matters because the bank said these hedged CDOs were worth just $1.76 billion at Oct. 31, down almost half from their face amount. If the guarantor goes poof, CIBC loses its hedge on these derivative contracts. And the Toronto-based bank would have to recognize the loss, which is growing.

Analysts watching CIBC, including Darko Mihelic of CIBC World Markets, quickly fingered what they believe is the unlucky backer: ACA Financial Guaranty Corp. Mihelic dropped ACA's name during a question to CIBC executives on the bank's Dec. 6 earnings conference call. His bosses didn't correct him. So far they haven't fired him either.

Neither did they correct another analyst, Ian de Verteuil of BMO Capital Markets, after he did the same. In a Dec. 7 report, RBC Dominion Securities analyst Andre-Philippe Hardy said the guarantor ``is almost certainly ACA.''

It's as though CIBC doesn't really care if outsiders can see through the cellophane pasties it's wearing -- so long as they remain in their rightful place.

In the Hole

If ACA is the insurer, this would be bad for CIBC, Canada's fifth-largest lender. ACA's parent, New York-based ACA Capital Holdings Inc., had a shareholder deficit of $883.3 million at Sept. 30, meaning the liabilities on its balance sheet exceeded its assets by about that much. The New York Stock Exchange has had a trading halt on the parent's stock since Nov. 20, though it still trades elsewhere. At 70 cents, ACA Capital is down 95 percent this year.

As for ACA Financial, it had $425.5 million of statutory capital at Sept. 30 and $1.1 billion of so-called claims-paying resources to back its guarantees -- for all its customers. That's not enough to cover the CDOs in question at CIBC.

Identifying ACA appears to have been easy. It is the only major so-called monoline insurer rated A. On Nov. 9, Standard & Poor's said it may cut ACA's rating. Moody's Investors Service doesn't rate the company. That fits the description CIBC gave last week.

Who's That Masked Insurer?

Rob McLeod, a CIBC spokesman, said ``it is not our general practice'' to identify counterparties. When I pointed out that a CIBC banking analyst publicly said it was ACA, McLeod said ``you should try him.'' Mihelic didn't return phone calls. ACA officials didn't either.

Should the masked insurer fail, CIBC would have to bring the CDOs' full face amounts onto its balance sheet and record losses for any declines in their fair value. A $1.71 billion pretax writedown would have wiped out CIBC's C$884 million ($937.5 million) of net income for the fiscal fourth quarter ended Oct. 31. The bank finished the year with C$8.91 billion of tangible common shareholder equity, which excludes preferred stock and intangible assets such as goodwill.

So far, CIBC has recognized C$17 million of pretax losses to reflect its A-rated guarantor's troubles. CIBC's chief financial officer, Tom Woods, disclosed the figure during last week's call, calling it a ``counterparty credit reserve.'' Woods said the reserve is ``obviously not sufficient'' now and that the bank would revisit it at the end of January.

At Sea

It's unclear why CIBC thought it made sense to have a small A-rated insurer guarantee a third of its AAA-rated ``super senior'' CDO holdings. This would be like paying your middle- class friend to insure your 100-foot yacht. Perhaps it just wanted to say it was hedged, and didn't think about needing to file a claim someday.

In hindsight, ``we overestimated the extent or value of the diversification we thought we had,'' Brian Shaw, chief executive of CIBC World Markets, said during the Dec. 6 call. ``And we underestimated the severity of the security performance and the counterparty performance in a stressed market.'' Shaw was responding to a question from BMO's de Verteuil, who asked why CIBC chose ACA.

All told, CIBC said it finished last quarter with $9.86 billion of hedged CDOs tied to U.S. subprime mortgages. About $4.61 billion of that face amount was backed by five AAA-rated counterparties it didn't name. The bank said the fair value of those CDOs was $2.82 billion on Oct. 31, meaning the counterparties were on the hook for the $1.79 billion difference.

CIBC said the remaining $1.78 billion of hedged CDOs was backed by two AA-rated counterparties and had a $1.02 billion fair value.

Even AAA ratings may mean little these days. Andrew Wessel, an analyst at JPMorgan Chase & Co., on Nov. 21 said possible credit downgrades for bond insurers, including ACA, might force banks to move as much as $60 billion of CDOs onto their books.

Yet the names of any given company's insurers usually are a mystery to outsiders. Scavenger-hunt disclosures like CIBC's might offer a peek. Investors, however, shouldn't have to guess.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in Boulder, Colorado, at jweil6@bloomberg.net

Last Updated: December 13, 2007 00:06 EST