It’s not really anything to do with financial markets, but it’s not often that the Australian Financial Review (AFR) gives you a chuckle in the morning.
Today’s AFR has a few quotes by world leaders in reaction to Barack Obama’s inauguration. As you would expect, they are all fawning, and looking forward to Obama’s quest to save the world:
“Your [Obama] election to this high office has inspired people as few other events in recent times have done.” Nelson Mandela.
“We are eager for him to get to work so that with him we can change the world.” Nicolas Sarkozy.
“He’s not only the first black American president but he sets out with the determination to solve the world’s problems.” Gordon Brown.
They are all fawning, bar one. And that of course comes from party-pooper-in-chief Vladimir Putin:
“I am deeply convinced that the biggest disappointments are born out of big expectations.”
There is a tenuous link to the financial markets of course. All these hapless world leaders, having told their loyal subjects that “when markets are broken, government needs to fix it” have slowly realize that they can’t fix it.
So now they are pinning their hopes on anything. Surely the election of the first African-American as president will do it? Of course it makes no difference whether the new president is African-American, Asian ancestry, Jewish, or even another WASP.
But we’ll leave them all in their dream world and let them enjoy themselves in their naivety while they can.
What it does highlight is that government has the upper hand over business. And based on everything we’ve read and heard recently it doesn’t look as though they are in any hurry to give up what they’ve got.
It wasn’t so long ago – in the US and UK especially – that the bail-out packages were being labeled as a good thing for the taxpayer because there was a good chance taxpayers would “make a profit” on the deal.
We’re not sure if anyone really believed that. And sadly for them that idea is getting further and further away from reality as billions of dollars of taxpayer dollars and pounds are thrown into the big black whole of propped up semi-nationalised zombie companies.
We do need to constantly remind ourselves Australia is not entirely immune either to corporate collapses or to government wastage. This morning we heard on the radio calls by the ACTU to hold a “Jobs Summit.” Principally so government, the unions and business can “take action” to solve the crisis through a “fiscal stimulus.”
We’ve had a look at the banks to try and crunch the numbers. If you recall in yesterday’s Money Morning, it seems to us as though Australian banks are in comparatively better shape than US and UK banks, but that they are not as “fundamentally strong” as we have constantly been told.
Is it any coincidence then that the Australian Securities & Investment Commission (ASIC) has decided to extend the ban on the covered short selling of financial stocks? The new date for lifting the restriction is Friday, March 6th.
If the banks truly were in tip-top shape they wouldn’t need the extra protection.
Let’s take another look at one of the banks we mentioned yesterday, Westpac. According to its 2008 annual report it had shareholder equity (the difference between assets and liabilities) of $17.8 billion, goodwill of $2.4 billion and derivatives exposure of $59 billion.
Bearing in mind those were the numbers prior to the takeover of St George Bank. So we can pretty safely assume the amount of goodwill on the books has increased since then. And so for shareholders equity, well that was only marginally higher than Westpac’s.
So with such a small gap between assets and liabilities how can the banks lend more money? They can’t. In fact, when you consider the falling asset values in the property sector, many of the loans that the bank already has on its books are likely to be in negative equity if the underlying asset had to be sold.
If we look at the old St George balance sheet it tells the story. Of the $98 billion of loans outstanding, $75 billion is in mortgages against residential property. Add on top of that the $12 billion of commercial loans.
Therefore with only $7 billion of wriggle room on the books it can’t allow too many of these loans to go bad otherwise it will suffer a similar fate to its US and UK counterparts.
That may explain why the four major banks are so keen for the government to set up and guarantee a ’special purpose vehicle’ to provide government funding to faltering property trusts.
It’s all part of the grand scheme to keep property prices inflated as high as possible. The consequence of making the banks accountable for their past ‘easy lending’ practices by letting property prices fall, repossessions increase and banks going bust is just way too much for the government to let happen.
We assume the government believes it will make a profit on this new scheme to compensate the taxpayer against the risk!