Why No Australian Banks Have Failed

There’s nothing we like more than a slice of hypocrisy in the morning. It washes down well with a cup of arrogance.

In this case, the slice and the cup go by the names of the ANZ Bank’s Mike Smith and Commonwealth Bank’s Ralph Norris.

It was particularly amusing to read Mike Smith’s comments about BankWest and other regional banks for writing “crap” business. Apparently, they need to “fix their balance sheets.”

The number of proverbs we could use here to emphasize our point is almost endless. But we’ll stick to an old favourite – those in glass houses, etc…

We’d take his comments seriously if it wasn’t for ANZ Bank’s ability to write its own amount of “crap” business over the years. Has he forgotten about ABC Learning and Opes Prime? Or maybe that doesn’t count because those were things that happened under previous management.

And of course Mr. Smith rolled out this old chestnut that he used at the recent earnings conference call:

“The great thing about the Australian banking system is that the government has not put 1c of taxpayers’ money into it.”

Again, we’d also take his comments more seriously if it wasn’t for the fact he and the other CEOs of Australia’s banking cabal ran off to the government at the first sign things could go pear-shaped to negotiate for:

• Wholesale funding guarantee
• Retail deposit guarantee
• Fairy Ruddfather Bank (or the Australian Business Investment Partnership)
• Ban on short selling of financial shares

All at the tax-payers expense, and with all the risk lumped on the tax-payer too.

Is he still sure the government hasn’t put at least 1cent of tax-payers money on the line?

We’d argue Australian banks have received as much financial support from the government as overseas banks have from their governments.

More perhaps. In fact, we’re more and more convinced the Australian banking system is just as rotten as those overseas. Could it really be possible that we’ve cultivated a breed of superhero bankers who had more foresight, skill and knowledge than their counterparts overseas?

Or is it perhaps that Australian banks are able to ‘hide’ their ‘crap’ business much easier than other banks due to them having less reliance on external funding and less securitization of those ‘assets’?

We believe that is exactly why no Australian banks have failed. Not because our system is more robust, but rather because it is less transparent. It’s not that the banks don’t hold ‘crap’ on their balance sheet, it is that they can conceal it easier.

They may work in the short-term, but in the longer term…

Anyway, we’ll look at that in more detail another day.

Back to the issue of debt funding. While the government and banks are keen to portray everything as being rosy, thanks to the government guarantees, peel away a layer or two and those – dare we say it? – unintended consequences are on full view for all to see.

And you need look no further than the rise in bond yields. While Mr. Smith claims the Aussie bank bail-out hasn’t cost taxpayers a cent, the truth is that it has already and will cost taxpayers millions and billions of dollars.

His claims that the government has received $1 billion in fees from the guarantee will be chicken feed compared to the overall cost to the economy.

But before I get onto that, Mr. Smith wasn’t alone with his dodgy comments. CBAs Ralph Norris chipped in with the following laughable comment:

“We could borrow money offshore now without the guarantee because there’s plenty of liquidity out there, but the problem is it’s very expensive.”

Got that, “it’s very expensive.” What does that mean? It means borrowers have to pay more for their debt thanks to the government guarantee. In other words, the taxpayers have been lumped with a massive potential liability and cost that has produced no benefit.

Let me explain…

Here’s an update of the Aussie yield curve we’ve published over the last few weeks:

The change in yield between the 28th May and 4th June was only negligible so you may not be able to see the difference between those two dates clearly. However, what is clear is the increase in yields across the curve between 14th May (dark blue, lower band) and today (lighter blue, higher band).

The fifteen year bond yield has increased from 5.04% in mid May to 5.75% today.

Even at the short end, three-month bond yields have increased from 2.86% to 3.14%.

It’s no wonder the banks are claiming debt is getting more expensive. It is, and it is they who caused it! And it is exactly why every measure taken by governments and the banks is ensuring the mistakes made over the last twenty years will be repeated.

You see, in simple terms, central banks have artificially dropped interest rates in a misguided effort to ’stimulate’ the economy. In fact all they did was stimulate irresponsible lending and borrowing at those low rates.

Now that interest rates have started to rise, the cost of funding will rise. And this will naturally mean those who have committed – over-committed – themselves to debt will suffer the most as rates rise.

And at the forefront of those facing a huge increase in the cost of borrowing will be the taxpayer.

If governments hadn’t been so quick to bail out their mates in the banking sector, chances are interest rates would today be higher than they are. The point is, they would not have dipped to an artificially low level thus drawing in borrowers that were attracted to the low rates.

We’ve argued before the government guarantee would distort the market, and it would actually make business conditions worse, and cause more harm to the economy than if nothing were done.

Fasten your seatbelts for Credit Crunch MkII.

Mis-Managed Investment Schemes

We received several more emails yesterday to the Money Morning Mailbag telling us about certain tax-efficient investments being promoted by accountants and financial planners.

We’ll go through a couple of them tomorrow. If you’ve received a ‘gem’ of an offer from your accountant or planner, send it through to moneymorning@moneymorning.com.au and we’ll take a look. Remember, we can’t give personal advice on these things, but the craziest of them will get a mention tomorrow.

Other Stuff on the Markets

The S&P/ASX200 closed higher by over 2.2% yesterday, while overnight on Wall Street the Dow Jones Industrial Average edged lower by 24 points. In Europe the FTSE100 gained 0.73%.

The price of gold in Australian dollars is trading at $1,1192.46, while in US Dollars it trading at $956.47.

The Aussie dollar remained steady versus the US dollar and Japanese Yen, trading at USD$0.8015, and JPY78.76.

Further strength for Crude oil overnight, closing at USD$71.42.

For the biggest movers on the market yesterday click here…

And today on the economic calendar we have the Unemployment Rate.