Has Commonwealth Bank Deliberately Misled Investors?

Has Commonwealth Bank Deliberately Misled Investors?

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Before I get on to today’s Money Morning just a quick note to let you know that you may not hear much from us over the next couple of weeks.

But don’t worry, you won’t be left completely in the lurch. In our place will be either Slipstream Trader Murray Dawes, or Diggers & Drillers editor Dr. Alex Cowie.

Your editor is flying out to Baltimore, Maryland on Sunday morning for a publishers’ conference. That’s followed by a trip up to Boston, Massachusetts for a few days to see what the folks up there know.

Anyway, providing we can get access to a computer, we’ll try and chip in from time to time over the next two weeks to fill you on what’s going on.

Until then, let’s get on with today’s letter…

It’s been a while since we had a look at Australia’s rotten banks. But it amused us to see that our favourite bank to short-sell, the Commonwealth Bank [ASX: CBA] is about to embark on a global banking and property spruiking tour.

According to a press release it issued yesterday:

“Senior executives from the Commonwealth Bank of Australia (‘the Group’) will soon be travelling overseas to meet with some of the Group’s offshore shareholders and other investors interested in Australia and the Australian banking sector.

“In the light of recent commentary from a number of sources on the robustness of the Australian residential housing market, the Group (given its significant exposure to this section of the economy) anticipates that this will be an important issue for many of the investors it is scheduled to meet with.

“In anticipation of these discussions, the Group has produced a presentation entitled ‘Australian residential housing mortgages: CBA mortgage book secure’. A copy of this document has been lodged with the ASX today.”

Talk about desperate. And be warned, the Commonwealth Bank’s presentation contains one of the biggest and most deceptive representations of data we’ve ever seen.

Quite frankly, if the ASX doesn’t demand the CBA amend its presentation then we’ll be shocked. Because if it isn’t designed to mislead and misinform then I don’t know what is. But more on that in a moment…

You can view the presentation slides for yourself just by going to the Australian Securities Exchange (ASX) website, or checking the news section for Commonwealth Bank using your online broker.

Let’s be honest, you can understand the desperation. When you know Australia has a housing bubble, and when I know Australia has a housing bubble, how do the banks respond?

They go into spruiking overdrive and tell you Australia is different: the banks are robust, they didn’t need a government bail-out, and besides, what are you going to do about it anyway?

After all, you’ve got to put your money somewhere haven’t you?

However, that kind of response doesn’t work so well when the banks are talking to big international investors. Because big international investors don’t have to do anything. They aren’t like you or I. Fund managers on Wall Street don’t have to invest in the Australian market at all.

And so they need someone to convince them that Australia is a good place to stick their money.

But when those same investors have read comments from investment bank, Morgan Stanley and market expert Jeremy Grantham (whom the Commonwealth Bank quotes in its presentation) then it makes sense these investors would want to know more.

Hence the need for the top brass at the CBA to set off on their crusade to Wall Street and the City of London.

And you can see why. Take a look at this table from the Australian Bankers’ Association (ABA):

Foreign bond trouble
Foreign bond trouble
Source: Australian Bankers’ Association

As you can see, as of September 2009 – the ABA hasn’t provided a more recent figure – out of the banks’ total funding requirement of $1.4 trillion, $366 billion (or 26%) of it is financed by foreign investors.

When you’re so dependent on foreign investors propping up the Australian banking and housing sector, the last thing you want as a banker, is for people to take the Australian housing bubble to the international stage.

Not only that, but with the government guarantee no longer available for new debt issues, the Australian banks now have to stand on their own feet in the international market.

That’s why it’s fight-back time for our crooked and insolvent banks.

Remember, the housing and banking bubble, and collapse is still fresh in the mind of investors in the US and Europe. How eager will the fund managers be to jump into a debt and housing bubble after just going through it themselves?

Considering the lack of liquidity in the Australian market, our guess is that bond investors will need a lot of convincing before they throw their money at the Aussie market.

It’s all very well for some clowns to claim that the banks are backed by the money-printing power of the Reserve Bank of Australia and the government, but that won’t be much consolation to them if the Aussie dollar hits the skids.

You see, if you’re a foreign investor and you’re buying Australian dollar denominated debt, even if the government bails out the banks, odds are that would have a catastrophic impact on the value of the Aussie dollar.

So while the fund managers would still get repaid at par value on their bonds, the value in US dollars or pound sterling would be significantly less.

Put it this way, if you’re investing in an Aussie bank bond with, say, a 6% yield, you’d want to be pretty sure that the Aussie dollar isn’t going to fall by too much over the term of the bond.

Should the Aussie dollar collapse back to 50 cents to the US dollar then that’ll wipe out any possible gain made from the bond yield. And even a much smaller fall in the dollar would have funds hedging their Aussie dollar exposure which would put further downward pressure on the currency.

In other words, you’d want to be darn convinced there isn’t an Australian housing bubble. Because if there isn’t a housing bubble then the risk to the banks is a lot less – unless the world wakes up to the fraudulent nature of fractional reserve banking – and the chances of the government needing to bail them out would be close to zero.

So, that’s why the CBA is going into overdrive to convince global investors that Australia doesn’t have a housing bubble. And that’s where the CBA has made what we can only describe as the biggest case of deception since Harry Houdini was pulling rabbits out of hats…

Let me show you the data in question and see if you can figure out the deliberate fudging of numbers by the Commonwealth Bank:

Comparing apples with rabbits
Comparing apples with rabbits
Source: Commonwealth Bank of Australia

Here’s a clue. You’ll notice that the CBA has referenced Demographia and UBS.

Have you figured it out yet?

Here’s some further help. Click here for a link to the 6th Annual Demographia International Housing Affordability Survey: 2010.

Once you’ve downloaded it, scroll down to page 14 and then compare the numbers in the survey to the numbers the CBA have published. I’ll wait for you to do that…

Amazing isn’t it?

In order to make their point, the CBA have used the Demographia numbers as a reference point for all the non-Australian cities, yet they’ve used the UBS numbers for the Australian cities.

Why on earth would the bank do that?

Simply because if they’d used the Demographia numbers it would draw exactly the opposite conclusion to the argument they’re trying to make. The fact is, they’ve conveniently grabbed the bunch of numbers that fits their argument and discarded the ones that don’t.

If they’d used the Demographia numbers for all the cities, including the Australian cities, the table would look like this:

Comparing apples with apples

 

Comparing apples with apples
Source: Commonwealth Bank of Australia

Paints a slightly different picture doesn’t it? Actually, it paints a completely different picture. One shows an unsustainable bubble, the other shows a bunch of figures comparable to elsewhere in the world.

Harry Houdini would be proud of that one: “Now you see it, now you don’t… Now you see it, now you don’t…”

It makes you wonder doesn’t it? If the shonky bankers can be so brazen as to present dodgy numbers to what you’d suppose are some of the smartest investors on Wall Street, can you really trust the information the bank gives to you as a normal every day customer?

I know we don’t. We wouldn’t trust an Aussie banker as far as we could throw them.

To be honest, the whole presentation is an embarrassment, and the deliberate fudging of the numbers to support their claims is the most embarrassing thing we’ve seen from the banks since ANZ CEO Mike Smith claimed Aussie banks hadn’t received “$1” of government support.

We can picture the CBA top brass turning up to the foreign investors and trotting out the same guff they’ve peddled to the gullible mainstream press for the last few years. Only this time the foreign investors will have heard it all before.

They’ll have heard it all before because it’s exactly the same guff they were telling their clients five years ago. And we can guarantee that if you’ve been bitten by your own snake there’s no way you’re going handle anyone else’s – even if they claim it won’t bite.

There’s so many holes in the CBA presentation it’s not funny. But the above example was the worst of them.

But we’ll be interested to see how funny the overseas investors find it. Perhaps they’re stupider than we thought and they’ll fall for it hook, line and sinker.

Our bet is they’ll see through the flimflammery for what it is. That means if they are foolish enough to take a punt on the Aussie banks and Aussie property market they’ll be after a much bigger yield and that means higher interest rates for borrowers.

But not only that, we wouldn’t be surprised if those same investors also walked away from the presentation with the idea that shorting the Aussie banking sector could be their best investment idea for the next five years.

Cheers.
Kris Sayce
For Money Morning Australia

Kris Sayce

Kris Sayce

Publisher and Investment Director at Port Phillip Publishing

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Tactical Wealth, and Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.
Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

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55 Comments on "Has Commonwealth Bank Deliberately Misled Investors?"

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Jeremy
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Jeremy
6 years 3 months ago

Wow! I cant believe this is the case.
If i have all my life savings with BankWest (Owned by CBA) should i be worried?
Great article.

Leith
Guest
6 years 3 months ago

Nice article Kris. Only the amount of liabilities funded by foreigners is actually a whopping $514 billion (see column H of: http://www.rba.gov.au/statistics/tables/xls/b03hist.xls?accessed=1009-14:45:58).

A key risk is that Australia’s ability to sustain current house prices, let alone further price increases, rests with the willingness of other countries to continue lending the banks money. But in times of crisis, such as when Lehman Brothers collapsed, foreigners tend to zip up their wallets, leaving our banks, house prices, and broader economy exposed to a sudden liquidity shock as the banks are unable to roll-over their foreign borrowings (let alone increase them).

michael francis
Guest
6 years 3 months ago

Those figures put out by the CBA are about as credible as the unemployment numbers.

Sandra
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Sandra
6 years 3 months ago

Woops! Musta been something i said recently about the two country “independants” – you know – the Labor lovers dressed in Nationals clothing to fool everyone in their electorates into voting for them …

Cos i see for the first time in years – my stuff is up for “awaiting moderation” – like a “newcomer” … so musta been something i said previously that’s put me on the norty list now!

cb
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cb
6 years 3 months ago
Peter Fraser
Guest
6 years 3 months ago

It really does depend on how those ratios are calculated. EG we could use single income, household income, or household disposable income. Even then it doesn’t allow for PPP so true comparisons are quite difficult.

But I agree that it is dishonest to use two different sources of calculations.

cb
Guest
cb
6 years 3 months ago

Sandra, one thing that automatically gets held up is when you put in your message more than one internet link to sites. Did you do this in that message? If you did, it might explain the hold up. Post them separately and they should come through fine.

michael francis
Guest
6 years 3 months ago

I wonder if the CBA roadshow will visit Euro Pacific Capital run by Peter Schiff. I’d love to be a fly on the wall at that one if it does.

cb
Guest
cb
6 years 3 months ago

Jeremy – when does the govt guarantee on deposits expire? I sure would watch that date closely, but would hardly consider one bank to be in a greater trouble than another. I would be surprised if any of the four pillars remained standing while one or more are collapsing. They pretty much should stand and fall together.

cb
Guest
cb
6 years 3 months ago
I am only part way into reading this paper, but what strikes me from the start is that all this fretting about overseas funding is totally unnecessary. Or, I should say, reliance on borrowings from overseas is unnecessary. It is nothing short of disgusting that our financial system is rigged up this way, that our banks are forced to source their funding from overseas and pay big money on that funding in interest, when the very same money could be created domestically by the government, which, then could collect the interest payments on that funding for the good of the… Read more »
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