Secret Banking Business

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You’ve read a lot about the banks in Money Morning during the past week. And today is no different. So strap yourself in…

Yesterday we gave you the reply we’d gotten from the Reserve Bank of Australia (RBA). We’d asked them when the RBA had been told about National Australia Bank [ASX: NAB] and Westpac’s [ASX: WBC] secret loans from the US Federal Reserve.

Its spokesman wrote, “The Bank does not comment on commercial institutions’ business dealings or transactions.”

This apparently even extends to when the taxpayer is also underwriting the banks.

Its funny isn’t it. When you apply for a loan with a bank they quite rightly want to know what other loans you have. That way they can supposedly figure out whether you can afford the repayments or not.

Although over the past thirty years we’ll admit, even that is less important than it used to be. Because over that period it was assumed asset prices would always rise and therefore borrowers were given bigger loans – if they defaulted, no problem, just sell the mortgaged asset at a profit… easy.

Yet when it comes to the taxpayer underwriting loans to banks it seems to be a different story. Everything must remain top secret. The RBA “does not comment…” So there.

So while the taxpayer was told about the deposit guarantee and the wholesale funding guarantee – big enough obligations by themselves – the taxpayer was kept in the dark about the USD$53 billion of loans the RBA had taken out with the Fed. Again, backstopped by the Australian taxpayer.

And the taxpayer wasn’t told about the over USD$5 billion of obligations to the US Federal Reserve that two of Australia’s banks had committed themselves and the taxpayer to.

But the RBA isn’t the only regulator to lose its tongue.

We spoke to Andrew McCutcheon, Media and Communications Manager at the Australian Prudential Regulation Authority (APRA). We’d sent APRA the same email that we’d sent the RBA last week.

We wanted something in writing but Andrew preferred a phone call. Hopefully you’ll forgive us, our shorthand isn’t what it used to be. Actually, that’s not saying much, our shorthand has always been bad.

So we’ll just have to paraphrase the response.

Andrew tells us that Section 56 of the Australian Prudential Regulation Authority Act 1998 forbids APRA from revealing any information regarding the institutions it regulates!

What? How does that work? What’s the point of a regulator if everything is top secret?

Although we’re not surprised he won’t tell us. According to the Act there’s a penalty of two years imprisonment for revealing secret information on the banks.

You can check out the full Act by clicking here.

And here’s the best thing, Section 56 comes under Part 6 of the APRA Act. The heading for Part 6 is… of course… Secrecy.

And because it’s top secret, the Act informs you that “A document that: (a) is a protected document; or (b) contains protected information; is an exempt document for the purposes of the section 38 of the Freedom of Information Act 1982.”

As I say, your editor is no legal eagle. Our only legal training was gained from the Matlock School of Lawyering followed by a post-graduate qualification from the Rumpole Academy. But even that limited training tells us that APRA will never reveal the full extent of what it knew and when it knew it about the Aussie bank bailouts from the US Federal Reserve.

So, the last response we’re waiting on is from the Australian Securities Exchange (ASX). But considering we’re yet to see a notice appear against NAB or Westpac’s names we can assume either the ASX already knew about the secret bailouts and aided the banks in keeping it a secret, or it’s going for the old head-in-the-sand routine.

Quite frankly, either explanation is possible.

And don’t think there are any Australian politicians who are keen to expose the bankers. Unfortunately Australia doesn’t have an equivalent of Ron Paul in Federal Parliament. Someone who’s prepared to stick up for sound money.

Instead, you’re more likely to get the kind of response that Money Morning reader Stuart apparently received from Joe Hockey’s office:

“Dear Stuart

“Thank you for your email to Mr Hockey.

“The Australian banks were not bailed out by the US federal reserve [sic], nor was the Reserve Bank of Australia. As NAB is a public company it would have needed to disclose this to the market, and I can assure you that it did not.

“Yours sincerely

“Alistair”

We’ve not idea who “Alistair” is, but he may want to check his facts. As he seems to have got his logic in a muddle. His argument seems to be that because neither NAB nor Westpac disclosed the bailouts to the market then the bailouts didn’t happen.

Even though they did. Because it’s there in black and white on the Federal Reserve website. But no, a public company would have to disclose that information, and because they didn’t, no bailout!

Madness.

Even the mainstream press has pointed out the bailout dollars received by the RBA from the US Federal Reserve.

And even the mainstream press has acknowledged that Australia’s banks would have received some of that cash as emergency loans.

The fact that NAB received USD$4.5 billion of US Federal Reserve bailout money but didn’t report this to the ASX – or if it did the ASX agreed to keep it confidential shows you this cover-up has gone right to the top.

But as the Wikileaks disclosures show you, governments worldwide – including Australia – have plenty they need to cover up.

Politicians, bureaucrats, conservatives and socialists are all labelling the Wikileaks revelations as treasonous or at least criminal.

We take the opposite view. We take the view that the kind of corrupt and inappropriate behaviour revealed in those documents proves how dangerous it is to have glorified town councillors in positions of immense responsibility.

Put it this way, if you tell your American friend to whack your Chinese friend on the nose, who gets hurt? Well, the Chinese fella obviously. And he may not take too kindly to what you asked your American friend to do.

But that’s pretty much the extent of the damage.

But if a glorified town councillor like the Fairy Ruddfather asks his American buddies to bop China, who gets hurt then? Potentially everyone.

A career in politics for most people in our opinion is simply an attempt to gratify a perverse urge to control others. It’s the same urge from town councillor all the way up to Prime Minister.

Anyway, it seems to be the more we dig, the more we’re prevented from digging. Neither APRA nor the RBA have any interest in keeping you informed about the safety of your taxpayer dollars and your savings… we don’t like that.

However, we have seen several comments that suggest NAB and Westpac were simply doing what any bank should do, access funds for a cheap interest rate from the Federal Reserve.

That the banks were simply borrowing cheap money which they could then lend out for a higher rate and pocket the difference.

It’s a nice line. And it could even sound plausible – if it wasn’t complete nonsense.

Let’s not beat around the bush here. NAB and Westpac borrowed from the US Federal Reserve because they had to. And the Reserve Bank of Australia borrowed from the US Federal Reserve because it had to – because it needed to bail out Australian banks.

The idea that NAB and Westpac executives suddenly decided to borrow cheap out of choice is ludicrous. It ignores the entire reason why these emergency loan facilities were made available by the Federal Reserve.

You see, it’s true that banks borrow money all the time. That’s how they work. They borrow money from depositors. They then create ten-times the deposited amount in new money to lend out to borrowers. All the while, the depositor is free to withdraw his or her money on demand.

But we won’t worry about that last aspect today. We’ve covered that before. Banks borrow money for short-term and long-term durations. That means on any given day a bank has to roll-over a loan.

Simply put, if a bank takes out a loan for a 30-day duration then at the end of 30 days the bank needs to repay the loan or it needs to roll it over to a new loan. In normal circumstances, when everyone was happily – and foolishly – lending money left, right and centre, this was pretty easy – out with the old loan, and in with the new.

But then through 2007, 2008 and early 2009, you remember what happened don’t you? The “credit crunch” occurred and lending ground to a halt.

Now, that was a good thing. It should have been the beginning of the end for the current unstable and corrupt banking system. But the central bankers, politicians and mainstream economists thought they knew better.

Instead of acknowledging the dangers of a highly leveraged banking system and allowing it to collapse, they didn’t want that happening on their watch. Hence the bailouts. Bailouts that have only succeeded in postponing the natural consequence of the credit meltdown.

Anyway, can you guess what happened to the banks?

That’s right the banks needed to repay loans but found it hard to borrow the money to pay off those loans.

So, in order to meet short-term loan repayments, the banks needed a bailout from the US Federal Reserve – the loans to Westpac and NAB that we know about – and from the RBA – loans to the banks that we assume will remain top secret.

Without those loans the banks wouldn’t have been able to meet their obligations to repay short-term funding. And if the banks couldn’t repay their short-term funding… they would have defaulted and you would have seen a run on the banks.

That’s why the banks took the loans from the Fed and the RBA. Not out of choice. Not because they recognised an opportunity to make a quick buck. They did it because they had to. They had to in order to not go bust.

But the other thing that amazes us about this is the lack of interest from the hopeless credit rating agencies.

As we’ve pointed out, without the loans from the Fed and RBA the banks would have defaulted on their obligations. Yet the banks retained their AA ratings throughout. And despite this info now being made available to the public, the banks are still double-A rated.

You probably remember all the guff spouted by the Aussie banking execs about how our top four banks all have double-A ratings. How they are four of only twenty banks in the world to hold a double-A rating.

A double-A rating that means nothing when the four banks were obviously within days of collapse. A sure thing if it wasn’t for the Fed chucking them a few billion to tide them over.

But as I say, don’t think that means you should heap praise on the Fed or Ben Bernanke for having saved Australia’s banks from collapse, because you shouldn’t.

All this sorry affair has done is prolonging the pain. Pain that would have been swift and sharp in 2008 has turned into something that will last for years, possibly decades.

Even Ben Bernanke has admitted on 60 Minutes in the US that:

“At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate”.

So much for saving the economy. Ruining it more like.

Make no mistake, the Australian banking system was bailed out in 2008 and 2009 just like most other banks around the world.

We figure that’s the reason why the mainstream press has completely ignored this story. Because it rubbishes their entire argument about the strength and stability of Australia’s banking system.

It isn’t strong, it’s just like the rest – perpetually on the verge of collapse.

Cheers.

Kris Sayce
For Money Morning Australia

Kris Sayce

Kris Sayce

Publisher and Investment Director at Money Morning Australia

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 investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. 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 more than fifteen years’ experience in analysing small-cap 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 50,000 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!

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109 Responses to “Secret Banking Business”

  1. Fitch

    cb – your reasoning is sound and Max Keiser makes sense also but the strategy is based on buy and hold which is mostly what’s happening now. However one must ask how much of this accumulation is leveraged by investors looking to profit from capital gains. If all that results from this is that silver trading increases at higher prices where is the threat to JPM?

    Coincidentally it’ll soak up a vast amount of QE paper and divert it from the productive economy.

  2. Fitch

    The belief that any asset class can only increase in value is a recipe for disaster.

  3. Peter Fraser

    JB @ 86 – Gold and Silver have had their day as reserve currencies, although a percentage holding may be part of the mix.

    But really who knows at this point..

  4. Peter Fraser

    cb @ 90 – I didn’t bother with this before, but yes there have been plenty here predicting revolution and anarchy.

    I wasn’t specifically referring to you, I don’t believe you have predicted that.

  5. Peter Fraser

    cb – I don’t think that gold and silver will count for nought, but under the right conditions other commodities will hold more value, even if only temporary.

    It was a “nothing is certain” statement.

  6. Peter Fraser

    So what happened with the bank run on the 7th December that was touted here by Nick as a possibility – it fizzed didn’t it.

    ffffiiizzzzzzzz – pop.

  7. JB

    Fitch @ 97
    I agree fully. This is why the property idiots – i.e. the majority of Australians – are busy getting burned and there is still a lot more pain to come!

    as for gold and silver – yes there will be a time sometime in the future when they will have reached the top of their cycle and it will be time to sell.

    but that sure as hell aint now

  8. cb

    Fitch – Okay, I follow you now. Ultimately, the question you are driving at appears to be this: At which point will gold and silver have reached a more or less natural equilibrium point with their pricing in fiat paper?

    That is a BIG question, but it is the right one. However, equally, the answer to it is very very complicated. Much will depend on whether these metals are going to be officially remonetised and used, either as a backing, or in their own right as coins and bars in trade.

    Official and formal monetisation would necessarily require a great deal of metal being put aside for this purpose, metal that otherwise would be available for industrial use in electronics, jewellery, etc.

    There are other factors relevant to answering that question, but probably this is one of the biggest ones. And, to be sure, we do not even know the answer to this at this point. PF is is confident that the days of the metals for this purpose are over, and he may well be right. There are others who are quite sure that at least a partial re-monetisation is inevitable if this crisis of debt money is to be ever brought under control. Bob Chapman appears to hold this view, and I cannot at this point make my mind up about it one way or another.

    However, the one thing that is quite clear, I think, is that we are still a long way away from sounding the “all clear” for fiat money. This, I suspect, forms part of JB’s reasoning, with which I am most inclined to concur.

  9. Sandra

    JB at 102
    I agree. i believe that one indication as to when the time will be ripe to cash in some or all of your bullion is when you can purchase an average sized home for between 500 and 1000 ounces of silver…

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