RBA Gets Mushroom Treatment

Today’s Money Morning contains an extraordinary admission from the Reserve Bank of Australia (RBA). An admission that defies belief.

But before we crack on with that, we couldn’t pass up the chance to have a laugh at the big Aussie retailers again.

In today’s The Age Myer [ASX: MYR] CEO Bernie Brookes is quoted:

“I get quite upset when I read some of the disparaging comments about Gerry Harvey and Solomon Lew because, whatever you think of them personally, they started with nothing and have become successful.”

That’s right, so successful they’re now using their influence to force bigger costs on individual Australians. Individual Australians who are simply exercising their freedom of choice about where and how they spend their money.

Apparently these retailers are upping the ante with their advertising campaign. They clearly think they’re on a winner.

Ah well, we encourage them to do their worst… each day they campaign for taxes on imported goods, the more people become aware of the savings available from shopping online. And the more consumers will turn to online.

But the campaign isn’t doing much for the share prices of the companies involved. Warning… I suggest you hold your nose before scrolling down, because the following price charts stink.

Take the Harvey Moron [ASX: HVN] share price:

Or how about Bernie Brookes’ Myer [ASX: MYR]:

Not forgetting the supposed high-end David Jones [ASX: DJS]:

And finally, Premier Investments [ASX: PMV]. The company chaired by Solomon “He started with nothing” Lew:

There’s the real reason for the campaign. Looking for a scapegoat. The fact is they’ve given shareholders crappy returns. They’re too lame to cop it on the chin and say their retail strategy is rubbish.

They’re too mainstream to admit the economy is down the gurgler…

Or that consumers have simply spent every cent they have and every cent they’ve borrowed. The consumer has nothing left and so the retailers are just trying to shift the blame.

Unfortunately for them it won’t work. And applying a GST to overseas purchases won’t help either.

The fact is the mainstream – including retailers – need to face up to reality. That apart from the resources sector, Australia’s economy is on skid row. And the performance of the retail sector is simply proof of that.

So much for a robust economy… flaky more like.

But speaking of non-robust and flaky, much to our surprise we received a reply to our Freedom of Information (FoI) request from the Reserve Bank of Australia (RBA).

To refresh your memory, our request in full was:

“I would like to request all internal and external communications from and to the RBA regarding information received by the RBA or sent by the RBA on NAB and Westpac’s use of the US Federal Reserve’s Term Auction Facility (TAF).”

Here is the RBA’s reply in full… without edits:

“Dear Mr Sayce,

I refer to your FOI request (reproduced below) and advise that there are no documents relevant to your question held by the Reserve Bank.

Yours sincerely

Anthony Dickman
Secretary
Reserve Bank of Australia”

And that was it.

We’d expected an official looking document. We’d even hoped to get something with bits – preferably whole paragraphs – redacted.

But we didn’t.

We just got an email.

But it’s not presentation of the information that’s important. It’s the RBA’s startling admission that has us truly amazed.

If the non-disclosure to the market of National Australia Bank’s [ASX: NAB] and Westpac’s [ASX: WBC] secret loans from the US Federal Reserve was a bombshell, then news the RBA didn’t know about these loans it is an atomic bombshell.

Which makes us wonder…

If the NAB and Westpac didn’t tell their pals at the RBA, then we assume they didn’t tell their pals at the Australian Securities Exchange (ASX) either.

That much we’d already fathomed. Because if NAB and Westpac did tell the ASX, and the ASX hadn’t passed that info onto the market then it would be guilty of a conspiracy to mislead investors.

Now, we can’t have a monopoly exchange doing anything criminal can we? Can we? Not when it’s fighting tooth and nail to keep its monopoly status… and while it’s in the middle of a takeover deal.

Even a non-legal eagle could tell you they’d be in severe hot water for not passing this news onto investors.

But if the banks didn’t tell the RBA or the ASX then are we sure they told the Australian Prudential Regulation Authority (APRA) about the loans? APRA is the banking regulator.

Think of it from the banks’ viewpoint. At the time, the US Federal Reserve was under no obligation to publish the loans data.

Everything was top secret. If it’s top secret why spill the beans yourself?

Why tell the ASX? They’ll only have to release something to the market.

Why tell the RBA? They’re covered by Freedom of Information requests. Annoying people could put in a request to find out.

Why tell APRA? Hang on. That might work. APRA is exempt from FoI enquiries. And as I mentioned before Christmas, APRA is covered by Section 56 of the APRA Act. This provides complete secrecy for any firm APRA regulates… in other words, secrecy for the banks.

So maybe there’s a chance the banks did tell APRA. But only because they knew APRA is legally prevented from disclosing any information about the banks to the public.

Telling APRA could be the banks ultimate fall-back position – “But we did disclose it, we told APRA. It’s not our fault if they can’t tell anyone.”

The only way to find out if the banks told APRA is to ask the banks. So yesterday we sent the following questions to the NAB and Westpac executive teams:

“Please can you advise on what date the bank informed APRA, RBA and ASX about NAB’s/Westpac’s use of the Term Auction Facility (TAF) from the US Federal Reserve?

“And why this information was not made public at the time?”

I’ll keep you posted on any reply we get.

But that’s not all. Notice my question to the RBA didn’t specify a time period. I wasn’t just asking what the RBA knew at the time of the loans. I wanted to know what the RBA knew since then.

And importantly, since the news became public.

But amazingly, at no point during the last month has the RBA bothered to drop NAB or Westpac a note asking them for details about the US Fed secret loans.

Even more amazingly, not one word has passed the lips or email inbox from one RBA executive to another.

At no time during the last month has Glenn Stevens, Malcolm Edey, Guy Debelle, Ric Battellino or Luci Ellis typed out something like:

“Hey guys,

“How was your weekend? I took the family for a picnic. We had great weather for it.

“By the way, did you read in Money Morning about the loans our pals at the Fed gave NAB and Westpac? I didn’t know anything about it, did you? Just wondering, no big deal… oh, and look at this cute picture of a cat…” etc.

Can you believe it? Not a single word has been spoken or written by anyone at the Reserve Bank of Australia concerning the secret multi-billion dollar loans from a foreign central bank to two of Australia’s “strong” and “stable” banks.

Not one word… not even in passing.

We can only think the RBA subscribes to the Arthur Daley school of questioning, “Ask me no questions and I’ll tell you know lies.”

In other words, don’t dare ask the banks what they were playing at, just in case the RBA doesn’t like the answer!

Anyway, as quick as a flash we belted out another email to our new media relations pal at the RBA. We asked these three questions:

1. Is the RBA surprised that neither NAB or Westpac considered it important to inform the RBA that they were borrowing funds from a foreign central bank?
2. Is the RBA surprised that neither NAB or Westpac have contacted the RBA since the information on the loans was released by the US Federal Reserve on 3rd December?
3. Why hasn’t the RBA contacted NAB or Westpac requesting an explanation for the loans and an explanation for why the RBA wasn’t notified about the loans?

Unfortunately our new pal is on leave until 13th January… clearly even central banking people need holidays too… what with all the hard work they put in. So we’ll have to wait for an answer.

Clearly this reveals that the RBA doesn’t keep in touch with the banks. And that it isn’t informed about secret bank back room deals.

Which is worrying considering the taxpayer is about to be put on the hook for billions of dollars thanks to the new Basel III agreement. That’s the one where the RBA is effectively insuring the banks… providing a backstop for it in the event of more trouble.

You’d hope that if your tax dollars are being used to underwrite the banking system that the insurer (the RBA) would have some clue what the banks are up to. You’d want to know if the firm you’re insuring has had to get an emergency loan in order to pay the bills.

Obviously not. Not if you’re the RBA.

But anyway, seeing as the banks didn’t tell the RBA what’s going on, how could RBA governor Glenn Stevens have said this at a speech in December 2008:

“In Australia or Japan or much of east Asia or Canada, while credit conditions have become more difficult, the banks are in much stronger condition than in the United States or Europe or the United Kingdom.”

He could only say that if he didn’t know about the secret loans two of Australia’s banks had already taken out with the US Federal Reserve.

And how could he make such a comment if the RBA doesn’t know the complete ins and outs of what the banks are up to?

Or how could Malcolm Edey say this in March 2009, if the RBA is in the dark about banking activities:

“I should stress, by the way, that Australian banks have been much more prudent than their overseas counterparts, and they have remained in sound condition throughout the crisis period.”

That’s right, so sound that National Australia Bank had to secretly borrow $4.5 billion from a foreign central bank.

Or how about when Ric Battellino said this at the end of March 2009:

“Australia entered this difficult period in much better shape than many other countries. Disciplined monetary and fiscal policies in earlier years, sound regulation and a prudent approach to lending by our banks meant that the country was largely free of major problems”

Tell that to NAB with its $4.5 billion loan. Battellino continued:

“We have had more scope than others to move policies in the expansionary direction and our banks, being largely free of problem assets, are in a position to keep supplying credit to the economy.”

So “free of problem assets” that NAB needed a $4.5 billion in secret from the US Federal Reserve.

Then there was this from our favourite bubble-denying central banker, Luci Ellis. This is what she said in April 2009:

“Unlike banks in many other countries, they [Australian banks] have been able to raise additional capital where required from private investors…”

Er, not all of it. Dr. Ellis of course, wasn’t aware of the $4.5 billion NAB borrowed in secret from the US Federal Reserve.

In May 2009 Glenn Stevens told the Canadian Australian Chamber of Commerce:

“Notwithstanding the global credit crisis, Canadian and Australian banks continue to be profitable and are well capitalised by private investors – something that many advanced countries cannot claim.”

Sorry Glenn, but Australia couldn’t claim it either. Even before the secret Fed loans were revealed, it’s not true to say Australia’s banks were only capitalised by private investors. He clearly forgets the taxpayer-backed deposit and wholesale guarantees…

Not forgetting the $4.5 billion the NAB needed to borrow from a foreign central bank.

Finally, let’s see what Malcolm Edey had to say about Australia’s banks in August 2009:

“Throughout the crisis period, the Australian banking system has proven to be much more resilient than its counterparts abroad…

“It seems clear that Australian banks generally had stronger balance sheets coming into the crisis period, and less exposure to high-risk assets, than many of their international counterparts.”

So resilient that NAB needed an emergency loan of $4.5 billion.

No wonder the goons at the RBA haven’t spoken to each other about it. I mean, they must feel pretty dumb after bigging up the Australian banking system and its resilience, only to find out the banks had been cheating behind their backs.

That NAB and Westpac, two of Australia’s “resilient” banks had gone cap-in-hand to the US Federal Reserve begging for emergency loans.

Remember that Westpac was one of the first banks to get a loan from the Fed. Eagerly banging on the door to get its hands on Fed cash.

What this farce shows is that you can’t trust a single word that comes from a banker or a central banker.

The RBA dudes were spinning a yarn about strong banks while behind closed doors NAB and Westpac were begging for central bank cash.

Against the wishes of those two banks the truth is out. Australia’s banks aren’t as strong as you were told.

After all the speeches made by the RBA it couldn’t possibly admit that it knew anything about the secret loans. If our FoI request had come back with a positive result then the RBA would have been exposed as liars.

But it seems – if we believe what we’ve now been told by the RBA – that the RBA didn’t know about the secret loans then it’s clear the RBA was given the mushroom treatment… it was kept in the dark.

But, to be honest, it all seems a little too convenient.

Is it really possible the RBA didn’t know anything about the secret loans?

Can we really believe no-one at the RBA has mentioned the secret loans to any of their colleagues since the loans became public one month ago? Not one word?

We’d be interested to hear from any RBA insiders whether that’s really the case…

Don’t think this story has come to an end just yet. Our guess is there’s plenty more to be revealed. And it won’t make for good reading for those that fell for the lies about the strength of the Aussie banking system.

Cheers,
Kris Sayce
For Money Morning Australia

Tagged as: economy, mushroom, price, rba, treatment