Before we get to today’s Money Morning we just had to relay the exciting news about the Queensland floods.
According to today’s The Age:
We wondered how long it would take the mainstream press to roll out that old chestnut.
The mainstream press’s new economic heartthrob, HSBC’s Paul Bloxham said:
“By the second quarter of 2011 the economy will probably be boosted by rebuilding and replacement of household durable goods.”
Hooray! Let’s boost the economy by destroying things.
It never ceases to amaze us. The mainstream continues to take these guys seriously. Not only that, but the bureaucrats hang off every word too. Sheesh!
But anyway, we’ll leave that subject for tomorrow’s Money Weekend. Today we’ve got something else to wrap up… the continuing secret loan scandal…
Tell you what, it’s been like drawing blood from a stone… only harder.
But finally, yesterday, the National Australia Bank [ASX: NAB] and Westpac [ASX: WBC] replied – sort of – to our questions.
It’s funny how quickly you get a reply when you send an email to the chief executive officer, the chief financial offer and the legal big-cheese at the banks.
We’d waited four weeks for the media relations goons to get back to us… and nothing. Go to the top, and boy do the wheels start moving.
Again, here are the questions we sent them:
“Please can you advise on what date the bank informed APRA, RBA and ASX about NAB’s use of the Term Auction Facility (TAF) from the US Federal Reserve?
“And why this information was not made public at the time?”
The questions were fairly clear.
Here’s the reply we received from an NAB spokesperson:
“During the GFC, NAB worked to ensure its balance sheet maintained a bias towards safety during what was a difficult market. Participating in the TAF was a cost effective way to raise funds. NAB accessed the TAF through our New York operations, and was encouraged to do so by the US Reserve, as a way to encourage term liquidity moving in the market. In the context of the bank’s overall funding requirements the amount was not material. Our regulators had a clear understanding of our overall funding and liquidity position.”
Oh how we hate the term “GFC”. We’ve vowed never to use it in Money Morning unless we’re quoting someone.
We don’t know why we hate it. But it grates.
However, we weren’t entirely happy with NAB’s answer. So quick-as-a-flash we fired back another email. We asked:
“Thanks. Which regulators?”
Almost as quickly, the NAB spokesperson replied:
“As you would expect, as part of our usual course of business, we provide updates to our regulators on the state of our overall funding and liquidity position.”
Still unhappy with the answer we fired back another email:
“Which regulators… APRA, RBA or ASX?”
The reply came… not so quickly though this time:
“During the crisis, we kept our responsible prudential regulator APRA informed. However, we obviously kept regulators such as the RBA and ASIC updated on issues such as our funding and liquidity position during this time. The ASX was kept up to date, through normal processes, such as Trading Updates and half and full year results.”
Still doesn’t answer the question though does it? It’s still an ambiguous reply… it called for another email from your editor:
“But did you specifically inform APRA, the RBA and ASX about the loans from the US Federal Reserve?”
Surprisingly the spokesperson replied:
“Specifically, we kept APRA (our responsible prudential regulator) informed.”
But we still weren’t happy:
“Are you saying you informed ASX and RBA about the Fed loans?” we asked.
The obvious answer to that is no. Which was confirmed in the final reply. Playing with a straighter bat than the Aussie cricket team, NAB replied:
“The participation in TAF was not material. However, regulators were aware of our overall liquidity and funding position as required. I can’t provide any further comment on the matter.”
Goodness me, why can’t these people just answer a question right away. Don’t they know we’ve got to get on with important research for Australian Small-Cap Investigator?
As for Westpac this is the reply we received to our initial question:
“Westpac met all its regulatory obligations on this issue. There were no disclosure requirements to the ASX. This facility was available to highly rated banks.”
Oh stop it… ha, ha, ha…
Highly rated banks like Citibank, Lloyds TSB and Royal Bank of Scotland. Clowns.
Anyway, before we go on. We were interested to see what the Australian Securities Exchange (ASX) had to say on this… so we forwarded Westpac’s email to ASX CFO Ramy Aziz and our new media pals there.
I’ll let you know when we get a reply.
But at least it adds another piece to the puzzle…
We bashed back a reply to Westpac:
“What about APRA and the RBA. Did you inform them and if so when?”
To which they replied, grumpily we think:
“Kris – as I said in our response – we met all our regulatory obligations.”
So we replied:
“But did the bank tell APRA and the RBA? It’s not a difficult question to answer. To save me the trouble of finding out whether informing APRA and the RBA is part of your regulatory obligations it would be easier to just answer the question.”
So far we’ve just heard the sound of crickets… no reply just yet.
Email is great isn’t it? It takes just a few seconds to fire off a question and you’ve got written evidence in return. No fussing around with shorthand or repeating answers or being misquoted… it’s all there in black and white.
But as I say, it would be nice if the banks answered the question the first time rather than prevaricating about the bush.
So where does this leave us? Well, here’s the state of play on who knew what…
Based on what the Reserve Bank of Australia (RBA) has told us, the banks didn’t tell the RBA a thing. That seems to be confirmed by the NAB, and judging by its shiftiness, also by Westpac.
It also appears that the “stable” and “strong” banks didn’t tell the ASX about the secret loans.
Apparently $4.5 billion of loans from a foreign central bank wasn’t “material” to NAB so it didn’t tell the ASX. And Westpac has explicitly confirmed that it didn’t tell the ASX either.
At least in that respect the ASX is close to being cleared of accusations of conspiracy to conceal information. So that’s one positive to come from this sorry mess.
But it’s still no excuse for its lack of interest in the matter since the secret loans became public.
That leaves one last regulator – APRA. APRA is the official regulator of Australia’s banks. But APRA is legally prohibited from disclosing any information on the companies it regulates… ie. the banks.
The only way we’ve got of knowing whether APRA was informed is if the banks tell us.
So, remember what we wrote to you yesterday:
“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.’”
Gee, and they call us a conspiracy theorist.
Turns out we were spot on. It looks like the banks didn’t tell the ASX. And they didn’t tell the RBA. Why? Because of the possibility the loans would be made public.
But telling APRA? Perfect. NAB admits it told APRA. So far Westpac hasn’t admitted it told APRA.
But if they both did so it was in full belief that Australian investors would never find out…
The plan worked perfectly. No one knew anything until those meddling libertarians in the US such as congressman Ron Paul got involved. He demanded the US Federal Reserve release full details of all banks that received emergency loans from the Fed.
At that point the cat was out of the bag. Man the battle stations, the banks must have thought. They needn’t have bothered. No one in the Australian mainstream press gives a hoot.
After all, they now look just as dumb as the RBA for falling for the spin that Australia’s banks were somehow different to other banks. Turns out they were just the same.
But it makes sense of what we read in yesterday’s Australian Financial Review:
“But Mr Laker [APRA chairman] said APRA would act as a gatekeeper to and set tough conditions for access to the RBA back-up facility.”
That’s in reference to the Basel III rules I mentioned yesterday.
In other words, everything will be kept secret from the taxpayer and the RBA. The banks will secretly approach APRA, tell it they want access to the RBA’s insurance policy and then we dare say APRA will give them a permission slip to take to the RBA.
But because all dealings with APRA are top secret you’ll never know the full details. You’ll only know what the banks want you to know.
Even more than that, what this whole affair proves is how much secrecy there is in the world of banking.
Call us a conspiracy theorist if you like – we don’t mind, our so-called conspiracy theories are more often proved right than wrong – but seriously, what else have the banks and APRA conspired to keep secret?
Think about it, if it wasn’t for the unexpected release of data from the Fed you’d still be in the dark on this.
Make no mistake, there is more to be revealed. Much more is our bet. The banking closet is doubtless stuffed full of bailouts and secret deals that the regulators and banks are fighting to keep secret from the taxpayer.
For instance, how much of the $53 billion the RBA received from the Fed flowed through to the bankrupt Aussie banks?
Will that ever be revealed? We doubt it.
Then there’s all the stuff we can’t even imagine that’s gone on.
Look, you shouldn’t be surprised by any of this. We’ve warned all along that regulations and regulators don’t protect investors.
Regulations and regulators only protect those that are regulated… in this case the banks.
It’s been a cover-up job from start to finish.
However, Money Morning reader Luke writes:
“You guys keep harping on about this secret loan but when we are talking about a company with assets of over $600 billion I don’t really care whether or not they secretly borrowed a measly $5 billion from the federal reserve.”
It’s a fair question. Is this issue really as big as we’re making out?
Yes. It is.
Let me give you an example to draw a comparison. It’s not exactly the same, but it’s close enough and should help you better relate to it.
Imagine if you’d borrowed $1,000 from your friend knowing that you had to pay it back in one month. Then imagine you’d taken that $1,000 and used it as security for a margin loan to buy $100,000 worth of shares ($99,000 margin loan and $1,000 loan from your friend).
Now imagine the stock market fell – that’s not hard to imagine! – so the value of the shares was now only worth $99,000.
Unless you can come up with $1,000 pronto the margin lender will close out your position by selling your share portfolio so you can repay your margin loan of $99,000.
But that would leave you with a problem, because your friend is expecting you to pay back the $1,000 you borrowed. How are you going to do that? None of your other friends have any money to spare…
Apart from one “friend”. This friend happens to be called the Federal Reserve. It lends you the $1,000 to tide you over for a while so you can pay your friend back, or ask him or her for an extension on the loan. If he or she agrees then you can pay your margin call and hope the shares rise again.
If he or she doesn’t agree then you can sell your stock, pay back your friend and then just owe your Federal Reserve friend the money.
As I say, it’s not exactly the same as the Fed loans to banks. But it’s close enough. And there is one similarity. And that’s with the leverage involved. And the way banks borrow other people’s money in order to leverage into assets while still having an obligation to pay its borrowings back on demand.
But as you probably know, leveraged positions are double-edged. It magnifies your returns but magnifies your losses as well. This is the position the Aussie banks were in and are in – which is no different to any other bank around the world.
If it wasn’t for the secret loans from the Fed, the Aussie banks would have been unable to roll over short-term loans. Failure to do so would have been comparable to our example of a share trader being unable to roll over the $1,000 loan from his or her friend.
That’s why NAB and Westpac needed the emergency secret loans from the US Federal Reserve.
$4.5 billion may sound like a drop in the ocean, but it wasn’t.
Apologists for the banks can bleat all they like about the loans being small-fry, but it won’t wash. Australia’s banks were staring into the proverbial abyss in 2008.
If it wasn’t for secret loans from a foreign central bank, bail outs from the Australian taxpayer, and top secret back room deals between the banks and its regulator, it’s likely all four of the major banks would have gone to the wall.
And NAB and Westpac insist that these loans were not “material” and not a “disclosure requirement to the ASX”. Give us a break.
For Money Morning Australia
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.