It’s time for an apology. No, not from your editor. We’re always right, so there’s no need to apologise [wink].
Instead the apology needs to come from the Australian mainstream financial press. The same financial press that told you Australia’s banks were strong.
That Australia had the best prudential regulation in the world. That Australian banks were different to all those dirty foreign banks.
But an apology also needs to come from the banks who themselves claimed things were different here. And that Australia’s banks didn’t have the same solvency problems as US and European banks.
Why do they need to apologise? Well, two years after the global financial markets collapsed, a secret bailout of two of Australia’s biggest banks has been revealed.
This is pretty big news. Or rather, you’d think it would be pretty big news. But as you can imagine there’s almost uniform silence from the banks and the mainstream press.
Shortly after we sent you yesterday’s Money Morning we decided to do a bit of fishing around on the US Federal Reserve website. You see, earlier that morning the Fed had released some pretty hot material, and we wanted to see what it contained.
What we found shocked us. Although it really shouldn’t have, because we knew the claims about the Australian banking system being strong and robust were complete lies anyway.
In fact, so shocking is this revelation that we considered sending you a Money Morning special edition yesterday afternoon. But we didn’t. We’re fed up of giving the mainstream scoops which they then claim as their own.
Instead we thought we’d wait to see if the Australian mainstream press picked up the story first.
Surprisingly they have. But not with any enthusiasm. And hardly with what you’d call any effort. Probably because they’re a bit sheepish about the fact the banks and regulators have made fools of them. I’ll provide you with the link to the one story on it in a moment.
So excited were we to see how the mainstream had handled this story we did something we normally never do – enthusiastically open the Australian Financial Review (AFR).
The first thing we did was check the Companies Index on the back page. This was promising, the two banks in question were mentioned. We eagerly flicked through to the relevant pages… and drew a blank.
Not a single mention of it. So we started from the front and worked our way quickly through the paper… page seven… here it is… “Rescues: RBA borrowed billions from Fed” was the headline… but no, this isn’t what we’re looking for.
On we went, past the big centre-fold spread telling readers that the AFR contains, “Up-to-the-minute market information, news, commentary and expert analysis… All from just $44 per month”.
We continued… through to the end. Not peep. Not a single mention.
And the AFR is supposed to be Australia’s premium business newspaper. We wouldn’t have thought so.
About all it’s good for is lining bird cages in our opinion.
But then, we guess if the AFR exposed the banks’ duplicity it wouldn’t be able to get an interview with the likes of Commonwealth Bank of Australia [ASX: CBA] CEO Sir. Ralph Norris.
Said person is the feature item in the Boss glossy mag insert in today’s AFR.
We can’t be bothered reading it. It’s surely pap.
But anyway, what the heck are we going on about? This…
I’m talking about the near collapse of the Australian banking system in 2008. I’m talking about the likelihood of two Australian banks collapsing in 2008 if they hadn’t secured a secret loan from the US Federal Reserve.
The fact that National Australia Bank [ASX: NAB] had to borrow USD$4.5 billion from the US Federal Reserve during 2008 and 2009.
And Westpac Banking Corp [ASX: WBC] needed USD$1.09 billion in January of 2008 and 2009.
What’s that, you don’t know anything about it?
And you don’t remember reading about it?
There’s a simple reason for that. It’s been top secret information until yesterday morning.
That’s right, if it wasn’t for the passing of controversial legislation in the United States you’d never have found out about NAB and Westpac’s Federal Reserve bail outs.
And based on the lack of interest from the mainstream press – including Australia’s so-called premium business newspaper, if it wasn’t for Money Morning you’d still be none the wiser.
The one and only article we’ve found that mentions it is this one from The Age, headlined “NAB, Westpac tapped Fed”.
It appears to be an adaptation of a New York Times article based on the reference at the end, with localised bits added by Eric Johnston. But this one pathetic effort shows just how clueless the Australian mainstream press is.
Johnston makes this comment:
“The Westpac borrowings are unusual, as it barely has a North American presence, operating only a US representative office.”
Seriously, do I really need to explain it to a veteran journalist?
Talk about not being able to see the wood for the trees. Talk about not getting it.
Here’s a clue for Mr. Johnston, it wasn’t Westpac’s US office that needed the dosh, it was Westpac in Australia that needed it. It shows you that without the direct financial support of the US Federal Reserve Westpac and NAB would have been toast.
Westpac and NAB needed the loans because they were on the verge of going belly up. It’s that simple. If they hadn’t gotten secret loans from the US Fed they would undoubtedly have needed secret loans from the RBA.
Fortunately for the RBA, the Fed opened the door and this allowed Aussie central bankers and bankers to claim that the Aussie banks hadn’t received a bailout.
But not only that, what’s most extraordinary is that Westpac was one of the first institutions to borrow money from the Fed when the lending facility became available!
But more about that in a moment. Let me give you some of the background first…
You may have read about something called the Dodd-Frank Act. The full name is the Wall Street Reform and Consumer Protection Act. It’s called Dodd-Frank after the bill’s sponsors, US Senator Chris Dodd, and Representative Barney Frank.
The legislation mandates a number of things, but part of it is the requirement for the US Federal Reserve to reveal which institutions it loaned money to under the various bail out programmes.
One of those programmes was titled the Term Auction Facility (TAF). According to the Fed’s website:
“Under the program, the Federal Reserve auctioned 28-day loans, and, beginning in August 2008, 84-day loans, to depository institutions in generally sound financial condition…
“…Of those institutions, primary credit, and thus also the TAF, is available only to institutions that are financially sound.”
OK, so only “financially sound” institutions were eligible for TAF loans. That would be financially sound institutions such as LloydsTSB plc which got a USD$10.5 billion loan from the Fed and which later had to be partially nationalised by the UK government.
It would also include ABN Amro Bank which grabbed USD$1.5 billion of loans from the Fed, and which would later cause such a financial strain on Royal Bank of Scotland (RBS) after RBS bought it that the UK government had to partially nationalise it too.
Not to mention the USD$53.5 billion of loans RBS needed directly.
Then there was Allied Irish Bank, who could forget it? The Irish certainly won’t.
Between February 2009 and February 2010 Allied Irish Bank needed USD$34.7 billion of loans from the Fed. Allied Irish Bank also had all its obligations guaranteed by the Irish taxpayer and is the primary reason why Ireland now requires an International Monetary Fund and European Union bailout to the tune of $113 billion.
And what about Bayerische Landesbank which needed a USD$13.4 billion bailout from the state of Bavaria? Well, apparently it was financially sound enough to borrow USD$108.19 billion between December 2007 and October 2009.
So, we can take with a grain of salt the Fed’s claim that only “financially sound” institutions had access to the TAF programme. Financially unsound and insolvent banks were given loans too.
And in the middle of all that wheeling and dealing, when a total of nearly USD$4 trillion was loaned to and repaid by “financially sound” institutions, Australia’s very own National Australia Bank and Westpac were in on the action too.
Although it was only a relatively small amount compared to some of the other transactions, it was still USD$4.5 billion and USD$1.09 billion respectively. But it was still a lot more than the USD$1.5 billion needed by financially unsound ABN Amro.
Also don’t forget that the NAB went to the Australian stock market in late 2008 to raise $3 billion. That was a sum it needed to bolster its capital.
If $3 billion was a significant and important number for the market to know about then surely USD$4.5 billion (about AUD$7 billion at the time) was even more crucial for the market to be aware of.
But there wasn’t a peep from them.
Because as I say, you didn’t know anything about the NAB’s and Westpac’s Fed loans. It was all top secret.
And it’s obvious that $3 billion capital raising still wasn’t enough because NAB had to go begging to the Fed twice after that for $1.5 billion a time.
But as I say, you didn’t hear a word about this at the time. It was all top secret. But that didn’t stop the bankers and regulators and politicians from posturing about the stability and strength of Australian banks.
In January 2008 Westpac denied there was a problem with its US exposure. That’s despite the fact just one month before, on December 20th 2007 Westpac had gotten a USD$90 million loan from the Federal Reserve under the TAF programme.
Not only did it get the loan, but it was one of the first in the queue! As you can see from the screenshot below (click to enlarge):
You can check out the full details here by downloading the spreadsheet.
You’ll note that Westpac applied for the loan on the same day as Citibank (bailed out by US government), Lloyds TSB Bank (bailed out by UK government), Bayerische Landesbank (bailed out by Bavarian government), and Societe Generale (which was bailed out by the US government courtesy of the AIG bailout against which SocGen had a massive CDS exposure).
In other words, we’re talking about a rag-tag bag of insolvent banks. And our own insolvent bank – Westpac – was amongst the thick of it, begging for an emergency loan from the US Federal Reserve as soon as the doors were opened.
It’s something you’d think would be of interest to shareholders don’t you? But there wasn’t a word from them.
And it must now make the Reserve Bank of Australia (RBA) feel foolish, considering in September 2008, just before NAB sought the Fed’s help, the RBA wrote:
“The Australian financial system has coped better with the recent turmoil than many other financial systems. The banking system is soundly capitalised, it has only limited exposure to sub-prime related assets, and it continues to record strong profitability and has low levels or problem loans. The large Australian banks all have high credit ratings and they have been able to continue to tap both domestic and offshore capital markets on a regular basis.”
Tapping “offshore capital markets” obviously included the US Fed.
So we wonder, how much did the Reserve Bank of Australia know about this? While it was talking up the strength of the Australian banking system did it know that two of the four Australian banking pillars were desperately seeking loans from the US Fed?
Or, like you, was the RBA in the dark? And what about the Australian Prudential Regulation Authority (APRA)? We’ve been told they’ve done all manner of stress tests and the banks passed with flying colours.
How can that be possible if Westpac and NAB need emergency loans from the US Fed? Was this included in the stress tests?
Anyway, we’d like to know. So we’ve fired off emails to the RBA, APRA and the Australian Securities Exchange (ASX) asking them these simple questions.
- When did the RBA/APRA/ASX become aware of Westpac and NAB’s loans under the TAF programme?
- If RBA/APRA/ASX were not aware of the loans under the TAF programme please explain why.
- If RBA/APRA/ASX were aware of the loans please explain why this wasn’t considered to be important enough to inform the market?
We’ll let you know if or when we get a reply.
But it wasn’t just Westpac that kept quiet about it.
NAB chairman Michael Chaney must surely have realised what he was saying when he made the following comment at the December 2008 annual general meeting:
“Our traditional banking and wealth management operations are all profitable, strongly capitalised and conservatively funded. In addition, our banking businesses have sound asset quality and are well provisioned.”
So sound was the asset quality that just six weeks earlier NAB’s New York branch had to arrange a USD$1.5 billion loan at an interest rate of 0.6% with the US Federal Reserve.
All under a shroud of secrecy.
All under the belief that no-one would ever find out about it because no-one could find out about it. The Fed at that time was under no obligation to reveal which banks were taking short term loans from the Fed…
Until the Dodd-Frank Act was passed.
Look, we’ll say we told you so. We’ve claimed all along that Australia’s banking system is no different to any other. It’s inherently insolvent – as are all modern day banks.
Along the way we’ve been called a “lunatic” and a “nutter” for writing what we believed to be true. And would you believe it, once the secrecy of corrupt governments and bankers is revealed this “lunatic” and “nutter” has been proven correct.
But I understand it may not seem like that at the time. Yesterday we received this email from a Money Morning reader:
“I don’t normally send comments to publications nor do I sit there and read others comments, however, yesterday I came across a sticker on a car bumper. When I read it, I immediately thought of you and I think you will like it too.
“‘Do not steal. The government does not like competition.’
“I enjoy reading your daily newsletter. Even though some of your theories sound crazy at the beginning, it’s funny how they do in the end sound believable. We do live in a world where some people do not put other peoples’ interest first.
It’s true. Government is above the law. It can legally steal private property – it’s called taxation. Nice trick huh!
But Lisa hits the nail on the head. What you read here may sound crazy, but it only sounds crazy because it’s outside the norm. It’s different to what you read anywhere else.
And that’s simply because we don’t have to worry about what our advertisers think – because we only advertise our own services. And we don’t have to worry about turning readers off with our seemingly radical ideas, because most of our readers come here because of those radical ideas.
My guess is you’re fed up with being told the same rubbish day-in and day-out by the mainstream press. A mainstream press that reports from press releases, and trusts whatever it is the guys in government or on Wall Street say.
In contrast we’ve learned to doubt everything they say.
We take the view that anything a mainstream economist or analyst says is wrong. It’s up to them to convince us they’re right. Very few of them succeed because ultimately… I hope this doesn’t sound arrogant, they are wrong.
The state of Australia’s banks is a perfect example. For the past two years you’ve had to put up with a constant drone of commentary from the mainstream telling you that Australia is different.
As I say, this bombshell from the Federal Reserve proves otherwise. And it proves we’ve been right to call the Aussie banks for what they are.
Maybe our claim about NAB’s system shutdown last week being caused by a solvency problem rather than a computer glitch still seems crazy to you. But we wonder, after reading today’s Money Morning, perhaps it now sounds just slightly less crazy than you first thought…
And furthermore, it must surely make you wonder what else it is the government and central bankers are keeping secret. Most of which will probably never be revealed.
All you and I can do is use our scepticism and questioning brain to figure out what’s really happening. Because more often than not, the story the mainstream peddles is as far from the truth as you can get.
Yesterday’s revelation from the US Federal Reserve about NAB’s and Westpac’s secret loans is a perfect example. We look forward to getting a reply from the RBA, ASX and APRA about how much they knew and when…
But we won’t hold our breath.
For Money Morning Australia