Royal Commission Takeaway: Taxpayers Clean Up the Mess

It’s just so typical.

When there’s a big mess to clean up, governments and institutions turn to taxpayers.

It doesn’t matter who made the bad choices. It doesn’t matter who put fuel on the flames.

When companies, industries or institutions burn to the ground, governments expect us to be willing socialists.

Consider what happened in the 1990s with Long-Term Capital Management (LTCM).

The American hedge fund was filled with the best and brightest. On the board of directors were two Noble Prize-winning economists.

Yet what LTCM did was anything but smart.

Like most hedge funds they tried to make as much money as possible. The risk of failure was an afterthought.

The fund jumped into emerging markets. They leveraged their book by a factor of 25 to 1. That means LTCM had about 4% of what they needed to cover any sour trades.

When the inevitable drew close, LCTM partners got an offer.

The offer was from US investment bank Goldman Sachs and Warren Buffett. They wanted to buy the partners out for just US$250 mln.

Such an offer was about 5% of the fund’s value just months ago. The partners didn’t accept. Instead, they waited for the Federal Reserve Bank of New York to step in.

At the expense of taxpayers, LTCM partners would receive US$405 mln from the bank. They would also pump US$3.65 billion into the fund, which would remain there for the next three years.

This is something those with political power just expect people to accept. And they’re now doing it to us Aussies, although to a lesser extent, right after the Banking Royal Commission.

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Taxpayers pay, again

In case you missed it, here’s a few wrongdoings we found out about during the royal commission…

AMP charged customers for services they didn’t receive. Then they lied to ASIC about whether they provided those services or not.

NAB also charged customers for services they didn’t receive.

CBA was selling dubious insurance to consumers.

Within 12 months we saw 130 witnesses. There were more than 10,000 public submissions. The royal commission saw most, if not all, of the dirty behaviour going on at Aussie banks.

So, what will the new Haynes recommendations do for big banks down under?

Almost nothing.

I couldn’t find any real fundamental banking reforms…

Haynes didn’t recommend stripping the Big Four of their power to self-calculate risk weightings. This allows them to compete at a competitive advantage to all other banks.

Haynes also didn’t recommend removal of any other regulatory preferential treatment to encourage competition from small banks.

Instead, Haynes thought it was key that big banks pay mortgage broker fees…

From the Australian Financial Review (AFR):

Borrowers will have to pay the fees of mortgage brokers, a provision that ought to undermine the big banks’ stranglehold on distribution which has allowed them to maintain and expand market share in home loans despite offering more costly products than their competitors.

Really. Will that solve our problems?

Among the Haynes recommendation was an additional regulatory watch dog. This new regulator will check to make sure regulators like APRA and ASIC are doing their job.

Yep, you read that right. We need a taxpayer-funded regulator for the regulators.

But why stop there, Haynes? Why not get a regulator to regulate the regulators who are regulating original regulators?

It’s just ridiculous. The AFR continues:

A new independent watchdog will police the financial regulators who have been directed by the Hayne royal commission to punish misconduct more aggressively by pursuing court action to deter wrongdoing by financiers.

And this is really the crux of the problem.

It will be the taxpayers that fund any new regulation of these greedy, dishonest executives.

Big banks will be no worse off after all 76 recommendations. It’s why the shares of the Big Four all rose yesterday.

Are we just not going to hold individuals accountable? Why not take a percentage of executive pay to fund regulators? Why not take a cut of management’s stock options to fund relief packages?

Why is it that you and I that need to pay to keep bank executives from wrongdoings?

For small banking

Yesterday I wrote about what I believe could be a solution to the tyranny of the Big Four. Here’s a snippet:

Imagine a local bank does what the Big Four do…they charge for services they don’t provide and sell you products you don’t need.

Pretty soon, customers wake up and move their business to another bank.

‘[So local banks]…care about you and the businesses in your community.

Their aim is to service the local economy. That means local home buyers and local businesses. The latter is probably the biggest advantage of local bank, as it spurs local economic growth.

Right now, customers can’t turn to another bank because the Big Four control more than 80% of the home loan market.

There is no fair competition in our banking sector. It’s one of the reasons the Big Four are among the most profitable and concentrated banks in the world.


MoneyMorning 06-02-19

Source: ABC

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Most of these profits come from regulatory favouritism. It’s regulators that allow the Big Four to gain advantages over the rest.

And thanks to Haynes, you and I are going to fund these biased watch dogs.

Your free market friend,

Harje Ronngard,
Editor, Money Morning

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Harje Ronngard is the lead Editor at Money Morning. He’s also the Editor of Wealth Eruption and Gold & Commodities Stock Trader, and co-Editor of the Third Wave Portfolio.

The aim of both Wealth Eruption and the Third Wave Portfolio is to find misunderstood opportunities. These are the type of investments that multiply small amounts of money five- to 10-times in size.

Harje has an academic background in investments and valuation. He’s had experience across a range of asset classes, from futures to equities.

For any investment, Harje believes you only need to ask two questions. What is it worth? And how much does it cost? These two questions alone open up a world of opportunities, which Harje shares with Money Morning readers five days a week.


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