End of Days

All around you see corporate Australia in trouble.  Big names taking hits QBE Insurance profits down, QANTAS bonds rated as junk and the car industry imploding. 

...More than $5 billion has been wiped off QBE's market value in two days, as investors punish the company for repeatedly disappointing and analysts warn that further pain could follow this week's profit downgrade.
In another blow to the insurer, Moody's on Tuesday downgraded its credit to Baa2, two notches above the rating it gives ''junk'' or speculative assets. It cited a weaker outlook for profits and higher debts.(here)

and meanwhile it seems S&P forgot to factor in the likelihood of possible future adverse macro events when they tried to bring some positive spin to current events...

Credit rating agency Standard & Poor’s has said the troubles faced by two of Australia’s most iconic brand names, Qantas and Holden, should not be regarded as a sign that the nation’s economy is derailing. [note it absolutely IS a sign!]
In a rare comment piece, the global rating agency said its decision to downgrade Qantas was a reflection of the competition the airline sector, which hit its earnings, and not the result of a change in consumer sentiment, and therefore it does not reflect broader economic conditions.

A drop in sentiment could further stall the much-needed pick-up in business and household spending. As it is, Standard & Poor’s currently forecasts ongoing subdued economic growth in 2014, with the fall in mining investment not fully offset by a very slowly re-emerging non-mining sector,” the agency said.(here)

And note this is also optimistic because it appears a lot of companies are fiddling the books - misstating their accounts to paint a more healthy picture (see this announcement by ASIC about its concerns of what is essentially degrees of fraud, or at least not complying with the spirit of accounting rules and principles).

 Part of the blame must surely lie with the resource curse - the substitutional effects the mining and resources economy has on the rest of the economy and a point well made in Britain's Telegraph:

The country is exhibiting clear signs of the “resource curse” as other sectors of industry whither on the vine, literally in the case of struggling vineyards. The beautiful wine-growing region of Hunter Valley is being “ripped apart” by coal mines, according to local activists. (here)

ASIC under fire again...

A leading consumer activist claims the corporate regulator has not only failed to investigate hundreds of cases of loan fraud put before it but, as a consequence, has covered up a systemic banking failure.(here)

TBTF (Too big to fail)

An interesting analysis of the Canadian banking system from FT Alphaville, following former Canadian Central Banker Mark Carney starting as head of the Bank of England, with a useful comparison to Australia.

Australia and Canada are very similar economies and jurisdictions - English heritage, resource and commodity exporters to the major economies of China and the USA and structural booms remaining in place (barely) with suggestions of currently overvalued property markets.

On the banking side both have conservative sectors with several (four or five) major banks at the pillar.  Interestingly the FT hailed one of the strengths of Canadian regulators recently was that they stopped the banks growing too big during, blocking earlier mergers amongst the top pillar banks.  A couple of questions:

i) while they look in good shape now (helpful for looking at Mark Carney today) will this hold into the future?  If not will Australian banks follow down a similar path? (hard to imagine given they are rated a world leaders at the moment on some metrics)

ii) in Australia it could be argued that one bank, CBA succumbed to merger fever when it acquired ailing BankWest, as CBA now has absorbed the loan book and swollen its income to be the leader of the pack of Aussie banks.  Might CBA now be too big to fail?  Certainly signs from the recent private wealth adviser frauds at the CBA aren't a good sign.  

Australia's banking system is rotten

Judge for yourself!  International rating agency Moody's has looked to downgrade Australia's big four banks, factoring in availability of government support for troubled banks (here), while the Herald group has been exposing Australia's own subprime industry - Low Doc loans, which are as toxic as their US equivalents - and of course the regulator it seems may have been asleep at the wheel and then very keen to deflect blame!  Seen it all before?

She says the emails which are being released - sent from 30 banks and other lenders into the 20,000-strong mortgage broker 'channel' - prove the banks are calling the shots. The emails examined by BusinessDay suggest some banks orchestrated the reckless fall in lending standards as the credit boom approached its crescendo in 2007 (here).

Of the borrowers who have asked for help from Ms Brailey's action group, Banking & Finance Consumers Support Association, 1170 of them claim their loan application forms (LAFs) have been tampered with. In most cases, the income figure has been increased to justify more credit. "There is not one clean 'LAF' among them," said Ms Brailey, 70, a consumer advocate from Western Australia. "This is Australia's subprime crisis.'' (here)

The Commonwealth Bank concealed financial improprieties by a top financial planner controlling an estimated $300 million in investments for 1300 clients, many of them retired and with serious health problems....The planner, Don Nguyen, who joined the nation's biggest bank in 1999 and has since been banned from providing financial services advice until 2018, allegedly forged signatures, created unauthorised investment accounts and overcharged fees.
A Fairfax Media investigation has revealed that bank staff took part in a cover-up that allegedly included the falsification of documents after Mr Nguyen left his position in July 2009.... one whistleblower, Jeff Morris, agreed to be identified by Fairfax Media to warn others about the perils of whistleblowing and the lack of support he got from the regulator, the Australian Securities and Investments Commission.  (here)

This is what a post boom world looks like...

The market oracles have been showing a glimpse of the future, with an Aussie miner suffering a share price slump following a buyout to a Chinese investor falling through:

...SUNDANCE Resources plunged in early trading after the iron-ore explorer terminated a planned takeover by China's Sichuan Hanlong Group....Sundance shares tumbled by more than half after the mining company said late yesterday that the $1.38 billion takeover wouldn't proceed because the Chinese investment group had missed key deadlines to finance the deal. (here).

...“They have to start from scratch now when economic conditions are a lot more difficult,” said Mine Life’s Wendt. “It’s not going to be easy for them to go out there to find investors because of the more concerning outlook for iron ore demand and iron ore prices and it’s significantly harder to attract funding for high capex projects.”(here).

Meanwhile in other sectors:

...Fitch Ratings has delivered a fresh blow to the upstream liquefied natural gas industry in Australia, tipping more cost blowouts and delays and calling into question the viability of some projects in the pipeline. ...Australia's competitive advantage in the sector is eroding on the back of increased costs and risks, and likely lower gas prices over the medium term, the agency said....

...Fitch also said predicted producers would be forced to sell-down assets...."Rising execution and development risks will force project sponsors of these LNG projects to dilute equity stakes or undertake sales of infrastructure and reserves," Fitch said in a statement. (here).

And with a slowdown comes more fraud:

...A Melbourne professor has warned that hardware and software used for tax fraud is likely in secret use by Australian businesses....The technologies, known as zappers or phantomware, can help a business remove sales from their tax records....Zappers are physical devices used to prevent sales transactions from appearing on a business' records... Phantomware is a class of software that creates virtual sales terminals. It can be used for legitimate staff training, but is also used to keep sales transactions off the books... (here).

Rotten super

Interesting fraud case involving a self-managed superannuation fund (pension fund) - tip of the iceberg?

...Last week, ASIC asked the Federal Court to appoint liquidators to MOGS as part of its investigation into a self-managed super fund scheme that allegedly misappropriated $4.5m from almost 400 clients around the country....

....Mr Gore, son of the late Mike Gore, who built the Sanctuary Cove resort on the Gold Coast in the 1980s, was listed among BRW's top 200 richest Australians before the global financial crisis. But in April this year, he filed for bankruptcy, citing debts of $282.9m after a string of failed deals, including taking on the Sanctuary Cove project that had bankrupted his father....

...According to ASIC's statement of claim filed to the court and obtained by The Australian, it is alleged that only $455,000 of the $4.75 million raised by ActiveSuper and Royale Capital was used to buy 14 homes in Arizona via companies in the US, the British Virgin Islands and the Cayman Islands....The remainder of the money was allegedly used to create loans for MOGS, a company in which Mrs Gore is a director and which counted Mr Gore as a consultant... (here).

The elusive banking culture

Watchers of the UK financial system will have noted the new head of global giant Barclays Bank in London recently attempting to draw a line under all of the recent scandals by launching the bank's renovated set of values (here).  Its peer HSBC, was more pragmatic in the US when confronted with money laundering charges and was able to argue it was too systemically important, or too big to fail (here).

Throughout the various scandals of the last few years has been the understanding that not only were banks and their stakeholders let down by individuals, but there was a systematic culture which favoured profit and criminality over ethical behaviour.

In comparison the last few years have been favourable to the Australian sector, with few scandals on an industry wide scale.  A recent case involving the Commonwealth Bank (here) has shed some light, but also attracting attention is perennial outperformer Macquarie (the millionaires' factory).  

Reviewing the recent press about the activities of the holey dollar's private wealth division show all the similar signs.  Not only were there compliance failures leading to the resignation of the head of division, but a flawed culture:

....this is a big deal. Macquarie Private Wealth is the largest full-service stockbroker in Australia. The findings of the internal audit by the adviser services unit were that some 365 advisers of the 420-strong team coast to coast were in breach of compliance....Though the number itself is big, the bigger deal is what the regulator's investigations say about that elusive yet critical aspect of the corporation, culture....In contrast to previous ASIC ''enforceable undertakings'' penalties - which mostly pertained to individual rogue activities - the Macquarie action is squarely aimed at management....

...Macquarie Private Wealth is a marginal proposition economically. If deal-flow rises and capital markets return to full swing, this regulatory nightmare may drift away.....(here)

The bankers will be hoping for rising deal flow, but so far no encouraging signs on the deeper issues.

CBA too big to fail and to jail?

A Hat tip to the Australian Property Forum for its coverage of the ongoing Bankwest/CBA scandal.  In case you missed it Bankwest was a victim of the GFC and after the insolvency of its English parent, HBOS was taken over by CBA.  While previous coverage had focussed on malpractice at Bankwest (such as this Four Corners special here).  The other issue is CBA's handling of the takeover and how it may have committed fraud to extract further value from the takeover, at the cost of Bankwest customers.

The following video provides a nice diagram and explanation - here.  The coverage on the Australian Property Forum is here.

As has been pointed out in the above sources this raises several disturbing questions:

- if such behaviour has not been prosecuted, when crisis hits the Oz banking sector again (GFC2) surely it will happen again and entrap more customers at different banks?

- given CBA is now the 7th biggest bank in the world and has released glowing results (here) surely this will mean it is even less likely to be prosecuted and more likely to continue its conduct?

As the video notes - Australian bank customers need to beware - they will not necessarily be safe from Australian banks!