By Kris Sayce (Money Morning)
If you haven't found the time to read the transcripts from the Senate economics select committee I suggest you find the time.
Simply because comments from two National Australia Bank [ASX: NAB] executives confirm - that's right, confirm - everything we've written about NAB's secret bailouts in 2008 and 2009.
You can download the transcript by clicking here.
We told you the banks need the loans because they faced a massive liquidity and solvency problem.
Our critics said we were talking rubbish. That we had finally lost our marbles.
They tried to say NAB was just being cheeky. That is was snaffling Federal Reserve loans on the cheap. They said NAB did what any back should do, take the opportunity to borrow low and lend high.
We countered the argument by explaining how bank borrowing works. How banks have to roll over debt on a regular basis. If there's a problem with rolling the debt over, then, well, it can leave a bank in the lurch.
We showed you how NAB and Westpac [ASX: WBC] had stood hunched shoulder to hunched shoulder with other troubled banks. Banks such as Royal Bank of Scotland, LloydsTSB, Citibank and ABN Amro.
Believe me, the admission I'll show you in a moment is dynamite. It's an admission straight from the horses' mouths. That the Australian banking system was in dire trouble in late 2008.
Yet where is the Australian mainstream press on this story?
Good question. Nowhere. The mainstream press conspired with the banks and regulators to sweep the secret loans scandal under the carpet. And now they've done the same with the Senate committee statements.
To be honest, the incompetence of the mainstream press doesn't surprise us. We'd waited a couple of days for the transcripts to be posted to the Hansard website (Hansard is the official record of parliamentary debate).
Until then, like you, we had to rely on what the mainstream press had reported. And what did they focus on? Of course, they focused on the easy stuff… banks' interest margins, bank fees, executive pay levels… the sort of stuff that's easy for the journalism cadets to get their teeth into.
I mean, the bombshell I'll reveal to you today isn't the sort of thing the seasoned finance hack would touch with a bargepole. Why? Because the seasoned finance hack doesn't want to ruin his chances of an invite to the next banking dinner party.
Or the chance to interview a top banking executive. That's more important to them than uncovering a story that proves the fragility of the banking system.
Although to be fair, even if they did want to report on it, chances are their editor would exercise a veto and cut out all the juicy stuff.
So, when we read the transcript, guess the first thing your editor did. Go on, guess.
What's that, you can't? Think harder. Think how annoying we can be… that's right, we fired off another email to our pals at the ASX. I won't reprint it here, instead I'll expand on what I wrote to them.
Remember some of the previous banter we had with the ASX folks. They told us the ASX didn't have the power to request information from a company. Not unless there was an unexplained price movement.
We told them their version of ASX Rule 3.1 was wrong. The ASX did have the power to request additional information from the banks. Not only did they have the power, but that they should do so immediately.
Funnily enough, two weeks since the US Federal Reserve released the extraordinary details of NAB and Westpac's secret loans and the ASX is still sitting on it.
The ASX continues to conspire with NAB and Westpac to keep the market uninformed about secret loans that prevented two of Australia's banks from going bust. I don't know about you but I'd think that was something the ASX would want an explanation on.
Yes, I've been criticised for my comments on the seriousness of these loans. I've been told on more than four occasions (five I think… maybe six) that Australia's banks were nowhere near going bust.
Well, it turns out your editor was right. But don't just take my word for it. In a moment I'll show you what two top execs at NAB - one of them the top dog - told the Senate committee about the financial condition of the banks in 2008 and 2009.
But first, Money Morning reader Paul sent us this timely reminder of the spin put out by the banking industries puppet mouthpiece, the Australian Bankers' Association (ABA) in October 2008:
"The Australian Bankers' Association (ABA) is concerned that recent announcements by the Federal Government to guarantee deposits and wholesale funding are being characterised as the Australian banks having been ‘bailed out'.
"This is false
"No bank deposits have been at risk. Bank deposits are safe - with or without the government's guarantee.
"Australian banks and the regulatory framework have been successful. Unlike in the UK, Europe and the USA, no taxpayer's money has been allocated to support an Australian bank. Australian banks are very strongly capitalised and continue to hold assets that are of good credit quality."
It's interesting the ABA would say that, because one year prior to that statement Westpac had grovelled to the US Federal Reserve for USD$1 billion. And one month later NAB would need to raise billions of dollars on the Australian Securities Exchange.
As NAB director of finance Mark Joiner told the Senate committee:
"There were two periods during the crisis when our credit rating was on negative watch. If we dropped out of the AA status, then the cost of funds and our access to funds internationally would have been severely altered."
Despite that, the ABA claimed Australia's banks were "strongly capitalised". So "strongly capitalised" that the NAB had to raise $6 billion on the market plus another USD$4.5 billion in secret from the US Fed.
That doesn't sound very strong to me.
But right there, in Mr. Joiner's statement is the precise reason why the NAB grabbed the secret loan money from the US Federal Reserve. Not because it was trying to make a few extra bucks, but because the bank was on a negative credit watch.
The bank execs knew that if the market knew just how tight the bank's balance sheet was, the bank would have lost its AA credit rating. Here are Mr. Joiner's comments to the Senate committee:
"There were two periods during the crisis when our credit rating was on negative watch. If we dropped out of the AA status, then the cost of funds and our access to funds internationally would have been severely altered. Then our ability to support the economy in the ways we described before—staying open for business and predictable for customers—would also have gone. We would have had to freeze our balance sheet growth and the like. While you probably do not want obscene amounts of profitability out of your banking system, it is good for everybody to have a strong banking system that supports a degree of economic self-determination and flexibility."
See, without these bailouts Mr. Joiner admits it would have been hard for the bank to stay open for business.
Yet just like the secret loans, you didn't hear about this statement in the mainstream press. They didn't seem to think it was important enough.
But that wasn't all, NAB CEO Cameron Clyne backed up his finance director. Here's what Mr. Clyne told the committee:
"As we went to the crisis, we were in a situation where obviously, quite appropriately, investors and prudential regulators were seeking us to hold greater capital. We had to go to the markets. We went to the markets in November 2008 and in July 2009 and raised about $6 billion in equity. We effectively had to absorb that and suffer the drop in return on equity. Had we tried to maintain the same return on equity on the additional $6 billion in capital, prices would have been substantially higher. I do contest the fact that we maintained return on equity. We most certainly did not."
There you have it. Australia's banks were on the edge. It needed the capital raised on the market, plus US Federal Reserve secret loans in order to make it.
Think about it. Think about the other bailouts the banks received - the first homebuyers grants, the wholesale guarantee, the deposit guarantee… but still it wasn't enough to prop up NAB and Westpac.
They needed more. These two "strongly capitalised" banks needed the secret Fed loans. Plus top-up loans from the Reserve Bank of Australian (RBA), which itself received USD$53.5 billion from the US Fed.
Yet all the while the ABA yapped that "Australian banks are very strongly capitalised and continue to hold assets that are of good credit quality."
We now know that to be false. A strongly capitalised banking system doesn't need a raft of government and central bank bailouts. It certainly doesn't need secret loans from a foreign central bank.
But even now, the regulators are spinning the same yarn. We printed this comment on Wednesday by RBA assistant governor Guy Debelle:
"The RBA participated in the swap line [with the US Federal Reserve] to help distribute US dollars into this time zone… It did not reflect any issue with the Australian banking system's own need for US dollars. The funds provided under the swap line were cheaper than the extremely wide market price at the time. As a result, Australian based banks availed themselves of this and in a number of cases on-lent the funds to banks in other jurisdictions."
We thought about his statement some more after we sent it to you. The way Debelle carries on he's making out that America and Australia were playing doctor and nurse to the sick global banking system…
That Australia was fine. Our banks were simply being good doctors by helping out others.
He's making the RBA and the banks out to be the Dr. John Forrest and Matron Grace Scott of the banking world. In reality they're no more than the Dennis Jamieson and Ada Simmons of banking.
But considering the magnitude of the admission, how did the good Senators' respond?
Following Mr. Clyne's reply, Senator Hurley continued:
"All right. Let us talk about the most recent rate rise above the RBA cash rate."
What?! Handed on a plate an admission that Australia's banks were in dire trouble in 2008 and 2009, and the hapless Senator blabs on about the latest interest rate decision.
That's another reason we didn't take up the offer to put questions to government ministers. If members of the Senate economics can't recognise a bombshell when they see one, there's not much point in us wasting our time giving them more ammo… they'd probably only blow themselves up with it anyway!
But all this aside, two weeks after the secret loans were revealed, Australia's regulators refuse to inform investors of the banks' deception.
As far as the RBA, APRA and ASX are concerned it's a non-issue. We can only draw the conclusion they don't want to ask NAB or Westpac any questions. That's because they know the answers will be embarrassing.
Not only that but they're clearly embarrassed at having talked up the stability of the Australian banking system while behind closed doors the banks were secretly receiving multi-billion dollar bailouts.
Based on everything we've read so far, it's clear that Australia's banks were much closer to going bust than even we thought. And that if it wasn't for secret loans from the RBA and the US Federal Reserve the Australian banking system would have collapsed.
We've got a lot more digging to do on this issue. It wouldn't surprise us if the Aussie banks had further secrets they'd prefer locked away in the closet.
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