Tag Archives: finance

Banks Covered by the Australian Government Guarantee

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Following the shenanigans in parliament earlier this week, the Government has modified their original 12 October media release about the Government guarantee for banks. In the process they no longer list the local and foreign banks covered by the guarantee, so with the help of Google’s cache* I am republishing the original list here. The Government has also (finally) announced the terms of the wholesale guarantee, so stay tuned for another post on that subject. Update: here is that post.

Today the Government announced the fees payable for a guarantee on wholesale debt, which will also apply to retail deposits over $1 million. At the same time they announced that foreign bank branches will be able to access the deposit guarantee but only if they pay the fee, regardless of the size of the balance. The lowest possible fee is 0.70% (it varies with each bank’s credit rating) and the bank is sure to pass that on!

Note that foreign banks not in the list below are now also able to access the wholesale guarantee (for short-term debt only) and the deposit guarantee, but the wholesale guarantee fee will apply even on balances below $1 million.

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Market Capitulation

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Apparently the sky is falling, at least that is what stock markets around the world are suggesting.

The Japanese stock market fell 9.6% today, the Korean market fell 10.6% and while the Australian market “only” fell by 2.6%, the Australian dollar is now down below US$0.65. European markets are already down 6-8%. There were dramatic Government interventions in the financial markets around the world earlier this month, which markets took as good news, but it seems they were unable to sustain the initial optimism and have given in to complete despair. The Korean market once had one of the most liquid stock index futures markets in the world, courtesy of the participation of a very large number of retail investors. Today at one point there was simply no bid on the KOSPI. The term used in financial circles when markets simply give up like this is “capitulation”.

The financial crisis, which started in the US has now well and truly spread to the rest of the world. This week the focus of attention moved to Asian and emerging markets, as Argentina announced plans to seize control of private pension funds in what is seen as a desperate attempt to stave of their second default on their sovereign debt this decade. This has driven the price on credit default swaps of insuring against default by the Argentine Government to over 30%. Even the price of insurance against default by the Australian Government has soared from around 0.02% a few years ago to 0.90% today.

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Update on the Guarantee of Australian Banks

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Treasury Secretary, Ken Henry, appeared before a Senate Estimates Committee today to provide some clarity on the nature of the consultation between the Government, Treasury and the Reserve Bank prior to the 12 October announcement that the Government would provide guarantees for all Australian banks. This followed yesterday’s article in The Australian which claimed that the Reserve Bank and Treasury were at odds on the question of providing an unlimited guarantee. Opposition leader Malcolm Turnbull tried to capitalise on the issue in Parliament the same day and, despite scoring some initial points, he lost the upper hand when he appeared to question Henry’s integrity.

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Come Back Keynes, All Is Forgiven!

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In current phase of the GFC* we are witnessing extraordinary Government intervention in the financial markets, with a host of countries providing enormous guarantees of bank liabilities, purchasing distressed assets or directly investing in ailing banks. Switzerland is the most recent country to follow this route, injecting around 6 billion Swiss Francs (A$8 billion) into UBS, gving the Government an estimated 9% stake in the erstwhile investment banking giant.

While the immediate aim of these moves is to save a financial system that is on the verge of collapse, there is also increasing concern that the ructions in the financial sector are a precursor to an extended global recession. This is also generating responses by Governments around the world. Here in Australia, the Rudd Government has announced a A$10.4 billion stimulus package, shelling out money to low-to-middle income families, pensioners and home-buyers.

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US Treasury: Proud New Owner of America’s Banks

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The latest moves by the US Treasury in the GFC have been hitting news headlines on the screens today:

  • US TO INVEST $250 BILLION DIRECTLY INTO BANKS
  • US TO GET PREFERRED SHARES IN BANKS
  • US TO INVEST IN MORGAN STANLEY, GOLDMAN, JPMORGAN, BANK OF NEW YORK, STATE STREET, CITIGROUP, BANK OF AMERICA, WELLS
  • US TO INVEST $10 BILLION IN GOLDMAN SACHS
  • US TO INVEST $25BLN EACH IN CITI, BANK OF AMERICA, JPM

This is a big shift in strategy from the original intention of the TARP bailout plan which aimed to help banks by buying up distressed assets from troubled banks rather than investing directly in them. Continue reading →

Australian Banks Get A Government Guarantee

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In the latest instalment of the Global Financial Crisis (“GFC”), following the lead of Ireland and other countries, the Australian Government has taken the extraordinary step of guaranteeing all deposits with Australian banks, building societies and credit unions as well as locally incorporated subsidiaries of foreign banks. The guarantee can also extend to wholesale debt (if banks pay an as yet undetermined guarantee fee), which allows protection of bonds issued by Australian banks offshore.

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Irish Government Bails Out All Irish Banks

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In the latest development in the ongoing train-wreck that is global financial markets, the Irish Government has stepped in to guarantee deposits and debt of all Irish Banks. This is an extraordinary step to take and reflects a banking system that is truly broken. Finance, particularly banking, is built on trust more than law (as described in Francis Fukuyama’s book “Trust”) and that trust has well and truly gone from the market.

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The Mother of All Bailouts

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Financial markets around the world remain extremely anxious as the US Congress ponders the Troubled Asset Relief Program (“TARP”) proposal, aka the Mother of All Bailouts (“MOAB”). Under this proposal, the US Government will spend up to US$700 billion to buy “troubled” mortgage-backed securities in the hope that this will lubricate the markets that have well and truly seized, encouraging banks to start lending once more to each other, corporates and individuals.

There has been criticism of the plan both from some Democrats who want to see curbs on executive salaries and from some Republicans who are decrying the plan as financial socialism. Nevertheless, most observers expect the plan to be passed by the end of the month particularly since Paulson seems to be conceding ground on the subject of executive compensation.

One interesting perspective on the chances of success comes from the prediction market intrade which allows bets to be placed as to whether or not the plan will be passed. At the time of writing, this market puts the chances at 77%. (The chart originally published here is no longer available).
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“Eat My Shorts” – Short Selling in Australia

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Earlier this week, Australia joined the US, the UK, France, Germany, Canada and other countries in clamping down on the practice of “short selling” shares. According to the regulator, the Australian Securities and Investments Commision (ASIC), the new restrictions were aimed at reducing “unwarranted price fluctuations”. For the moment, the restrictions are in place for a period of 30 days, at which point ASIC will decide whether to extend or lift the restrictions.

For many outside the financial markets, the practice of short selling is a mysterious one and, for some, rather worse than that. The following letter to the editor in the Sydney Morning Herald is a case in point:

Short selling can be carried out only if the buyer is misled into believing that the seller owns the stock (“ASIC in total ban on short selling“, September 22). Can short selling ever be morally justified? Surely the only beneficiaries of such activity are those with sufficient funds to manipulate the sharemarket. After all, we cannot legally “short sell” anything else we do not own, such as a neighbour’s house, business or car.

Laurie Mangan Tamworth (September 23)

So what is short selling? Contrary to Laurie’s view, there is no misleading involved but it does involve selling shares that, essentially, you do not own. There are two types of short selling: naked (which really sounds naughty) and covered (which sounds a bit better). To explain what each of these involves, I’ll first go into some of the mechanics of share trading.

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AIG: Too Big to Fail

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The phrase “too big to fail” (TBTF) has been used a lot throughout the credit crunch of the last twelve months or so. Now it seems that American International Group (AIG) was too big to fail as it was bailed out by the US Federal Reserve (the “Fed”), while Lehman Brothers was not and was allowed to collapse in ignominy. For those outside the financial markets, it probably doesn’t make a lot of sense (not that it makes much more sense for those on the inside), so what is going on here?

There is an old saying that if you owe the bank $1,000 that’s your problem, but if you owe the bank $1 million that’s their problem. Something similar is at work at the moment in the financial markets.

In theory, companies in a capitalist economy are free to stand or fall on the results of their own business decisions. If they do fall, investors who chose to buy shares or bonds will lose out, but that risk is supposed to keep everyone focused on making better decisions. Banks have always been a little bit different, for two reasons. First because they take deposits from “mums and dads” (or, as the banks call them, retail depositors) and it is in the interests of the smooth-running of the whole system that this money is put into banks rather than under the mattress. Hard experience over the years of bank runs has led to various forms of depositor protection around the world, such as Government guarantees in the US through the Federal Deposit Insurance Corporation (FDIC). Of course, banks make a decent, albeit shrinking, profit from all these protected deposits.

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