Thursday, October 28, 2010

Westpac drops a clanger (updated)

This blogger will analyse at greater depth the new Westpac bubble-busting report soon. For now however, here is one spectacular quote that finally confesses the truth about Australian banks' new role as wards of the Australian state. There is no need to hide it anymore, they own us:
External shocks are potentially more problematic. A major commodity price decline for example could see foreign investors seek to lower their exposure to Australian banks. Australia’s heavy reliance on global capital means this would be an unsettling scenario. A collapse in global liquidity following the Lehman Brothers bankruptcy in 2008 caused global investors to cut their exposures to foreign borrowers and Australian banks were among those borrowers that suffered. The Federal Government’s response included temporarily providing banks with a government guarantee on bond issuance. Markets rebalanced and the guarantees settled the anxieties of foreign lenders. However this was in the context of a global liquidity crisis where all governments of debtor nations provided such guarantees.

A similar globally coordinated response by governments could be expected in the extremely unlikely event of a second global financial crisis.

If Australia was specifically hit by a commodity-driven crisis, investor sentiment towards an individual country requiring a government guarantee for its banks might be less understanding. Nevertheless we expect that investors’ decisions would essentially be driven by their assessments of the state of the domestic economy.

No ifs, no buts. No discussion. Just the simple assumption that if the bank gets into trouble on the liability side of its balance sheet, it'll be be bailed out with a new guarantee. Stunning moral hazard in action.

Well, this blogger has waded through it and just as the comments of his fellow bloggers below suggested, it is more of the same claptrap seen in the CBA and Fitch reports.

The only point of interest is that which is pulled out and highlighted above. Bill Evans' claim that his foreign-debt guzzling bank will be bailed out in the event of a terms-of-trade correction that hits housing. He offers no analysis or stress testing of the Budget in such a scenario. Yet it is obvious to this blogger that any such guarantee will be far more problematic second time around. Nor does Evans bother with any analysis of the costs of any such bailout to the Budget and the services it funds. Nor is there any analysis of the costs to the Budget after the event. Just assumptions and breathtaking arrogance.

This blog presents for your viewing pleasure, the Westpac report...



Economic Delusion said...

Another day, another bank in denial. I haven't even read it, but let me guess.

- Population growth
- Undersupply
- Underlying demand
Blah Blah Blah

Meanwhile in the real world the debt leveraged correction continues.

Leith van Onselen said...

The banks protest too much. The ANZ release similar rubbish each year via its property outlook report. The CBA's pathetic effort to ease foreign investor's nerves were well publicised and rebutted by the blogosphere. And let's not forget QBE LMI's spruikilicious report a few weeks back.

Now we only await NAB's assessment that everything is fine and housing is underpinned by 'strong fundamentals'.

Anonymous said...

"What's all the fuss about?" they say.
I'm not sure what was the better success - able to generate extremely high ROE with small margins by fuelling the biggest asset bubble in the Southern hemisphere (oh and NZ's as well...) - or convincing the public at large that they were not at risk during the GFC...which is now being called the "North Atlantic" Financial Crisis...because its different here.....
This is probably the greatest time to get your shorts on, although the payoff may yet be another year or two away. Exuberance is high for banks and their minions. Very interesting times.
Chris B.
(Leith and EconDel can you contact us so we can put your blogs on talkfinance alongside Davids please?!?)

homes4aussies said...

In the part discussing the bailout, Bill neglected to mention the bail out of the housing bubble directly..... oh, that was because later on he said that the turn around in the housing correction "proved" it wasn't a bubble..... oh, oh, but for me I reckon a 20%+ 12 month gain in median house prices (ABS data), snapping a correction which was progressing at a faster clip than the US housing market correction at the same stage, and after the rampent growth of the last decade, only proves beyond a shadow of a doubt that we have a massive bubble.....

I think it is time for people to really get vocal about the banks conflicts of interests going into the senate review..... as we all know, a few extra bps on rate rises is not at all the main issue....

You can't have on the one hand the banks supplying (or not) the credit to developers to address any perceived housing shortage, while on the other hand the banks roaming the world telling investors the Australian housing market will not correct as long is there is no significant supply side response.

And H&H, you might be able to help me on this one, is there anything to stop a bank's wealth management arm from diverting some mum and dad's retirement money into buying property which is on the books of their mortgage or commercial lending operations (which may or may not be distressed???)

And I just wonder who on earth is going to buy this RMBS originated out of the new lower quality lending opertations being set up right now - the no doc/low doc/higher LVR.... probably our wonderful Governments might make a "nice" investment for us, and just perhaps the wealth management arms of our major banks?????

One thing I know for certain, as the tide goes out we will learn a lot..... just as with all other speculative manias.....