[Bernard L. Madoff]

tom, on 07 February 2010 - 02:09 PM, said:

But together all us plebs form a large part of the banks capital. Better it is a true market so we put out money with the safest bank. This way banks our rewarded for prudence. We don't have much choice in Australia but if capital became scarce you would see one of the banks move to become the safe bet.

You've convinced me with simple sound logic.

You should run for office.

[Bernard L. Madoff]

Anyone remember Pyramid collapsing in 1990?

http://en.wikipedia....ciety#Bad_loans

Quote

The vast majority of the losses suffered by Pyramid and the whole Farrow Group had been from ventures into commercial property, frequently lending aggressively to speculative projects. Doubtful loans were hidden in the books by various techniques, such as capitalizing fees and interest into the loan balance, changing the loan conditions, or even selling the property into a subsidiary company for a price that covered the debt. Staff were paid a commission on new lending business, which is proper enough, but also for improving bad loans, which gave them an incentive to rearrange the affairs of borrowers who were in default. The Farrow Group also operated on much smaller interest rate margins (between rates received from borrowers and paid to depositors or wholesale lenders) than other finance groups. This was a deliberate strategy, set out by Bill Farrow in the group's 1986 annual report. He expected deregulation to force down what had traditionally been quite wide margins, to be replaced by an emphasis on fees for services. He was correct in that analysis, but in accepting small spreads the group was particularly vulnerable if bad loans reduced their effective interest income.

You will LOVE this cartoon (deja vu?)...
http://www.nicholson...lash.php?id=46Z

[tom]

Tinpusher, on 07 February 2010 - 02:19 PM, said:

You've convinced me with simple sound logic.

You should run for office.

Thanks,

I hate to admit it but I am just following Costellos reasoning for not guaranteeing deposits on the occasions he was asked to. I dont like much of what Costello had to offer but in this I have to agree with him. It is as simple as saying the government guarantee anything and you create a moral hazard where parties will not act prudently. Suddenly a major loss is just a negative externality, i.e. the off chance of losing lots of the governments money, but it may be considered a bet worth making if they are given the capacity to make teh bet by government.

And for us we are faced with a moral hazard also, we just put our money in the highest yielding account not caring what they do with it. As long as its a bank it is covered by the government so you would be mad to put it anywhere other than the highest yield.

Anyway from a personal viewpoint it will mean I will have to look for something new to put my deposit into. Probably just split it up between the four majors.

[goethe]

tom, on 07 February 2010 - 02:33 PM, said:

Anyway from a personal viewpoint it will mean I will have to look for something new to put my deposit into. Probably just split it up between the four majors.

Buy a Aussie house! Saving is un-Australian, didn't you know?

This post has been edited by goethe: 07 February 2010 - 02:48 PM

[Bernard L. Madoff]

tom, on 07 February 2010 - 02:33 PM, said:

Probably just split it up between the four majors.

There are smaller institutions with less ASP (Aussie Sub Prime ). Look at balance sheets like any investment.

For a laugh I looked at RAMS home loans. Guess what? No deposit facilities. Just a Ponzi carry trade scheme (cheap OS credit then lend to you).

Quote

2010 Money magazine, Non-Bank Cheapest Low-Doc Loan Award - 2 years in a row

[tom]

Tinpusher, on 07 February 2010 - 03:04 PM, said:

There are smaller institutions with less ASP (Aussie Sub Prime ). Look at balance sheets like any investment.

For a laugh I looked at RAMS home loans. Guess what? No deposit facilities. Just a Ponzi carry trade scheme (cheap OS credit then lend to you).

Yeh, while I would consider borrowing off Rams I sure would not lend to them. I reckon a bit of Rams capital would also come from the Australain government. They seem to periodically put money into the likes of Rams to keep competition going apparently.

[Bernard L. Madoff]

The downside is that on most mortgage docs in teeny weeny print is that they can call in the loan at any point.

So lets say that Mr Tom has an 80% LVR loan. the market tanks ala the rest of the bloody world 6% a year for 4 years. You have tchnical negative equity but you are OK because you in it until retirement and it beats rent...right?

They call in the loan. You are scrambling to sell in a market where sellers to buyers are 2:1...or declare what?

RAMS may be different but I have had mortgages with Westpac, St G and CBA and they CAN call in the loan.

[tom]

Tinpusher, on 07 February 2010 - 03:33 PM, said:

The downside is that on most mortgage docs in teeny weeny print is that they can call in the loan at any point.

So lets say that Mr Tom has an 80% LVR loan. the market tanks ala the rest of the bloody world 6% a year for 4 years. You have tchnical negative equity but you are OK because you in it until retirement and it beats rent...right?

They call in the loan. You are scrambling to sell in a market where sellers to buyers are 2:1...or declare what?

RAMS may be different but I have had mortgages with Westpac, St G and CBA and they CAN call in the loan.

You are right, if that is the case it is a disaster waiting to happen. Maybe I would have to stick with Commbank on a mortgage as well....

[Bernard L. Madoff]

http://www.theaustra...o-1225827621983

Quote

Distorted banking market still a problem

• John Durie
• From: The Australian
• February 08, 2010 12:00AM

WAYNE Swan's belated but welcome decision to remove wholesale borrowing support for the banks still leaves him with a host of competition issues.

The measures introduced last year were part of a worldwide effort to keep credit flowing in the wake of the financial crisis.

But in Australia the scheme exposed a weakness in the banking system -- its reliance on offshore funding -- and strengthened the market power of the Big Four banks, particularly Westpac and the Commonwealth.

As much as Swan arguably needed to do something to keep credit flowing, the sad reality is that the banks now know that whatever mess they get themselves into, the government will come to their rescue.

The government will maintain guarantees on deposits of up to $1 million for three years. This is way overdone, and there seems no justification for such a high limit.

It adds one more distortion to the market, hurting the smaller financial institutions and strengthening the big banks.

The timing of the move to withdraw the wholesale funding support has surprised some observers, with financial markets still shaky because of fears about the sovereign debt of Greece and some other European countries.

Some smaller Australian banks will also express concerns that the March 31 deadline leaves little time for them to get any new funding in place.

Whether there is a rush to use the guarantee between now and the deadline remains to be seen. The big banks at least have been active in raising funds, and most report fulfilling most of their funding requirements.

Ironically, the two big Sydney banks, CBA and Westpac, which have benefited most from the crisis, have also been the most active users of the government guarantee in recent months.

It was needed to help fund the home loan expansion as they grabbed market share. Neither ANZ nor NAB have used the government guarantee since about July last year.

Because they enjoy a higher credit rating, and access to secondary markets has been limited, the big banks have been able to grab more than 90 per cent of the home loan lending market.

The smaller financial institutions have been denied alternative sources of funds. Swan has attempted to redress this by boosting the securitisation market, but clearly more is needed, including different paths to funding.

NAB, for example, is pushing heavily into wealth management through its Axa bid, because the business generates funds without the need to tap offshore markets.

The ACCC decision this week on the AMP bid for Axa will set the scene for a re-opening of the debate on bank market share. The big banks like NAB already have the lion's share of the market, and some argue they should be denied further access.

In the middle of the crisis, the ACCC waived through the CBA takeover of BankWest for fear its parent may collapse.

The federal government has attempted to keep in touch with its global peers in ending wholesale support, but arguably the market made such measures redundant long ago.

The sooner the government examines other measures to help support the market, rather than imposing barriers, the better it will be for everyone.

[savagegoose]

i mentioned banks asking people to restore LVR positions to some people i know. dont know if thats why but recently they have both had their houses on the market. one has sold 2nd i dunno about. but news banks could force em back to LVR sure did come as a surprise to both.
got that news form GHPC months ago,.

[Solomon]

tom, on 07 February 2010 - 11:18 AM, said:

The sooner they get rid of it the better. It is just that it is surprising teat Rudd and co woul dbe this responsible.

The longer it is in place the more chance the banks are going to become irrisponsible.

It is a classic moral hazard. For example if the government guaranteed any money lent to me, I would have a crack at making billions. Im either going to lose millions or make them and if I lose it is not my money anyway.

The bankers see this years profit as their primary objective, in order to make the most profit they need to secure the most capital at the right price. Finding punters who will borrow the capital off them is the easy part finding people who will loan to them the hard bit. With a guarantee it is so much easier to grow their business.

For so long as the govrnment leaves the guarantee in place the more reliant on the guarantee the banks will become. Westpac was clearly moving to wean themselves off the guarantee by becoming more fussy with who they lend to. This will help then source funding later if there average mortgage LVR is lower than the other banks. I imagine the government has already floated this past the banks hence westpacs moves of late.

All that said like yourself in reality I can only see some calamity befalling the banks within weeks of it being removed and Swan just putting the guarantee right back in place. Given another year or two of teh guarantee there will be no going back. And if the governemnt has to guarantee banks forever than we might as well nationalise all of them. At least then the government can make teh money, not just take on the risk.

Thanks Tom for that reply.
Very helpful.

I guess I was trying to answer my own question - Why now??
What has initiated this change in the policy all of a sudden?
The Davo Conference perhaps? Something being said there that worried the government either about bank policy, or their own bottom line.
I don't know enough about currency and the lines of credit to know whether there might have been something there that was a catalyst somehow.
Did the banks ask for it to be removed, or did someone just point out to them the danger you highlight in your post.

I know there are many in the economic sphere, who believes Australia is over the worst, and therefore it should be lifted as soon as possible.
Like others have said, I also think that the fabric of our economy is still well and truly tied to USA, and there are still worrying signs there of a deepening recession.

Like so many things that happen in this world, I guess I will never truly know.