Would you like a banker permanently positioned in your boardroom, or bedroom, because that could happen if the banks lose the infamous Bell Group legal battle.
Would you like a banker permanently positioned in your boardroom, or bedroom, because that could happen if the banks lose the infamous Bell Group legal battle.
So far, most comments about the 20 year-old fight between a syndicate of banks and the WA Government have been directed at the time taken to argue the case, the estimated $1.6 billion in potential damages, and the $300 million in legal fees - and counting.
There is, however, a much more important principal at stake, and that is the relationship between a bank and its customers.
More specifically it's about knowing whether a customer is telling the truth, and whether a bank has the a legal obligation to sit at a board table to ensure that it is privy to every discussion, and file note, as well as the nods and winks between company directors.
Taken to its logical extent, the case could significantly alter the relationship between banks and personal customers because a loss in the Bell matter means that rather than accept a customer's word when applying for a loan the bank "must know" the inner secrets of every customer before advancing a loan.
Right now, the complex case is having a fresh day in court with three judges hearing an appeal by the banks against a 2008 Supreme Court judgment which found against the banks, ordering the syndicate to repay $280 million, plus interest, which took the total award to its estimated $1.6 billion.
It's rather pointless re-arguing the case here, but the salient points are that:
- The bank syndicate had a long-term relationship with Bell Group, and made loans to it under an agreement called a "negative pledge". Today, that sort of loan might be called a "low-doc" loan because it was light on paperwork, relying heavily on the customer doing the right thing and meeting interest and principal payments on time.
- In early 1990, as Bell struggled for survival, the negative pledge deal was switched to a more conventional mortgage arrangement which gave the banks title to assets should the customer default.
- About 15 months later Bell defaulted and a liquidator was appointed. The banks took possession of assets, and sold them.
- The liquidator argued that the banks had acted wrongly, and that they knew Bell was on its last legs when they upgraded their loans from negative pledge to a full mortgage.
Justice Neville Owen in the WA Supreme Court agreed with the liquidator, famously saying that the banks "should have known" that the company was on its last legs when the low-doc loans became full-blown mortgages with attached title to assets.
The banks have no choice but to fight the Owen judgement to the end of the earth and not just because of the money involved.
What the Owen judgement means, if it stands, is that a bank "should know" when a customer is about to go broke, and therefore should not lend any more money - a bit like a publican's duty of refusing to serve a drunk.
In many cases, a bank manager might suspect that a customer is in severe financial difficulty, just as a publican might suspect that you've had one beer too many, but to upgrade suspicion to a state of knowing is a huge leap.
Right now, every bank manager in Australia has suspicions about the financial stability of many clients but he can't do anything, except ensure that the bank's position is protected and that the client services his loans.
Owen's judgement implies that the banks upgraded the Bell loans, waited sneakily on the sidelines, and then snatched assets.
The problem with that version of events is that the banks waited 15 months, which a reasonable man would see as enough time for Bell to sort out its financial problems, and if the directors could not find a solution in that time then perhaps it is time to close the shop.
Knowing is the key word in all this. When does a bank manager, or a publican, know that a customer has had too much debt or beer, versus when does he suspect, and the only way to know is to get inside the head of the drunk, or the boardroom of a corporate customer - and the bedroom of a personal customer.