A look at the banks’ treatment of property developers has proved the value of corporate memory.
FOR the past year or so, banks have been allowing developers to attempt to trade out of difficulty rather than foreclosing, as might have been expected when loan covenants were breached.
The truth is that banks have had little appetite for the trouble that comes from putting people out of business.
This is the lesson that has carried over from the early 1990s, when a property crash left the banks with assets worth much less than the debt they carried. By foreclosing on developers and conducting fire sales the banks actually made the market worse and triggered further collapses.
Those actions have not been forgotten, and there has been a big effort to avoid panic in the market this time around.
Instead of forcing developers out or making them dump stock on the market, the banks have held back on all but a few operators. It would almost seem like collusion the way it has occurred, uniformly across the sector. While it might seem to be common sense to avoid the mistakes of the past, the similarity of the action suggests that it has been coordinated, possibly by banking regulators.
That’s not to say the banks have been completely magnanimous in their actions.
In renegotiating loans or providing flexibility to customers that are ‘working out’ their problems, banks have also extracted better terms.
While they will argue that money has become more expensive to them as well, part of the truth is that banks are in the lending business and there is little upside for them in foreclosing on a client and ending up with an asset to sell in a diving market.
They also know that they are much more likely to see their money repaid in full from a developer who has so-called ‘skin in the game’ and a reputation at risk. A receiver or liquidator has much less incentive to ensure the debt owed is repaid in full.
Whether or not this will endear banks to their clients is unknown. Presumably they know that banks are acting in self-interest.
As an aside, it has to be asked if the same logic could have been applied to cases of corporate failure such as property developer and financier Westpoint.
While there appears to have been many things wrong with the way Westpoint went about its promotion and fund raising, those behind it have argued publicly that the watchdog’s actions caused the collapse of several projects, resulting in a big loss.
Given ASIC moved on Westpoint in 2005, it could have a point. The property market was alive and kicking for years after that, suggesting that the developments, if completed, could have produced a return for investors.
Instead, they have had to resort to class actions to chase compensation through the courts – never a pleasant way to earn a return.
Of course, numerous advisers linked to Westpoint have been banned and at least one director was charged late last year. Nevertheless, it could be argued that regulators were too heavy handed and should have separated the issues with regard to marketing from the developments themselves.
Is it possible that, under close scrutiny of ASIC, the developments could have been ‘worked out’ just as those struggling with debt these days are doing so under the watchful eye of their bank.
Perhaps. Then again, a spectacular failure provides a much better warning to others than a quiet work out, doesn’t it? And that helps ensure corporate memory is etched in developers’ minds.
Nothing’s free
AT last week’s Committee for Economic Development Australia outlook conference, I was intrigued by the suggestion of CEDA research and policy director Michael Porter that the Higher Education Contribution Scheme be extended to apply to those who needed retraining or even retirees seeking to broaden their interests.
Introduced in 1989 to end free universal tertiary education, HECS was a big shift from the previous system.
While the HECS system is an imperfect compromise, it is clear that free education had done its job in Australia. By encouraging a shift to higher learning, free education ensured that university qualifications became valued and, therefore, worth paying for.
The HECS system acknowledges the fact that those who want to study to improve themselves and their income earning capacity may not have the funds up front to do so. The state, in this respect, provided funds in order to get a better return from its population.
And while a debt is created, it doesn’t have to be repaid unless the recipient is a tax-paying contributor to society.
The flaw in the system is, however, that the funding is centralised and fixed, which makes it less sensitive to the demands of the market than pure private funding would be.
Nevertheless, it costs the state significantly less than its predecessor.
Does that make it a system that could be applied to other areas where the cost to the community is high?
Could HECS equivalents be created for areas such as health and justice?
Could the system be extended in education to cover primary and secondary education, by requiring the parents to pay a HECS-style contribution?
In health, the analogy is obvious. Healthcare is costly and becoming ever more so. We also value healthcare, so much so that it is a big election issue. Why couldn’t HECS-style payments be applied to healthcare? Tax-paying contributors to society that use state healthcare are then required to pay it off as an additional tax on their income, just as HECS is levied today. For retirees, perhaps healthcare costs could be repaid by a levy on superannuation payments?
In terms of justice, it may be a bit less obvious. But think of those who are fined, have been the cause of criminal compensation payments, been through rehabilitation programs, or have even spent time in prison. They could be required repay that ‘debt’ via a HECS-like system if they become a contributor to society through paying tax.
While this latter idea may have some hurdles to jump, I’m sure there is little argument that those who cost society ought to repay that if possible.
In this way the HECS payment system is a sort of means test. Those who earn enough to pay tax ought to be paying their own way. That is not a perfect system, but it is more efficient than the community bearing the total cost of everything – just as students have found out.
