05/12/2007 - 22:00

Expect some sub-prime fall-out

05/12/2007 - 22:00

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Expect some sub-prime fall-out

Australia’s bankers tell us that a US-style sub-prime credit crisis could never happen here. Oh yeah? They might as well add that there are fairies at the bottom of the garden.

Sub-prime, when sliced and diced, is all about American banks not knowing anything about their customers.

Quite simply, banks loaned money to people they had never “eyeballed”.

Technically, they made their loans by buying bundles of paper originated by mortgage brokers, assuming that (a) the broker had met the customer, (b) that the “average” risk profile of the bundle would even out any dud loans, and (c) that they could, in turn, bundle the loans into an ever-bigger package and sell them as a “securitised” product to unsuspecting investors.

When you cut through all that financial mumbo jumbo, which looks to an outsider like a game of pass the parcel, it all comes back to that critical first point. No-one from the bank ever met the real customer, the person supposed to be making the loan repayments.

What a surprise when the banks discovered that they were doing business with people who either couldn’t, or had no intention of, repaying the loan. Worse still, loan defaults pushed re-possessed houses onto a falling market – and we have today’s crisis which is rocking the property market around the world.

Now, let’s take that American experience and put it in an Australian context by asking a couple of questions: 1) How many managers in Australia’s banks actually meet face-to-face with customers; and 2) When (if ever) have you met your bank manager?

Rich people in Perth’s western suburbs will say they met their manager at the golf club last Friday night, or had him around for a barbecue over the weekend.

The other 99 per cent of the population will say they didn’t even know they had a bank manager and that their home loans were arranged by a mortgage broker.

In other words, exactly the same conditions are being created here.

This will eventually lead to a banking crisis of some sort, because banks are lending to people they don’t know, and they’re trusting mortgage brokers (and computer questionnaires and questionable credit checks) to do the work they once did – and should still be doing.

Australia’s bank crisis will probably not be precisely the same as sub-prime, or as extensive, or as devastating to the national financial system as sub-prime, which is threatening to slow world economic growth in 2008.

But it will eventually lead to a banking crisis, with a variation on the following common themes:

• the utter stupidity of lending money to people you have never met; and

• creating a banking system that actively discourages human contact.

Senior Australian bankers will say they have the appropriate systems in place to protect themselves from making too many dud loans. That’s what senior American bankers said.

And, if you don’t believe we’re heading down the same road, just look back at the appalling track record of banking (or credit) disasters in this country and you can almost smell the next one coming.

•••

Dullsville is a tag hated by Perth’s city fathers and the state government, but it’s better than the ‘No-ville’ tag that could be applied.

Last week, in the latest demonstration of a paralysed government afraid of the future and afraid to make decisions, Agriculture Minister Kim Chance rejected an opportunity to end a ban on genetically modified crops.

All Mr Chance had to do was follow the lead set by NSW and Victoria. ‘No’, was his reaction to the lifting of GMO bans in the east – a dead-ringer for the ‘no’ from his boss, Alan Carpenter, on uranium mining.

Taken together, we now have this situation – WA refuses to supply nuclear fuel to a world desperate to fix its global warming problem, and refuses to boost food production by accepting that GMO crops are safe.

This is not just Briefcase running a political agenda. The need for nuclear fuel is recognised by governments worldwide. The need to boost food production using GMO crops is also recognised worldwide, and now by fellow Labor governments in other states.

Saying no, or doing nothing, seems to be the easy option for government in WA. We have no (or limited) retail shopping hours, no (or limited) affordable housing, not enough teachers, nurses, or police.

Oh, and the government also has no opposition.

•••

On the question of uranium, and fuel for the world, Briefcase came across a marvellous illustration of the mess we’re making of our national energy policy – if, in fact, we actually have a national energy policy.

A few months ago, it was pointed out that, despite an anti-uranium policy in WA, we had become a centre of the world uranium industry, with the money, management and design originating in West Perth office blocks, and the mining taking place in Africa.

Well, guess what. On a national level we’re doing the same with coal.

In Sydney there’s a fast-growing coal exploration and mine development company called Riversdale. Over the past 12 months, its share price has risen from around $2 to around $9, driven by the soaring world coking coal price (up from $100 to $150 a tonne), and by the ease with which Riversdale will develop its mine.

Price is something we all can understand; ease of development is another matter, which requires a small explanation.

Because the new Rudd government in Canberra has said it will sign the Kyoto protocol on greenhouse gas emissions, it will be very hard for companies like Riversdale to start big new coal mines in Australia.

The solution? Take the West Perth uranium option and develop a coal mine in Africa where Kyoto doesn’t apply, which is precisely what Riversdale is doing in South Africa and Mozambique.

What a farce.

WA won’t mine uranium in its backyard but is home to companies that mine it in other people’s backyards.

Australia won’t encourage coal mining because it is a source of greenhouse gas, but is happy to see Australian companies mine coal in Africa.

And guess what? Exactly the same amount of uranium and coal will be mined, without Western world safety standards, and outside Western world nuclear power safeguards.

All we have done is export jobs and economic growth without having any effect whatsoever on global pollution – in fact because Africa is dodgy at the best of times, we have effectively ensured that the pollution and safety problems are worse.

•••

“The magnificent and the ridiculous are so close that they touch.” Le Bovier de Fontenelle

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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