05/06/2007 - 22:00

No shortage of suckers here

05/06/2007 - 22:00

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PT Barnum was right. There really is a sucker born every minute.

What’s surprising is that when the American circus master made his famous comment on customers he would have had no idea that most of them appear to live in Australia, and are investors in property development companies.

Briefcase, which has fumed in the past about stupid people chasing a few extra percentage points on their life savings, is struggling to believe that we are really watching the collapse of another property-based scheme.

This time around it’s the failure of a business called Australian Capital Reserve, which appears to owe 7,000 investors a total of $330 million. Coming so quickly on top of the collapses of Westpoint and Fincorp, it is easy to see that a pattern is emerging.

What is also easy to see is that there is (a) absolutely nothing new in any of this, and (b) we are at the beginning of a new round of financial failures, not the end.

Second-tier property companies are the current newsmakers. What comes next is the unravelling of the complex world of derivatives, warrants, contracts for difference (CFDs) and other hybrid products conceived by investment banks and stockbrokers and marketed (disgracefully) to mums and dads in the Australian superannuation and savings market.

Right now, at a time when financial markets around the world are booming, no-one can see an end to the good times – that’s why complexity, and lack of security, is not being questioned. Never forget, even turkeys can fly in a stiff upward breeze.

All this leads to the point that an end will come, and when it does the unravelling process of some of the more exotic financial instruments will prove to be impossible, and it won’t just be property fund investors who are wailing about their lost savings.

•••

Three issues rise from what’s happening in the investment market. There is (a) the obvious question of blame for the latest failure, (b) the role of government, and (c) the far deeper question of promoters being allowed to sell sophisticated (tricky?) products to unsophisticated investors.

•••

On the question of blame it is easy to see that the people running ACR, Westpoint and Fincorp really did not know what they were doing – or their businesses would not have failed.

To them goes the lion’s share of the blame.

However, every business transaction has at least two sides. Investors who put their money into ACR must share some of that.

Defenders of the depositors will say they had no idea that their money was at risk, and that they were misinformed.

There is, perhaps, a little truth in that. But the reality is that most of the depositors were merely chasing the 9.9 per cent interest rate on offer rather than be satisfied with the 6.2 per cent available at any of the major banks – where their deposit has a government guarantee.

Greed has been the single telling issue in the failure of ACR, Westpoint, Fincorp, and WA’s own mortgage brokers scandal – and it was greed on both sides of the transaction.

It is a depositor’s ultimate duty to ensure the protection of his/her money, and the government’s duty to ensure that stupid, or crooked, people are not allowed to operate deposit-taking institutions.

•••

That introduces the role of government, and it amuses Briefcase to see that there is a flurry of activity at the Australian Securities & Investments Commission to tighten the rules governing financial products.

Part of the new approach, we are told, will be to crackdown on illegal operators. To which Briefcase asks, why is a crackdown needed, surely that’s the day job of the pencil pushers at ASIC?

We are also told that ASIC will launch an investor education program, prompting Briefcase to wonder if that will be as successful as most other government-run education programs, which have parents and students fleeing in droves for the private system.

The problem for ASIC, as it is for all levels of government, is that private operators are always one step ahead and anything government does is always reactive.

To test that claim, ask this question: how on earth does government take a pro-active stance against an investment scheme that is yet to be designed? Answer: it can’t. That leads to the question of what comes next, and this where it’s time reach for the crystal ball.

•••

The obvious point, and it’s staring us all in the face, is a ‘double happy’. The speculative end of the resources sector will fizzle out (as it always does), and the complex world of derivatives, warrants, hedge funds and private equity deals will end in a big bang, probably when one of the funds gets caught in a failed punt on the Chinese stock market.

With the resource spec stocks Briefcase needs say very little – just learn the lessons of past nickel, gold, oil, and uranium booms and ask how many companies survived.

With the derivatives and hedge fund world, ask the question of who actually owns what?

After you arrive at the correct answer that no-one really knows, ask the next question: how do you unravel a failed hedge fund, or a fund built on complex derivatives, warrants and CFDs? Answer: with great difficulty.

Then there is the issue of the morality of marketing these products to unsophisticated investors.

Australia’s trillion-dollar superannuation and savings system is one of the country’s greatest assets. But it is also a honey pot for dodgy investment-scheme promoters and it will one day cause as much pain as it does pleasure.

•••

On the question of business failure, the first lesson learned by all wise people is to not be there when the bailiffs call – a bit like Woody Allen’s famous quip: “I’m not afraid of death. I just don’t want to be there when it happens.”

Armed with the knowledge of knowing how to avoid failure, it is worth noting how three smart publishers are voting with their cheque books and embracing the internet as the most powerful communications tool since Johann Gutenberg started fiddling around with the world’s first printing press around 1450.

These are the three deals that ought to be sending a very loud message to anyone owning a press.

• Rupert Murdoch has offered $US5 billion to buy Dow Jones to build a global television and internet financial news service.

• Canada’s Thomson family is selling its printing interests to buy Reuters and become a pure electronic news publisher.

• James Packer is selling another 25 per cent of his printing interests to a private equity fund. It stretches credibility to image that he will retain a residual 25 per cent stake for long.

To all his good friends who live for their daily dose of paper, enjoy it while it lasts because anyone with a brain can see what’s coming and that involves news on your screen – just as WA Business News does with its highly successful daily email.

•••

“In business, the competition will bite you if you keep running. If you stand still, they will swallow you.” Semon Knudsen.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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