18/04/2012 - 10:56

Smart lenders poised to seize opportunity

18/04/2012 - 10:56

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A tighter lending market, dominated by the big banks, may open the door for a return of smaller, more friendly lenders.

A tighter lending market, dominated by the big banks, may open the door for a return of smaller, more friendly lenders. 

‘We knew the banks were not meeting demand because of their excessive pursuit of security in lending.”

What an interesting comment. 

It could have been made last week but it was actually made 21 years ago about a time when the banking world was being turned upside down.

Sir James McCusker, late father of Western Australia’s Governor, Malcolm McCusker, was talking to me in 1991 about events leading to his founding of Town & Country Building Society with his friend, Bob McKerrow.

The two former employees of the Commonwealth Bank had quit safe jobs they had taken in the shadow of the 1930s Depression to launch a business designed to make home ownership easier for people on modest salaries.

Their timing was brilliant. Demand for homeloans in post-World War II WA was sky high but banks were tightly controlled. 

Back then the Australian Government (through the Reserve Bank) controlled the flow of credit by turning the loan approvals tap on and off rather than through the current use of fluctuating interest rates. 

“When we started Town & Country it was like jumping on an up escalator,” Sir James said in a farewell interview after selling the building society to ANZ Banking Group, adding that “there is no niche now for small banks, building societies or credit unions”.

He was right in 1991, but he might not be right today, given the return by banks to tougher lending rules to avoid being damaged by a re-run of the sub-prime mortgage crisis, which started in the US and then spread around the world like a financial virus.

It is current tight bank-lending rules and the banking preference to only do business with relatively rich people, which is adding to the home ownership crisis in Australia, as well as helping drive property prices down.

It’s not a credit squeeze of the same sort that happened in the 1960s and 1970s but the effects are similar, with good people prevented from getting housing finance.

No business situation is a perfect replica of past events but the problems of Australia’s big four banks would appear to be creating a set of circumstances ideal for the re-birth of building societies, or some other secondary tier of banking.

The escalator, which made the McCusker fortune, including the $78.3 million paid to Sir James by ANZ (and then diverted after his death into a number of charities), is not yet in place but there are hints of movement in the property market.

In the US, home of the 2008 crisis, one of the biggest players in the property-lending game, the AIG insurance group, has made a tentative return to property.

AIG chief executive Robert Benmosche said last week the outlook for his company had improved greatly since it received a $US182 billion bailout from the US government.

“We’re now thinking about maybe we should try to find a way to buy the mortgages that we’re insuring,” Mr Benmosche said.

Other US financiers are also starting to look at property, which has been in the sin bin for the best part of five years. What happens in America has a habit of flowing across to Australia.

While rebirth of the building society movement, which first arose in  Britain in the 18th century, is unlikely, there are opportunities opening for financiers who can see the problems being caused by the major banks shrinking their business profiles.

Mass sackings of bankers, particularly by investment banks, is putting a lot of financial talent on the street looking for a way to build a business, in much the same way Sir James and Bob McKerrow did when they saw banks effectively withdraw from home lending.

Those same mass sackings and pay cuts by banks is having an effect on the wider community, as investment guru Gerard Minack noted recently.

In a research paper on the banking sector, Mr Minack, global market strategist for the investment bank Morgan Stanley, said there was a lot of nervousness in banking and related industries, which were, in turn, leading to a “white-collar recession” in financial services and stockbroking.

It is out of this white-collar recession identified by Mr Minack, which has hit innovative thinkers in the increasingly stodgy banking sector hardest, that something interesting might grow in the financial services world, just as Town & Country did a lifetime ago.

Combet shufflers

Politicians have a habit of talking rubbish, especially when discussing subjects about which they know nothing. The best recent example is federal industry minister Greg Combet proposing a system to ensure local manufacturers get a bigger share of work from the resources sector.

Mr Combet’s scheme calls for all projects receiving more than $20 million in Commonwealth funding to provide Australian companies with the opportunity to bid for contracts and submit an Australian Industry Participation Plan.

Projects valued at more than $2 billion will be required to produce a participation plan and report on how Australian businesses are being provided with opportunities.

Unfortunately, all that Mr Combet has created is another layer of bureaucracy, which will achieve nothing except create jobs for paper shufflers in Canberra, because what he has failed to recognise is that too many Australian manufacturers and service providers are simply uncompetitive.

It is one thing to write a set of rules giving local companies a chance to bid (something they already have), it’s another to get them to bid at an equal or lower price than an overseas competitor.

German bubble?

Funny stuff, cheap money. 

In Germany, ultra low-cost finance has triggered a property boom, with a house in Munich selling last week for 6 million euros, double the price of six years ago. 

For anyone familiar with how we got into the current global debt crisis in the first place, keep an eye on German property, because it is starting to looking awfully like a bubble, fuelled by cheap and easy credit.

***

“The easiest person to deceive is oneself.” Lord Lytton


STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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