22/04/2010 - 00:00

Surprises for Goldman, NAB

22/04/2010 - 00:00


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Investors and business executives have been given a few sharp reminders in recent weeks about the risk of regulatory shocks.

Surprises for Goldman, NAB

WHAT have junior Western Australian miner Bauxite Resources and Australian banking heavyweight National Australia Bank got in common? It’s the same thing that investors in local company International Petroleum share with those in Wall Street titan Goldman Sachs.

They have all been given a nasty surprise by regulators, which have cost investors money and forced business directors to rethink their plans.

It is premature to judge the merit of what the regulators have done in all of these cases. What is clear is that the best-laid plans can be turned topsy if regulators see the world differently from company directors.

And it doesn’t matter how large your business is. Just ask Goldman Sachs, the largest and most successful investment bank on Wall Street, and Australia’s NAB.

Could global resources giants BHP Billiton and Rio Tinto be next, as competition regulators around the world scrutinise their planned iron ore production joint venture in the Pilbara?

The Australian Competition and Consumer Commission is scrutinising the proposed deal and, more significant, so is the European Commission, which readers should remember had its origins as a protected trading bloc for steel producers – the very same steel producers that are worried about the implications of Rio and BHP merging their iron production in the Pilbara, but crucially not their marketing activities.

WA Business News does not know what the outcome will be, but nor do the companies themselves, or investors in their stock.

Most investors probably don’t give a lot of weight to regulatory risk, but events of the past month indicate they should.

NAB got its regulatory shock this week when the ACCC opposed its proposed $12 billion acquisition of AXA Asia Pacific Holdings.

The bad news for NAB was good news for insurance and finance group AMP, which is now in the box seat with it rival bid for AXA.

The ACCC decision was not a complete shock. Perhaps the most surprising aspect was the rationale.

The regulator concluded that a merger between NAB and AXA would result in “a substantial lessening of competition in the market for retail investment platforms for investors with complex investment needs”.

In forming its view, the ACCC may have been reflecting on the market power of Westpac, which has gained control of multiple investment platforms via its acquisitions of BT Financial Group and St George Bank.

NAB’s regulatory surprise was nothing compared to the hit that Goldman Sachs took last Friday, when the Securities and Exchange Commission launched civil action against the investment bank and one of its traders.

The charges are based on a belief that Goldman deceived investors when it sold a series of mortgage-backed securities called collateralised debt obligations.

Investors lost an estimated $US1 billion on the Abacus CDOs but another Goldman client, which was punting on a collapse of the US mortgage market, allegedly profited by a similar amount.

Goldman Sachs has strongly defended the claims, saying the accusations are ‘”unfounded in law and fact’”.

Nonetheless, the SEC’s action will serve to reinforce criticism of big investment banks and hedge funds, particularly those that are smart enough or lucky enough to profit from a collapsing market.

The move on Goldman was announced as US legislators prepare to vote on new financial supervision reforms promoted by the Obama administration. US commentators agree that the SEC move will have bolstered support for the reforms.

If that is the case, it’s a spurious basis for winning support.

Locally, junior miner Bauxite Resources recently ran afoul of the Environmental Protection Authority, which has set an unexpectedly high level of assessment for the company’s mining plans. That is a risk that WA investors and project developers should be very familiar with.

Far more surprising was the Australian Securities Exchange’s decision to block the listing of the securities of Global Iron and International Petroleum.

The two companies are in the stable of Perth entrepreneur Tony Sage and planned major transactions with Frank Timis, who would have emerged as a director and major shareholder of both companies.

The ASX used its “absolute discretion” to block the deals, based on Mr Timis’ track record and concerns over disclosure standards.

For investors who like to pay at the riskier end of the business spectrum, that is a new risk to factor into their calculations.



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