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You really can’t bank on anything

ENRON Corp hails from Houston, Texas. It would be appropriate for the group to boast the biggest bankruptcy in corporate history, with debts of more than $US20 billion. The shock waves have rolled across the world – and washed up at the front steps of Australia’s leading banks.

In what looks a lot like a “me too” lending policy, NAB, ANZ, CBA and WBC are exposed to taking a collective $A677 million bath. It turns out a large chunk of the loans they extended were unsecured.

Are these the same banks, you ask, that require your first born child as collateral when you beg for a small business loan? Yes. But Enron was different, you see. It was the seventh largest corporation in America, valued on Wall Street at over $US63 billion only last year, and one of the major contributors to the George W Bush election fund.

No doubt it was an honour to join the likes of JP Morgan Chase, Citigroup, and scores of other banks in throwing money at the group. Was it not the biggest and brightest energy trader in the world? Well, apparently not.

If the Australian banks were unaware of what Enron actually did, they were not alone.

What brought the colossus down, it seems, was gambling. Not just in oil and gas contracts, but in a range of financial products. In other words, our old friends “derivatives”.

Enron was a wolf hedge fund dressed up as a grandma utility. It shares similarities with Long Term Capital Management, where fund manager John Merriwether harnessed the brains of Nobel prize winners Robert Merton and Myron Scholes to conquer the globe.

The trio ran up $US1 trillion worth of derivative positions in everything from Swedish mortgages to yen futures.

When the edifice crashed in flames in 1998, it almost took half the US banking system with it. LTCM was so big it had to be bailed out.

So is Enron. Which is why US bank executives are launching a lifeboat to save the group – or at least stave off a collapse until they are safely retired on the golf course with their stock options.

Australian banks have been hit by contingent liabilities from home-grown collapses like Pasminco, but their strong balance sheets have only been slightly dented. There is choppy water ahead from other directions.

Tumbling interest rates have prompted depositors to whip money out of accounts earning less than peanuts.

That is depriving the banks of their cheap source of funds. The credit card battle has just started. Oh, and the bank unions have threatened strikes at ANZ, NAB and WBC this month.

However, a lot of bad news is already in the price of bank shares, which have underperformed as investors, perhaps unwisely, chase higher risks and bigger returns.



Thai ministry finally finds someone to blame

IT could only happen in Thailand. Former central bank governor Rerngchai Marakanond is being sued for $US4.2 billion for having personally caused the 1997 Asian financial crisis. It is no joke. Thailand’s Finance Ministry has spent more than three years investigating the collapse of the baht, which triggered a domino effect in half a dozen Asian currencies.

The enquiry singled out Mr Rerngchai as being responsible for the failure to defend the Thai currency against the speculative attack that had such a major impact on the country. The devaluation only occurred after the foreign exchange reserves had been drained from $US32 billion to $800 million in a matter of weeks.

The investigation committee found that the former proprietor of the Bank of Thailand made an honest mistake and would not face the criminal courts. Instead, a civil suit would seek 185 billion baht (around $US4.2 billion) in damages from him.

Nobody thinks that even a senior Thai bureaucrat has this sort of money.

It was unclear how they settled on that particular figure, although its is almost exactly one quarter of the $US17 billion loan near bankrupt Thailand had to seek from the IMF.

The government may have some sort of case. Rerngchai was nominally in charge of all the Thai banks.

Some of them indulged in corrupt practices, and a few fell over. But it is a bit rich to blame one man for the trillion-dollar capital flight that exposed the Asian tigers as pussy cats.

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