Government Cons Constituents into Feeling Good About Higher Taxes

In last month’s Federal Budget, the Government announced the introduction of an additional tax on the Financial Services Sector, or at least on five of the larger banks operating in the sector. This comes at a time when the Government is on one hand, advocating policies to reduce company tax, while increasing taxes on the other. (So unlike Governments to have contradictory agendas!)

The Liberal Government is ‘banking’ on this new tax levy being more popular than Labor’s failed Mining Tax, which the coalition Government subsequently repealed. This new populist policy is the Government’s attempt to leverage off the creed that all Australians hate banks, apparently because they are well managed global businesses whose apposite profits are too big.

Therefore, the thinking is that the public will be happy if the so-called ‘greedy’ banks are taxed more than other companies and as a consequence, the Government gains a popularity lift from you, the electorate. This is a desperate ‘socialist solution’ by a Government who is supposed to be encouraging private enterprise to grow the economy; no wonder we are confused about what this Government is supposed to stand for!

The Government is taking advantage of the public’s naive ‘bank bashing’ mindset by virtually condoning hatred against a small number of profitable institutions just so they can pass their bias, uncompetitive and oppressive policies unimpeded. The Government is counting on the gullibility of the public who have been conditioned by successive financially incompetent Governments, and the media, to believe we have been ripped off when in fact the Bank’s ‘Return on Equity’ is somewhat moderate compared to many other publicly listed companies (see below).

I keep hearing the media and politicians say that the Banks should pay this new levy and not complain because they (the banks) are so hated and more unpopular than politicians, (if that’s possible). But who are they? Well, ‘they’ is essentially you, whether as an individual shareholder or more likely in your superannuation fund, or if you have a bank mortgage or a bank account, not to mention if you any exposure to any of these banks’ subsidiaries.

Anyone with any relationship, direct or otherwise, with the Banks will pay for this new levy/tax. If there is an additional cost to business, someone pays and in the final analysis, the people who own and deal with the banks will pay the additional tax the Government has conned you into feeling good about.

Let’s face it, I don’t think that getting a dividend yield of 6% as a shareholder of a Bank is an ‘obscene’ return, in fact, far from it given the ‘capital risk’ you carry. So this ‘clever’ new policy is only a slick revenue grab, that somehow ‘the constituency’ has been duped into thinking they’ll love!

If Government-cultivated hatred and loathing is driving a prejudicial policy agenda in Australia, where we single out and indiscriminately penalise certain groups or sectors in our community; then we are on a slippery totalitarian slope with despotic overtones. 

Another consideration in this subterfuge is the randomness of the policy, there is no reasonable basis for the new tax. Apparently, the Australian Government supports a Fair Taxation System unless the ignorant decide the industry is so unpopular that it justifies a discriminatory socialist policy. If you implement a tax just because you make a large profit, then why not apply the new tax to companies that make larger ‘returns’ than the Banks do and if not, why not? Would that not be a reasonable and equitable basis to apply a tax, with a just ‘outcome’ for all Australians under the ‘Fair Taxation System’?

I have scanned the various market segments and randomly identified 14 companies with a higher ‘Return on Equity’ (RoE) than the five banks targeted. Should companies like those listed below also be identified as ‘bad profitable corporate citizens’ to be singled out and penalised for being commercially viable?

What is going on in Australia when you virtually need to apologise for being successful and profitable? Talk about the tall poppy syndrome; it’s economic emasculation of epic proportions! If making a profit is so obscene and offensive that we need to disincentivise success, then it is a crippling legacy to pass on to the youth of Australia: a future of limited opportunity courtesy of a pathetic, lazy, short-sighted, spiritless and tired leadership.

Return on Equity:

  • Amcor 86.9%                          
  • CSL 41.5%
  • JB Hi Fi 37.8%
  • Woolworths 32.1%
  • Rea Group 28%
  • Sirtex Medical 27.7%
  • Telstra 26.8%
  • McMillan Shakespeare 23%
  • ResMed 21.2%
  • Breville Group 20.4%
  • Flight Centre 20%
  • Ainsworth 18.2%
  • BHP 16%
  • Corporate Travel 16%
  • CBA 15.7%
  • MQG 14.2%
  • WPC 13.2%
  • NAB 12.2%
  • ANZ 10.1% 

‘He knows nothing; and he thinks he knows everything. That points clearly to a political career’ – George Bernard Shaw

3rd June 2017

Global Financial Crisis – When Will We Do This Again?

As we approach the ten-year anniversary of the Global Financial Crisis (GFC), I thought I’d get in early with a few ruminations, before the experts who didn’t predict the crash write their moot editorials.

I keep reading about the GFC and the predictable question: will it happen again? Well, history has the answers. It was only 20 years prior to the GFC that the US faced the ‘Savings and Loans Crisis’ where the failure of bureaucratic ‘regulatory and enforcement agencies’ ended up costing $160 billion, predominantly funded by taxpayers. Even the learnings from the 2001 Enron scandal were quickly forgotten; where corporate fraud of approx. $45 billion contributed to the company registering for bankruptcy.

When you look back at our historical track record, you realise how heedless we hominids are, as we continue to allow the same fraudulent behaviour to reoccur. Perhaps the answer or reason WHY can best be explained with a closer examination of the judicial system and incarceration rates. There is no doubt that white collar crime pays. The financial sector’s punishment for transgressions seems to be highly remunerated senior executive positions in government, where they get to set the future policy agenda and protect their ill-gotten wealth by recommending taxpayer-funded bailouts.

So, let’s look at what happened ten years ago and compare it to where we are at now, ask if anything has materially changed and wonder who will pay for the next round of bailouts.

The catalyst for the GFC started with the misguided concept that pretty much everyone should be able to afford a home, much like the present ‘Housing Affordability’ debate in Australia, about how to interfere in free markets to artificially influence affordability. The consequences were higher prices, with exuberant growth generated in the housing sector creating a false and inefficient market which inevitably collapsed with a subsequent correction (as free markets do).

The so-called crisis in the subprime mortgage market in the US was fuelled by readily available and cheap credit, honeymoon deals and high-risk loans where financiers massively misrepresented applicants’ capacity to repay loans. Again, a regime existed where there was a complete lack of regulatory compliance and enforcement, allowing Financial Institutions and Banks (FI&B) to lend unabated, fuelled by commissioned staff who were immorally motivated by their employers; employers who set the wrong Key Performance Indicators (KPIs), the wrong remuneration models and therefore unsurprisingly, we saw the wrong behaviour.

Meanwhile, the FI&B were generating obscene profits as they actively promoted high-risk lending, but without having to carry the associated risk. They simply shifted the risk to the mortgage insurance companies, who covered the banks against loss in the event of default. The rot set in when the insurers collapsed, with a central insurance player in the US eventually requiring a taxpayer-funded bailout, reportedly around $180 billion.

FI&B had to find creative ways to get these junk loans off their books before they defaulted. Their solution was to bundle and package up these rubbish mortgages and sell them off as defensive or low-risk income investments i.e. monthly income mortgage funds (backed by property, what could go wrong?)! The target market was conservative investors and retirement/pension funds, looking for a regular monthly income stream.

The question is: how do you convince conservative investors to buy junk mortgages i.e. how do you ‘window dress’ high-risk mortgages as low-risk income investments? This deception could only be perpetrated with the assistance of a complicit rating agencies industry, who sell the desired credit ratings for the right price and that’s exactly what the rating agencies did. They rated ‘junk’ as ‘investment grade’ effectively giving licenses to FI&B to credibly disguise and sell rubbish investments in the open market.

They knowingly ripped off consumers, because they knew these instruments would fail when the underlying loans inevitably defaulted. This was an orchestrated fraud and collusion on a scale never seen before! If the rating agencies’ actions were not fraudulent, then they were certainly complicit, yet somehow they managed to deflect responsibility and have never been held to account. Keep in mind that these agencies are responsible for rating the sovereign risk of our country! Why has their behaviour gone unchecked and how do they get away with it? Why is there still no meaningful regulation around rating agencies?

These rating agencies continue to control and influence the investment and advisory industries and, as a direct consequence, investor behaviour. How can they possibly be trusted when investment fund managers are still buying favourable ratings for a negotiated price? As a consequence, investors are still losing money on underperforming investments, while the money managers and credit rating agencies never lose. The credit rating system is corrupt and totally ineffective as a management or due diligence tool for consumers to gauge the worthiness or suitability of any given investment.

The next level of greed and deception perpetrated by the FI&B was to orchestrate additional profits from the junk mortgages they sold to retail & wholesale investors. How? Manufactured products! A number of these FI&B were so confident that the bundled junk investments they sold would be worthless, that they took out insurance to that effect (derivative positions) and then collected when they imploded.

So when the loans failed, they collected twofold, once when they sold the junk product and later from trading their derivative position. Talk about benefiting from the misery of others when you can make twice the money from engineering ‘failure’ than you can from honest trading and all at the expense of the consumers who believe that their governments have the right governance, compliance and enforcement controls in place to protect them. We poor misguided citizens!

This is what happens when our trusted FI&B are left unchecked as government regulators fail to enforce the law. What is the value of paying thousands of ineffective bureaucrats for not holding the FI&B executives to account, perhaps because most of these executives are now bureaucrats themselves? What a great system: governments act as enablers for institutional theft and then use our taxes to fund the corporate bailouts.  How do we keep losing the same dollar twice? We need to improve regulation but more importantly, we need government to start enforcing the current laws.

How is it that a corporation can go bust after losing our money and then expect taxpayers to bail them out because they were ‘too big to fail’? If a corporation is ‘too big to fail’ then governments should legislate to unwind conglomerates and reverse the ‘bigger is better’ trend, because it is not!

I believe change is urgently needed if we are to minimise the risk of future financial losses at the hands of institutions. Start, as I have emphasised above, by dealing with credit rating agencies. It’s a flawed model and there needs to be a mechanism in place to hold them accountable for their performance i.e. some transparency around the accuracy and value of research, rather than just being allowed to sell a rating without recourse.

Favourable credit ratings give FI&B, fund managers and stockbrokers a licence to print money, even when the underlying investment fund, equity or product, fails to meet the performance expectations as set out in the rating agencies initial report. All these ill-gotten profits are funded from money lost by investors who were given misleading or inaccurate information right from the start.

Secondly, there needs to be a closer look at how FI&B use mortgage insurance companies. Basically every loan approved conditional to mortgage insurance means that the FI&B recognise that the risk is too high to carry on their balance sheet. So the FI&B subrogate control and responsibility of the ‘loan default’ process to the insurance company. That leaves the borrower without any capacity to negotiate with their financiers, who are now beholden to the insurance companies.

Unlike banks, insurance companies do not have legislated capital reserves, so what are the potential risks in the event of rising defaults? What is the cost of making housing more affordable in the short term when there is no long-term contingency plan when interest rates and unemployment rise? History tells us that if the housing sector is artificially stimulated, then you can expect with a high-degree of certainty that a correction is a foregone conclusion. It’s just a question of whether you’ll be one of the many little people who end up bailing out the big end of town so they can maintain their hedonistic and privileged lifestyles.

I keep hearing that banks are bastards; well wait until you have to deal with insurance companies!

23 April 2017

“I sincerely believe… that banking establishments are more dangerous than standing armies”. Thomas Jefferson

Why Are Government Regulators Not Working?

Why is it that the ‘bureaucracy’ in this country is failing us all so miserably?

For example, I keep hearing from the press and politicians that we need a ‘Royal Commission’ into the Banks. If this is true, is it because the bureaucrats have failed to do their job to enforce standards in the financial services industry?

We are all burdened with and pay for multiple layers of heavily duplicated, bloated, inefficient and costly bureaucracies that are responsible for monitoring the behaviour of financial institutions.

So why is it that the bureaucracy has failed to proactively protect consumers? Is it because they continually align themselves with Government as they blame ‘industry’ for their incompetence, even though ‘enforcement’ is the purpose of their existence?

If these reactive governmental ‘corporation police’ are responsible for the governance, compliance, licencing, protection, implementation and enforcement of legislation, then apparently their political masters don’t think they are doing a very good job.

I don’t know what the likes of the Australian Competition and Consumer Commission (ACCC), Australian Prudential Regulation Authority (APRA), Australian Taxation Office (ATO) and Australian Securities and Investments Commission (ASIC) have been doing. Are these agencies so incompetent that a Royal Commission is warranted?

Perhaps a Royal Commission into the Banks might expose the bureaucrats for what they ‘are not’, although I doubt that would happen as it appears that the public sector’s inefficient and incompetent structure is by design, as governments choose to maintain the unsustainable practice of over-staffing and charitable employment policies, to reduce the official unemployment statistics, rather than be serious about proactively protecting consumers.

So a Royal Commission will achieve what? History has shown that recommendations from Government Inquiries or Royal Commissions are rarely adopted and mostly ignored by the politicians who appoint them in the first place.

In the final analysis, a Royal Commission is just another expensive exercise that allows politicians to be seen to be doing something without changing or achieving anything, other than further increasing the size of the bureaucracy.

Perhaps the real rort isn’t what banks do with shareholders’ money, but what the bureaucracy does with taxpayers’ funds! I don’t know anyone who thinks we are getting value for money.

Perhaps politicians should appoint a Royal Commissioner to have a look into the misappropriation and squandering of millions of dollars in public funds by the likes of APRA, ACCC, ATO and ASIC?

29th October 2016