Australian Financial Deregulation

In 1996, the banker Michael Waterhouse, with the Westpac Banking Corporation published the review: How Does Regulation Affect the Future Role and Competitiveness of Banks?  The document highlighted three primary criteria that were used to determine that deregulation had been a success.  These were:

 •  the outcome of deregulating savings and deposit rates, removing lending controls and opening the financial markets...

•  deregulation has resulted in significantly greater competition, convenience and diversity of choice for both individual and business users of financial services; and

•  the stability and integrity of the financial system has largely been maintained.


Previous posts on this blog show how all of the shareholding of Australia's major banks are dominated and controlled by exactly the same shareholders which questions any statement about real competition.    Comments about the integrity of the financial system were premature.  What's often forgotten is that regulations that controlled the lending of money had been in place to stop a re-run of the great depression.


Removing lending controls...

Michael Waterhouse discussed the benefit of "removing lending controls" in providing easier access to cheap loans.  The document goes further by stating that under previous regulations, "lower income earners were often excluded from borrowing from banks".  

Apparently, "with the removal of lending controls, banks were in a position to meet a greater share of the borrowing needs of ordinary Australians".  A lot has changed since 1996.

Australian Mortgage Lending

The removal of regulations in regard to lending can be seen with the graph of Australian debt below.  

Personal Debt levels have doubled over the past decade.

Government Debt rapidly increased after the Global Financial Crisis with the stimulus packages.
Housing Debt accounts for the vast majority of debt created since lending controls were removed

Housing related debt growth is not due to an increase in the number of loans because of population pressure in Australia.

The Popping Bubble Blogspot uses data from the Australian Bureau of Statistics to try and plot the relationship between the supply and demand for housing in Australia.  Measuring "demand" is difficult to do but the figures do show that the housing debt boom is clearly not driven by population pressure on the number of dwellings.  

These observations correlate with observations made by the Reserve Bank in 2008 as to the relationship of traditional forces upon house prices.  The graph below is taken from Anthony Richard's Reserve Bank presentation which shows the initial spike in house prices starting with the 1988 reintroduction of Australia's First Home Owner's Assistance scheme.  Instead of assisting with the affordability of housing, the grant has done the opposite as house prices have risen to meet available reserves.

Bob Hawke's home-owner's grant was abolished in 1990 which was followed by a noticeable drop in house prices and stagnation in property value increases for almost a decade. An updated scheme was introduced by John Howard in 2000 and (not shown) was increases by Kevin Rudd in 2008.  Quite clearly, the availability of "easy" money has been a deciding factor in the cost of housing.  

In a "chicken & egg" situation of money availability driving up the costs of housing & then justifying larger loans due to demonstrated value of the asset being purchased - banks have been willing to approve ever greater loans with longer repayment periods.  At the time of the 2008 crash is was quite easy to obtain 105% mortgages where no deposit at all was required for purchasing a house. 

The graph below shows after tax profits (in millions of Australian dollars) attributed to shareholders of the big four banks

What's not surprising is that the explosion in housing debt shows a greater relation to the bank profits posted for shareholders.  We can clearly see that deregulation and ballooning debt crisis has occurred while benefiting the shareholders of Australia's banks. 

Banking Collusion

Market Manipulation

Previous posts show the level of control held over the entire Australian sharemarket by financial giants.  Major Holdings shows that that a very small group of players have the power to completely control the market if they were to collude. The latest scandals from the Northern Hemisphere that show traders from different organisations have commonly been acting together to manipulate a number of markets in their own interests.

 Libor Market Manipulation & Interest Rates

The latest scandal to rock Banking and Finance is in regard to Barclay’s traders $453 million fine for collusion with traders from other banks in manipulating the London Interbank Lending Rate (LIBOR) to maximise profits.  The (now famous) “Done … for you big boy” response is typical of the 257 known requests from Traders in deliberately fixing rates in the interests of the banks.  These artificially derived rates were used by Barclays (and it appears others) in justifying the interest rates it passed on to mortgage holders from 2005 – 2009.  Citigroup, HSBC, JP Morgan, Lloyds, Deutsche Bank and Royal Bank of Scotland are now also under investigation for their part in the same scandal. 

 Barclays Chief Executive, Bob Diamond is reported to be the highest paid chief executive in Britain with a take home salary of £20.97 million.  The widespread manipulation and known illegality either occurred with his knowledge or without.   If he was aware, his astronomical salary has come as a result of quiet approval to scandalous activity.  If he didn’t know what was going on in the bank, one may question why he would be paid so much in the first place.    

Barclays has been the most visible player in this controversy although the Huffington Post has written more into how the unfolding saga is showing Citigroup to be the largest of all offenders.  

The Libor scandal has had a direct impact on every person who has been subject to interest rates set by the major banks as the retail lending rate has been determined in response to the supposed cost of borrowing by the banks themselves.    According to a confidential report leaked from International Organization of Securities Commission, fewer than half of the benchmark interest rates (Europe, America and Asia) are calculated by methodologies that were unclear, not transparent and only rarely subject to specific regulatory standards.  In essence, a large component of the financial industry isn't based on anything tangible at all!

Municipal Derivatives Manipulation

The Libor scandal is only one in a long line of allegations of collusion and market manipulation against major investment banks.  On June 5^th, JP Morgan agreed paid $44.6 million to resolve allegations that it had conspired to fix Municipal derivatives.  This followed a $211 million settlement with the US Government from the previous year as part of a probe that also snared Bank of America $137 million and UBS $160 million for deliberate overcharging. 

Gold and Silver Price Manipulation

The latest revelations as to collusion amongst the financial giants come amidst an on-going but reluctant investigation by the US Commodity Futures Trading Commission as to strong evidence that JP Morgan and HSBC traders had worked to manipulate the price of silver.  In October 2010, CFTC Commissioner Bart Chilton stated there have been “fraudulent efforts to persuade and deviously control” silver prices and that violators should be prosecuted.  Essentially, HSBC and JP Morgan used their collective dominance to flood the market so profits could be made from short term price fluctuation.

In 2010, London based Trader Andrew Maguire became a whistle-blower to the CFTC in providing real-time & advanced notification of silver and gold price manipulations allegedly occurring as a result of collusion between traders from JP Morgan and HSBC.  The email trail is here.  Ted Butler has done a great piece related to the silver market manipulation on his blog:
http://crocodileslament.blogspot.com.au/2012/06/us-government-and-jp-morgan-collude-to.html

In July 2012, the Telegraph published an article titled "The price of gold has been manipulated.  This is more scandalous than Libor".  This highlighted that the behavior of Gold prices is not what would be expected in a text-book market environment.

Energy Market Manipulation

 The Federal Energy Regulatory Commission (FERC) has filed charges against JP Morgan Chase for manipulating California's energy market.  The Financial Times writes:

The electricity investigation involves whether JP Morgan's bidding strategies extracted "inflated" or "excessive" payments from two wholesale power markets serving California and several Midwest states. The bank's commodities business owns or has rights to output from several electric generators.

 This follows a preliminary finding against Deutsche Bank AG for the same manipulation.

Conclusion

Every major market shows signs or evidence of manipulation by large institutions when opportunities for financial gain present themselves.  The ongoing Libor scandal has clearly demonstrated that the small group of decision makers within all of the powerful financial firms know each other and were prepared to cooperate with each other if collective financial rewards could be gained.

The concept of market rates being determined by relationships of supply and demand is a simplistic fiction that doesn't relate to the reality of the modern world.  

ASX200 & Market Domination

continuing from http://citizenloz.blogspot.com.au/2012/06/australasian-banking-four-banks.html

Sharemarket Basics

The “Australian Securities Exchange” or ASX lists the top trading firms in Australia.  

The index is essentially an assessment of how much combined wealth exists in the top 200 firms and this is combined with the list of available shares for each firm to come up with measurement to represent the market.  The main index used in Australia is Standard and Poor's ASX200.

Note: The estimate of how much a firm is worth in total is referred to as Market Capitalisation and is always abbreviated to "Market Cap".

Australian Market Domination

In the previous document, three banks were shown to hold control over a considerable number of large Australian corporations.

	Name of Shareholder
	HSBC Custody Nominees (Australia)
	J P Morgan Nominees (Australia)
	National Nominees *
	Citicorp Nominees Pty

·         National Nominees Ltd is a wholly owned subsidiary of National Australia Bank.  NAB itself has J.P. Morgan, Citigroup and HSBC as its primary shareholders.

The table below lists the entire ASX200. 

Corporate boards are elected annually.  Holders of 30% or more of company shares are normally able to determine who the board members for each firm will be.  The table below shows (in gold) the corporations that the bank nominees hold more than 30% control.

Be careful to observe that banking nominees may control shareholding but are not the benefactors (or ultimate owners).  The list below is an indication of centralised power, not ownership. 

Market Cap ($M)	Company name	Bank Holding %	Bank Holding ($m)
826	ABACUS PROPERTY GROUP	26.0%	$                 215
734	ACRUX LIMITED	35.2%	$                 258
1,906	ADELAIDE BRIGHTON LIMITED	41.4%	$                 790
7,596	AGL ENERGY LIMITED	38.1%	$             2,893
603	ALACER GOLD CORP.	0.0%	$                      -
2,269	ALUMINA LIMITED	74.1%	$             1,682
9,123	AMCOR LIMITED	64.1%	$             5,844
11,059	AMP LIMITED	49.5%	$             5,471
1,774	ANSELL LIMITED	63.2%	$             1,121
3,326	APA GROUP	15.9%	$                 527
474	APN NEWS & MEDIA LIMITED	44.6%	$                 211
461	AQUARIUS PLATINUM LIMITED	28.2%	$                 130
1,244	AQUILA RESOURCES LIMITED	25.9%	$                 322
424	ARDENT LEISURE GROUP	49.8%	$                 211
1,629	ARISTOCRAT LEISURE LIMITED	59.5%	$                 969
4,253	ASCIANO LIMITED	76.1%	$             3,237
5,160	ASX LIMITED	48.0%	$             2,475
1,845	ATLAS IRON LIMITED	48.8%	$                 900
1,354	AURORA OIL & GAS LIMITED	39.3%	$                 532
989	AUSDRILL LIMITED	43.8%	$                 434
1,454	AUSTRALAND PROPERTY GROUP	25.8%	$                 375
57,801	AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED	50.1%	$           28,970
1,459	AUSTRALIAN INFRASTRUCTURE FUND	38.5%	$                 562
798	AWE LIMITED	43.8%	$                 350
2,060	BANK OF QUEENSLAND LIMITED	40.3%	$                 830
299	BATHURST RESOURCES LIMITED	15.8%	$                   47
1,312	BEACH ENERGY LIMITED	53.3%	$                 699
451	BEADELL RESOURCES LIMITED	58.9%	$                 266
2,852	BENDIGO AND ADELAIDE BANK LIMITED	33.4%	$                 953
102,517	BHP BILLITON LIMITED	52.1%	$           53,452
487	BILLABONG INTERNATIONAL LIMITED	61.9%	$                 302
938	BLUESCOPE STEEL LIMITED	52.6%	$                 494
1,402	BOART LONGYEAR LIMITED	70.5%	$                 988
2,526	BORAL LIMITED.	57.6%	$             1,455
953	BRADKEN LIMITED	55.2%	$                 526
9,241	BRAMBLES LIMITED	76.7%	$             7,087
993	BWP TRUST	30.4%	$                 302
632	CABCHARGE AUSTRALIA LIMITED	33.9%	$                 214
3,713	CALTEX AUSTRALIA LIMITED	32.2%	$             1,197
3,557	CAMPBELL BROTHERS LIMITED	29.3%	$             1,042
1,367	CARSALES.COM LIMITED	56.6%	$                 774
2,675	CENTRO RETAIL AUSTRALIA	39.4%	$             1,054
5,372	CFS RETAIL PROPERTY TRUST GROUP	58.0%	$             3,117
1,694	CHALLENGER LIMITED	59.4%	$             1,006
665	CHARTER HALL GROUP	63.2%	$                 420
1,025	CHARTER HALL RETAIL REIT	58.5%	$                 599
590	COALSPUR MINES LIMITED	32.9%	$                 194
10,087	COCA-COLA AMATIL LIMITED	46.6%	$             4,703
3,649	COCHLEAR LIMITED	63.9%	$             2,330
80,595	COMMONWEALTH BANK OF AUSTRALIA.	36.3%	$           29,232
2,324	COMMONWEALTH PROPERTY OFFICE FUND	58.2%	$             1,353
4,345	COMPUTERSHARE LIMITED.	44.9%	$             1,949
6,184	CROWN LIMITED	34.5%	$             2,130
20,287	CSL LIMITED	57.3%	$           11,617
767	CSR LIMITED	49.5%	$                 380
583	CUDECO LIMITED	37.4%	$                 218
146	DART ENERGY LIMITED	30.7%	$                   45
1,184	DAVID JONES LIMITED	37.7%	$                 446
438	DECMIL GROUP LIMITED	44.9%	$                 197
4,452	DEXUS PROPERTY GROUP	81.2%	$             3,614
604	DISCOVERY METALS LIMITED	43.3%	$                 261
1,343	DOWNER EDI LIMITED	73.2%	$                 984
2,192	DUET GROUP	47.3%	$             1,038
1,080	DULUXGROUP LIMITED	57.6%	$                 622
3,089	ECHO ENTERTAINMENT GROUP LIMITED	56.0%	$             1,728
587	EMECO HOLDINGS LIMITED	69.3%	$                 407
624	ENERGY RESOURCES OF AUSTRALIA LIMITED	14.0%	$                   88
598	ENERGY WORLD CORPORATION LTD	59.6%	$                 356
1,266	ENVESTRA LIMITED	9.5%	$                 121
1,174	EVOLUTION MINING LIMITED	46.9%	$                 551
1,435	FAIRFAX MEDIA LIMITED	60.9%	$                 874
581	FKP PROPERTY GROUP	49.5%	$                 288
701	FLEETWOOD CORPORATION LIMITED	26.3%	$                 184
3,278	FLETCHER BUILDING LIMITED	49.1%	$             1,610
1,873	FLIGHT CENTRE LIMITED	0.0%	$                      -
14,573	FORTESCUE METALS GROUP LTD	29.5%	$             4,296
596	G.U.D. HOLDINGS LIMITED	28.1%	$                 167
511	GINDALBIE METALS LTD	26.5%	$                 136
1,461	GLOUCESTER COAL LTD	29.4%	$                 429
1,115	GOODMAN FIELDER LIMITED.	76.0%	$                 847
5,176	GOODMAN GROUP	81.6%	$             4,225
5,721	GPT GROUP	85.5%	$             4,890
1,870	GRAINCORP LIMITED	60.2%	$             1,125
249	GRYPHON MINERALS LIMITED	58.7%	$                 146
601	GWA GROUP LIMITED.	24.1%	$                 145
2,024	HARVEY NORMAN HOLDINGS LIMITED	28.0%	$                 566
1,261	HASTINGS DIVERSIFIED UTILITIES FUND	25.6%	$                 323
1,035	HENDERSON GROUP PLC.	44.6%	$                 462
4,987	ILUKA RESOURCES LIMITED	80.3%	$             4,003
389	IMDEX LIMITED	53.5%	$                 208
848	INDEPENDENCE GROUP NL	60.8%	$                 516
467	INDUSTREA LIMITED	43.4%	$                 203
6,861	INSURANCE AUSTRALIA GROUP LIMITED	47.5%	$             3,262
347	INTEGRA MINING LIMITED	41.3%	$                 143
287	INTREPID MINES LIMITED	44.9%	$                 129
1,640	INVESTA OFFICE FUND	71.1%	$             1,166
893	INVOCARE LIMITED	32.1%	$                 287
1,314	IOOF HOLDINGS LIMITED	33.2%	$                 436
4,398	IPERNICA LIMITED	8.4%	$                 371
800	IRESS LIMITED	51.0%	$                 408
3,384	JAMES HARDIE INDUSTRIES SE	81.2%	$             2,749
862	JB HI-FI LIMITED	37.4%	$                 322
926	KAROON GAS AUSTRALIA LIMITED	43.4%	$                 402
856	KINGSGATE CONSOLIDATED LIMITED.	58.6%	$                 502
5,690	LEIGHTON HOLDINGS LIMITED	21.4%	$             1,216
4,050	LEND LEASE GROUP	62.6%	$             2,535
376	LINC ENERGY LTD	26.9%	$                 101
1,629	LYNAS CORPORATION LIMITED	66.9%	$             1,089
439	MACMAHON HOLDINGS LIMITED	39.8%	$                 175
669	MACQUARIE ATLAS ROADS GROUP	84.9%	$                 568
8,995	MACQUARIE GROUP LIMITED	53.2%	$             4,787
994	MEDUSA MINING LIMITED	48.0%	$                 477
595	MERMAID MARINE AUSTRALIA LIMITED	48.9%	$                 291
1,750	MESOBLAST LIMITED	34.7%	$                 607
3,139	METCASH LIMITED	59.4%	$             1,864
419	MINERAL DEPOSITS LIMITED	76.3%	$                 319
1,719	MINERAL RESOURCES LIMITED	30.4%	$                 522
267	MIRABELA NICKEL LIMITED	42.7%	$                 114
4,222	MIRVAC GROUP	76.7%	$             3,236
1,893	MONADELPHOUS GROUP LIMITED	36.1%	$                 683
917	MOUNT GIBSON IRON LIMITED	34.1%	$                 313
1,059	MYER HOLDINGS LIMITED	57.2%	$                 606
49,613	NATIONAL AUSTRALIA BANK LIMITED	48.2%	$           23,924
1,539	NAVITAS LIMITED	32.3%	$                 497
18,850	NEWCREST MINING LIMITED	86.2%	$           16,252
15,891	NEWS CORPORATION	0.4%	$                   65
809	NRW HOLDINGS LIMITED	64.1%	$                 518
1,256	NUFARM LIMITED	41.0%	$                 515
544	OCEANAGOLD CORPORATION	27.3%	$                 148
9,013	OIL SEARCH LIMITED	69.4%	$             6,251
1,225	ONESTEEL LIMITED	55.9%	$                 684
8,804	ORICA LIMITED	58.8%	$             5,177
14,055	ORIGIN ENERGY LIMITED	47.1%	$             6,620
2,551	OZ MINERALS LIMITED	65.7%	$             1,675
498	PACIFIC BRANDS LIMITED	66.4%	$                 330
994	PALADIN ENERGY LTD	43.7%	$                 434
1,626	PANAUST LIMITED	25.4%	$                 413
150	PANORAMIC RESOURCES LIMITED	64.1%	$                   96
908	PERPETUAL LIMITED	15.2%	$                 138
1,282	PERSEUS MINING LIMITED	45.8%	$                 587
2,167	PLATINUM ASSET MANAGEMENT LIMITED	11.6%	$                 252
1,415	PREMIUM INVESTORS LIMITED	3.7%	$                   53
2,492	QANTAS AIRWAYS LIMITED	71.1%	$             1,771
14,653	QBE INSURANCE GROUP LIMITED	66.1%	$             9,687
8,198	QR NATIONAL LIMITED	50.4%	$             4,128
1,382	QUBE LOGISTICS HOLDINGS LIMITED	26.6%	$                 368
188	RAMELIUS RESOURCES LIMITED	44.8%	$                   84
4,535	RAMSAY HEALTH CARE LIMITED	31.7%	$             1,438
1,871	REGIS RESOURCES LIMITED	31.7%	$                 593
5,027	RESMED INC	58.6%	$             2,947
942	RESOLUTE MINING LIMITED	75.6%	$                 712
23,792	RIO TINTO LIMITED	54.4%	$           12,948
1,046	SANDFIRE RESOURCES NL	22.7%	$                 237
11,176	SANTOS LIMITED	54.7%	$             6,111
342	SARACEN MINERAL HOLDINGS LIMITED	53.6%	$                 183
2,191	SEEK LIMITED	55.3%	$             1,211
796	SENEX ENERGY LIMITED	3.9%	$                   31
2,441	SEVEN GROUP HOLDINGS LIMITED	21.0%	$                 512
1,465	SEVEN WEST MEDIA LIMITED	27.7%	$                 407
675	SIGMA PHARMACEUTICALS LIMITED	59.0%	$                 399
621	SILVER LAKE RESOURCES LIMITED	41.7%	$                 259
2,043	SIMS METAL MANAGEMENT LIMITED	56.1%	$             1,146
399	SINGAPORE TELECOMMUNICATIONS LIMITED.	12.3%	$                   49
342	SMS MANAGEMENT & TECHNOLOGY LIMITED.	54.2%	$                 185
4,868	SONIC HEALTHCARE LIMITED	60.1%	$             2,926
831	SOUTHERN CROSS MEDIA GROUP LIMITED	69.9%	$                 581
3,374	SP AUSNET	27.2%	$                 919
2,003	SPARK INFRASTRUCTURE GROUP	43.2%	$                 866
654	SPOTLESS GROUP LIMITED	67.4%	$                 440
690	ST BARBARA LIMITED	79.8%	$                 551
7,115	STOCKLAND	76.6%	$             5,447
10,048	SUNCORP GROUP LIMITED	61.9%	$             6,215
997	SUNDANCE RESOURCES LIMITED	41.0%	$                 409
1,381	SUPER RETAIL GROUP LIMITED	33.3%	$                 460
5,398	SYDNEY AIRPORT	59.2%	$             3,195
2,154	TABCORP HOLDINGS LIMITED	56.7%	$             1,222
3,666	TATTS GROUP LIMITED	36.2%	$             1,326
3,421	TELECOM CORPORATION OF NEW ZEALAND LIMITED	72.5%	$             2,479
44,919	TELSTRA CORPORATION LIMITED.	47.8%	$           21,485
533	TEN NETWORK HOLDINGS LIMITED	25.6%	$                 136
249	THE REJECT SHOP LIMITED	36.3%	$                   90
3,098	TOLL HOLDINGS LIMITED	45.7%	$             1,415
1,361	TPG TELECOM LIMITED	15.9%	$                 216
971	TRANSFIELD SERVICES LIMITED	55.1%	$                 535
1,215	TRANSPACIFIC INDUSTRIES GROUP LTD	32.2%	$                 391
8,298	TRANSURBAN GROUP	72.2%	$             5,988
2,809	TREASURY WINE ESTATES LIMITED	70.1%	$             1,969
364	TROY RESOURCES LIMITED	42.3%	$                 154
2,019	UGL LIMITED	33.2%	$                 670
851	VIRGIN AUSTRALIA HOLDINGS LIMITED	19.2%	$                 163
29,148	WESFARMERS LIMITED	41.7%	$           12,158
787	WESTERN AREAS NL	0.0%	$                      -
21,096	WESTFIELD GROUP	73.2%	$           15,447
8,429	WESTFIELD RETAIL TRUST	74.1%	$             6,243
62,600	WESTPAC BANKING CORPORATION	42.6%	$           26,680
4,235	WHITEHAVEN COAL LIMITED	35.1%	$             1,488
26,456	WOODSIDE PETROLEUM LIMITED	41.8%	$           11,053
32,636	WOOLWORTHS LIMITED	40.1%	$           13,084
6,175	WORLEYPARSONS LIMITED	50.8%	$             3,139
881	WOTIF.COM HOLDINGS LIMITED	26.1%	$                 230
$    1,051,159			$         514,996

J P Morgan, Citigroup and HSBC are collectively able to approve or reject every major board member & chairman in Australia.  Along with the subsidiary National Nominees, these banks control 49% of all shares and capital in the market - this represents $514 billion of wealth.

As a reference - the Australian Prudential Regulation Authority stated in 2011 that the superannuation investment level for Australia stood at only $95.2 billion.

Special Points of Interest

• The ASX200 crash of 2008 represented only an 8.4% loss of value from the market.  Banking nominees are powerful enough to manipulate the market (or the government reaction to a jittery market) at will.

•  Banks aren't investing in particular players or industries, they are saturating all large firms with bank controlled ownership.  Financial interests are held in all competitors it suggests that investors would be opposed to price wars or cut-throat competition that would hurt the profits of "competing" firms.  

Australian consumers have long been sceptical about the idea of competition amongst the banks or supermarkets or energy companies as if large firms were acting together to maximise profits at the expense of consumers.

Ownership of all major competitors suggests that monopolies exist that are capable of acting against the interests of their customers, companies or national interest if the incentive of reward is great enough.