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.