Henry Ergas is underwhelmed by the Swan banking reforms.
ANYONE who believes that allowing gravel to call themselves boulders will convert a rock garden into Stonehenge urgently needs a dosage check. And that Wayne Swan and Joe Hockey seem to be sharing the meds hardly adds to one’s confidence in the proposed banking reforms. But even putting the pebbles-into-pillars fantasies aside, the real trouble with the reforms is that they could inflict serious harm, merely so as to show that the government is “doing something”.
Ouch.
As Henry alludes to, its worse than that – the government and opposition are going to compete on who can better undermine the banking system. There is an argument for regulatory reform in banking – there is always an argument for deregulation – but how that works out needs to carefully thought out and planned. Something the current government is not well-known for doing. To be blunt, neither is Joe Hockey – generally a nice guy, but this is a huge stuff-up.
Tim Colebatch lets the cat out of the bag.
Australians are fed up with being ripped off by bank bosses who are paid several hundred times more than them. They are angry that banks are able to charge us what they like, and get away with it. They want tough action to hit banks where it hurts – and these reforms don’t do it.
But there is no evidence to support the ‘ripped off’ claim and banks simply cannot ‘charge what they like’. Pay your bills on time if you don’t want to pay so-called penalties. So what if bank bosses are paid a lot of money?
Also at the Age Stephen Kirchner puts the boot into the decision to further prop up the securitisation market.
The experience in the US and Canada has been that government intervention in mortgage securitisation has increasingly stifled competition and innovation. The financial crisis would not have been possible were it not for the US government’s support of mortgage giants Freddie Mac and Fannie Mae. These government-sponsored enterprises leveraged government guarantees to dominate the US mortgage market, but with very little benefit to consumers in the form of lower interest rates.
Peter Wallison of the American Enterprise Institute estimates that almost two-thirds of all the bad mortgages in the US financial system were bought by government agencies or were required by government regulations designed to extend lending to non-prime borrowers.
There is no suggestion the Australian government’s support for RMBS will have the same disastrous consequences, given the program’s much narrower scope, but it is ironic that the Australian government, with the support of the federal opposition, should resort to a policy that differs only in degree from policies that were deeply implicated in bringing on the financial crisis.
That is a damning argument. This is what Ergas says
As for an increased commitment of public funds to buying residential mortgage backed securities, this involves the commonwealth selling government bonds, a very low risk instrument, and using the proceeds to purchase an asset that has substantially higher risks: indeed, so high a risk that private buyers are reluctant to purchase RMBS at current prices.
What is proposed, therefore, is a deterioration in the quality of the balance sheet of taxpayers.
All up it looks like the Swan reform package is still-born. Unfortunately Hockey’s bungling has given bipartisan support to the notion that banks need to be punished for their success. This means that Swan will probably get away with it.
Regarding “bank bosses who are paid several hundred times more than them.” The Head of the Commonwealth Bank employs 44,000 people. That would be 44,000 more employees than most of his critics.
Recent research by Morgan shows that approx 75% of bank customers are happy with their bank.
Swan is the bungler; Hockey is a clown.
And by the way. Anybody who purchased a market-weighted portfolio of bank shares either 1 year or 5 years ago would have been better off investing at fixed interest.
Thomas Esmond Knox
14 Dec 10 at 7:34 am
The Head of the Commonwealth Bank does not employ 44,000 people. The Commonwealth Bank probably does but that’s another matter.
TerjeP
14 Dec 10 at 8:16 am
Eslake thought it was pretty silly this morniong as well on ABC 2.
.
14 Dec 10 at 9:08 am
Hockey has a lot to answer for. And Abbott who must have approved his statements.
ken n
14 Dec 10 at 9:11 am
We should have known better from the egregious SUNRISE appearances. Hockey and Rudd are egomaniacs to boot with shit policy ideas.
.
14 Dec 10 at 9:34 am
Hockey has (at least recently) been advised by economist Chris Joye. Joye is a smart cookie who has made many worthwhile contributions to the housing affordability debate (by stressing supply-side factors). Unfortunately, as a lefty, Joye (and his mate Joshua Gans) can’t resist meddling in markets. For example, not only has Joye backed government investment in RMBS to promote liquidity (see also here), he has has also suggested taxpayers guarantee AAA-rated RMBS to level the playing field following the government guarantee of bank deposits. Joye is also a supporter of using Australia Post to provide banking services and, egregiously, supports the government’s new ‘price signalling’ powers for the ACCC against banks (same link).
So what do you expect? Hockey, out of his depth, gets advice from a clued-up lefty.
Sleetmute
14 Dec 10 at 10:08 am
Hockey needs to go if the Libs are to have any economic credibility at the next Federal election.
johno
14 Dec 10 at 10:43 am
what scares me is the proposal that the Government will amend the Banking Act 1959 to allow Australian banks, credit unions and building societies to issue covered bonds, to secure the long-term safety and sustainability of our financial system so it can continue to provide reasonably priced credit to Australian households and small businesses (from Treasury) Confirm the Financial Claims Scheme as a permanent feature of our financial system (from Treasury) and The Gillard Government will invest a further $4 billion in high-quality, AAA-rated RMBS (source Treasury.)
and if this exposure through your government is not enough, the rules are intended to be changed to increase your exposure through your superannuation fund:
Financial institutions have expressed interest in using this bullet structure to raise funds. A recent Commonwealth Bank issuance included a $210 million bullet tranche. The success of that deal further demonstrates the viability of the bullet RMBS concept, with more bullet issuances expected over the coming months.
Bullet issuances can be structured to be eligible for inclusion in certain bond market indices, such as the UBS Composite Bond Index. Many institutional investors, who invest on behalf of Australian superannuation funds, are required to replicate or invest in the securities contained in these indices. This additional structural demand and diversification of investors has the potential to make RMBS more reliable and cost effective
This sounds to me like very risky policy
val majkus
14 Dec 10 at 11:59 am
The immediate indicator (share prices) suggests that this is a reform that has achieved the reverse of the intended effect (to help the small players). Given the track record of this administration, who is surprised?
Rafe
14 Dec 10 at 2:19 pm
Agreed
Yobbo
14 Dec 10 at 3:45 pm
Yes, Hockey fucked up months ago when he dived in. Some idiots thought he been justified and triumphant back in November, but in truth he has laid the ground work for Swan’s latest fuck up and now cannot successfully criticise it.
The news should be full of the epic fail revealed in the stock market but there was nothing on the ABC tonight.
pedro
14 Dec 10 at 9:31 pm
As for an increased commitment of public funds to buying residential mortgage backed securities, this involves the commonwealth selling government bonds, a very low risk instrument, and using the proceeds to purchase an asset that has substantially higher risks:
What a load of baloney. “substantially higher risks”? I trust the upper tranches of a quality RMBS a lot more than I trust Wayne Swan.
The RMBS purchase plan was well thought out. Maintaining it doesn’t hurt at all.
so high a risk that private buyers are reluctant to purchase RMBS at current prices
Current prices are BBSW + 120bps! Our banks (whose balance sheets have god-knows-what on them) can borrow 2 year for about BBSW + 80/90! The elephant in this room is called “Moral Hazard”.
(and as an aside, Mr Ergas would do well to look at one of the AOFM’s excellent presentations. They show private buyers have been buying greater and greater slices of successive RMBS transactions. “Reluctant to touch” should read “becoming increasingly enthusiastic about”)
The “deterioration in taxpayer balance sheets” isn’t 4 billion of lousy RMBS – it’s the 2 *TRILLION* of bank balance sheets we’re all merrily underwriting. For free!
PSC
15 Dec 10 at 12:18 am
So adding to it doesn’t worry you in the slightest, PSC?
JC
15 Dec 10 at 12:25 am
So adding to it doesn’t worry you in the slightest, PSC?
No, upper tranches of quality RMBS doesn’t worry me in the slightest – not one jot or iota.
Banks – well they be different.
PSC
15 Dec 10 at 12:40 am
PSC:
The Government’s action is really no different to the intervention by Fred and Fan in the US real estate markets, albeit in a at this stage much smaller scale. It took 10 years for the US real estate market to cave in and most people put most of the blame in the intervention by those two entities.
We’re doing the same with the government support of the mortgage market. And the same sort of mindset is showing up here in terms of the government actively seeking to increase home ownership leading to the unintended consequences of further distortions in an already fully distorted market.
The government should not be guaranteeing the banks. But to suggest that you seem to hate the guarantee while defending the mortgage backed potential clusterfuck is unpardonable stupidity.
JC
15 Dec 10 at 12:49 am
PSC, the question in my mind is that at least banks are subject to prudential regulation whereas mortgage intermediation is not. How would you do it anyway? What if, over time, ratings agencies started stamping “AAA” on less than ‘top tier’ RMBS? Isn’t that how the sub-prime crisis started?
Sleetmute
15 Dec 10 at 6:58 am
The government should not be guaranteeing the banks. But to suggest that you seem to hate the guarantee while defending the mortgage backed potential clusterfuck is unpardonable stupidity.
“Defending” is strong. I’d suggest the RMBS support is immaterial in the scheme of things. The RMBS market is certainly still in an odd state after GFC, so I can see the argument that limited government intervention is warranted – and you’re drawing a very long bow to argue that it’s harmful.
The government RMBS policy about as relevant to anything as the government policy on public toilet maintenance. The numbers are just too microscopic to be material.
But Wayne Swan is making exactly the same mistake as Ergas and Kirchner – somehow thinking that the RMBS support is terribly *material*.
It’s a side show.
PSC, the question in my mind is that at least banks are subject to prudential regulation whereas mortgage intermediation is not. How would you do it anyway?
SM – Pretty much all RMBS has LMI over it – and APRA regulates LMI which will be taking the pointy end of the credit losses anyway. And I would strongly encourage any investor in RMBS (or indeed any security) not to take the word of any rating agency as gospel, but to do their own modelling and make up their own mind. Indeed the rating agencies publicly suggest exactly the same.
PSC
15 Dec 10 at 7:07 pm
Bullshit. It is harmful. The private market doesn’t want to own those assets. They have a more compelling reason not to do so than the argument by the government, which has none other than wanting to support their mates in the MBS market and advocating higher ownership. It sucks.
JC
15 Dec 10 at 7:27 pm
The private market doesn’t want to own those assets.
If the private market doesn’t want to own them, how come they’re buying ever increasing chunks of the new tenders, and buying stuff off the AOFM on the secondary market?
I’m still waiting for the knock-me-down argument that this is in some way more material that the governments choice for awarding the janitorial contract for the houses of parliament.
PSC
15 Dec 10 at 8:02 pm
They’re buying them because there’s a guarantee attached essentially making them Aussie government paper. So the risk is not the security if fails, it’s Aussie government risk.
Dude, you were knocked out in the first 5 seconds of the fight. the reason you can’t recall is because you were in a coma for entire thread.
JC
15 Dec 10 at 8:18 pm
They’re buying them because there’s a guarantee attached essentially making them Aussie government paper.
Oh bollocks JC. From memory they’ve all got LMI, predominantly from Genworth, and there are a goodly sized lower tranches in there. AFAIK there’s no LMI from captive insurers who would benefit from implicit TBTF guarantees. And they’re good mortgages, near zero low-doc and crap like that. But that’s it – there’s no other coverage, wrapping, backing or whatever. Just good assets, backed by third party insurance and a slice of equity.
Dude, you were knocked out in the first 5 seconds of the fight. the reason you can’t recall is because you were in a coma for entire thread.
I think I was put to sleep by the quality of the argument.
PSC
16 Dec 10 at 12:24 am
PSC:
are you losing your senses? You argue that
1. it’s bad the government intervenes and guarantees bank deposits because you dislike that intervention.
2. You are in favor of intervention in the mortgage market because you like that intervention as it helps the market in the sector.
You then tell us that the banks are buying mortgage paper completely ignoring your initial reason why you thought the government needed to intervene in the first place, which was because the banks weren’t active in the mortgage market.
If you’ve come out of your coma you need to be induced back into one.
JC
16 Dec 10 at 12:41 am
I am not a lefty!!
chris joye
16 Dec 10 at 2:34 pm
Chris, I feel your pain. You should demand to see that man outside, toot sweet, or pistols at dawn to defend your honor!
Peter Patton
16 Dec 10 at 2:39 pm
JC – read what I wrote, then respond to it, in that order. Otherwise there’s not much point me writing anything.
PSC
16 Dec 10 at 8:08 pm
Agreed. This is a pretty good blog, btw. I don’t normally come here that often due to work constraints, but it is impressive. Well done to Sinclair et al.
chris joye
16 Dec 10 at 8:42 pm