The NAB should be getting a lot more grief than they have from regulators, the media and analysts for the complete $4.4 billion stuff-up over mortgage processing business Homeside in the US of A.

For readers who have not been following this latest NAB disaster, Frank and Dick have presided over a US$1.61 BILLION provision against Mortgage Servicing Rights and US$590 million write off against Homeside goodwill. All up, so far, a hit of US$2.2 BILLION. At the current little Aussie battler exchange rate of about US50c, that’s a hit of $4.4 BILLION! Yeee hah! That’s more than 20% of the NAB’s $20.8 billion of shareholders’ equity (2000 NAB Annual Report) and a gigantic loss fest in anyone’s language!

This time there was no effusive praise gushing from ASIC’s chief bank cheer squad leader David Knott, not like the last time out when David rushed to heap plaudits on the NAB Board for working all weekend so they could properly inform the market. Maybe David’s superboss, one Pete Costello, had a word in David’s ear. And no sign of Jowly Joe Hockey either. Pete and JJ had obviously sniffed the wind on this one and smelled a turkey shoot in the offing.

However whether Knott sniffed, he obviously doesn’t inhale where the NAB is concerned. NAB seemingly can do no wrong in ASIC’s eyes. This time, for an encore, ASIC was more subtle, going for “encouragement” and “detailed input”. Yes readers, that’s correct. When it was publicly pointed out last November that NAB’s advisers were reportedly taking undisclosed commissions from NAB on the sly to steer investors into NAB products, on 19 September ASIC announced their response was to “encourage” and “provide detailed input”, no not the hapless investors for God’s sake, but to NAB.

Here’s ASIC’s press release (www.asic.gov.au) on 19 September.

Wednesday 19 September 2001

The Australian Securities and Investments Commission (ASIC) today announced that it has concluded its enquiry into commission disclosure practices within National Australia Bank’s (National) financial planning arms.

ASIC will continue to monitor ongoing compliance with the remedial disclosure measures, including extensive qualitative improvements to its disclosure documents, announced by the National as a result of its enquiry.

‘ASIC had been concerned about aspects of the National’s disclosure materials, particularly whether or not consumers were sufficiently or adequately aware of preferential commissions being paid to advisers who recommended the National’s own products, in comparison to those of external providers’, said Ian Johnston, ASIC’s Executive Director Financial Services Regulation.

‘The former ASC had undertaken a limited review of National’s disclosure documents in 1997, which lead to some improvements, in line with the Commission’s “Good Advice” standards in Policy Statement 122 [www.cpd.com.au “The law prohibits advisers from making recommendations to consumers about investments in which the adviser has an interest, without disclosing that conflict of interest”. ASIC’s Director of the Office of Consumer Protection, Peter Kell, said “Investors have a right to expect that their interests will always come first and that their adviser will act honestly and provide advice which is only in their best interests.”]. However, on this occasion, we encouraged the National to undertake a much more comprehensive review of its disclosure materials, to ensure that consumers of financial products could be confident in understanding what their adviser was receiving for the recommendation made.

‘As a result of the issues highlighted by ASIC, and following detailed input from ASIC, the National is now working to implement extensive qualitative improvements to its disclosure documents, primarily aimed at explaining the differential commissions paid to advisers who recommend the bank’s in-house products.

‘While ASIC is satisfied the National has complied with the strict requirements of the law, these new initiatives will significantly enhance disclosure’.

On 8 November 2000, ASIC announced it had commenced a formal inquiry into allegations that the National’s financial advisers received higher commission payments for selling the National’s products than those of other external providers. ASIC commenced the inquiry following allegations published in an article in the Sydney Morning Herald on 26 October 2000, ‘Sweetheart deal for advisers’.

Ends

Now if this was the UK or the US for example, NAB would probably have been assisted with the “detailed input” of the regulator’s boot to write to every investor who had invested in NAB’s products and “encouraged” to reimburse investors any losses they suffered in those products.

Terrific support to a club member, Dave, and very comforting. I think you can safely say that Joe and his flinty-eyed boss P Costello may bring this up in your next performance appraisal. And by the way NAB, thanks for being the Liberal Party’s primary banker all these years.

Anyway, back to the NAB turkey line up.

Several interesting things emerged from the briefing.

First, Dick and Frank looked like they were being lined up to be plucked at dawn. Crikey readers can see for themselves on www.national.com.au under presentation to shareholders.

Frank fidgeted and squirmed like a naughty schoolboy and looked as if he wished he was back among the retired folk in Jacksonville. Don’t worry Frank, you probably don’t have much longer to wait.

Demon supporter Dick sitting on Frank’s right just looked nervous and incompetent. But who can blame him, for looking incompetent that is? After all, he has needed the following star line up to tell him what went wrong, and he was responsible for the original due diligence on Homeside when he was Head of NAB investments and advisory section.

Dick’s all-star helper ex post evento list is:

New York law firm Wachtel Lipman Rosen & Katz

Melbourne law firm Arnold Bloch Leibler

Cohane Rafferty Securities

Blackrock Financial Services

Merrill Lynch (sale of Homeside)

KPMG

senior NAB risk managers

Dick, pity you didn’t think to either hire them well before the event or just hire some competent managers, stepping aside yourself if you felt it was all, well, a little beyond you.

Second, NAB’s auditors KPMG and senior NAB risk managers are involved in the ex post facto investigation. Does that mean Frank and Dick and their subjects? Well it must, mustn’t it, because that would be “inappropriate” wouldn’t it? Or aren’t the “NAB senior risk managers” responsible to them? Hang on, weren’t the NAB’s senior risk managers and auditors involved in the pre evento 4.4 BILLION fiasco? And did these glaring inconsistencies provoke a squeak from the bunch of bank analyst sychophants dialled into the briefing? No siree! We wouldn’t want to be shut out of the cosy loop by asking pointed questions, would we boys and girls?

Third, Cicutto refused to talk about the review report going to Charles Allen and the rest of the Board, which apparently is in late December after the AGM, although the exact timing was quite opaque. That’s all Cicutto was prepared to say, other than it was “inappropriate” to say anything about it.

Well Frank, you’ve heard the saying about fish and Denmark, but the analyst sycophants didn’t even mutter a squeak much less an epithet about the “appropriateness” or lack thereof of this “report” not being available to shareholders (and the ASX, remember those annoying section 3.1 disclosure rules?) before the AGM. Here’s your chance to redeem yourself, ASIC. Dave (yes you Dave, remember, you are supposed to be the chief of the rego watch dog, not kennel sweeper), take a break from bank cheer squad workouts and your “encouragement” duties and give some “detailed input” into Charles Allen’s backside. Just reach for the phone as soon as you read this Dave and dial up Chairman Allen. Forget the pleasantries. Just demand that a copy of the “appropriate” Homeside report be lodged with the ASX and mailed to all NAB shareholders within 14 days of the shareholders’ AGM in December. Oh and Pete Costello, why don’t you put in a call to Dave and tell him if he doesn’t, you’ll give some “detailed input” to Dave and then find someone a little more effective after the election to tear some strips out the striped panted padded backsides of the club Mel members.

Four, but by no means least, Frank has lucked out on an innovative scheme to solve the problem of the bank’s excess capital. He and his “senior managers” just lost it. Simple as that! No need now to answer questions why the capital hasn’t been returned to shareholders long before now, or why the use of steroids (or anything else for that matter) in the UK hasn’t worked. Simple. Now Frank and the team are now blithely embarking on plan B in the UK with Project Endeavour. Investors just have to think of James Cook and Mother England and the prospect of a shafting from the UK natives in the City. An analyst at the NAB briefing timidly asked if Frank was implying that acquisitions and/or return of capital was off the NAB agenda? Frank said that was a correct implication. Just pathetic!

If a $4 billion plus management failure doesn’t stir the passions with these analysts and the instos that digest their drivel, what does it take? Are they blind, deaf, permanently out to lunch or just don’t they care? Perhaps they even think all this is “normal”. Well, we might have hit on something here. This is probably normal in the mad hatters club that passes for millennium corporate and institutional Australia

They also seem to have missed some major shrinkage down at the NAB. Why would that be unusual? They only invest other peoples’ money in NAB. In US$ terms, Dick and Frank, to say nothing of the Bank’s board formerly lead by the unlamented Mark Rayner and more latterly the untested Charles Allen, have shrunk the market cap of the NAB from US$29.5 billion on 22 April 1999 just after Frank’s predecessor Don Argus bailed out to an equivalent of US$14.5 billion on an equivalent basis allowing for the subsequent expansion of about US$2 billion of retained earnings and the US$2.7 billion MLC acquisition. That’s a growth rate of 25% pa boys, downwards. Charles, Frank, Dick, how do you think the NAB’s US shareholders feel about your stellar reverse performance? Yes we know, it was all the currency’s fault, just like the NZ Board is completely blameless re Ansett 2001 and Mount Erebus in 1979. Yes, well, the Aussie shareholders have suffered a market cap reversal from $45 billion to $30 billion on the same basis, and that’s a 33% rear ending (yes analysts, don’t you think the shareholders could have made better use of the $8 billion odd of shareholders funds that they have poured in over the last two and a half years one way or another, or doesn’t that count either). And in a bull bank market, no bull!

No-one thought to ask Dick and Frank what they were still doing on the NAB’s shareholders’ payroll, even if they are the turkeys? It doesn’t take a three month plus report to figure out that the Chief Executive Officer and Chief Financial Officer of an organisation must be held responsible and accountable for 20%+ of shareholders’ funds, or does it? Maybe at NAB in the heart of club Mel it does.

On the other hand, maybe some “other senior managers”, that is, other than the CEO and CFO hold stewardship rights to the odd billion or two or four of shareholders’ funds and Chairman Allen needs an “appropriate” report to help him find out who the turkeys are. After all, he’s only been on the Board for the best part of a decade and such things may still be unknown to him. Or maybe his turkey detector has been in for repairs. For ten years or so? Remember Charles, that phone next to you could ring just as it did for your predecessor Mark Rayner last month down on the farm at Mokanger when he was invited nee demanded that he take the directors’ walk of shame. Word has it that the instos are getting just a little bit bilious about all this, and whilst being polite, as they are, last week’s turkey parade was just a bit off key. Just a hint Charles.

McKinnon is obviously living in some sort of dream world when he said to the assembled throng : “Good time to be buying one of the most efficient platforms in the country (US country that is)” Who’s he kidding? If it’s so darn good, why’s he selling it? And how would he know? He couldn’t run it. This also didn’t seem to occur to the instos and analysts, but maybe they were just being polite. It makes one wonder what it would take to make them impolite. A twenty or thirty or ye gods more billion shareholder excretive value bonfire, or what?

And finally we have APRA (ASIC is already flat out on cheer squad, encouragement and detailed input duties, and can’t be further overloaded). Treasurer Pete Costello and the good ‘ole Aussie instos have adopted the supine position, so far. Might not be wise to hold it for much longer chaps.

Remember Pete, being Treasurer and chief banker and all that, you are ultimately responsible for any nasty fallout on this and any other big disasters festering in NAB’s 500 Bourke Street bunker.

And in an election year, it’s hard to soar with the eagles when you’re scrabbling around the fowl yard with the turkeys.

Barry Banker

Turkey shoot spectator

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