Peter Costello’s $5 billion in hedging losses are an outrage but as usual in politics, the bigger scandal is the cover-up rather than the crime itself.

Think about the outrage emanating from the Costello-Kroger camp back in 1988 after the Cain Government dropped $100 million on the VEDC and covered it up until after the election.

Federal Treasury has joined a long and sorry list of Australian mining companies that have literally lost billions of dollars punting the dollar.

But has anyone dropped more than $5 billion?

Woodside Petroleum and WMC must be getting close and they of course are headed by mates of the Treasurer and pillars of the Melbourne Liberal establishment.

Woodside chairman Charlie Goode sits on the Liberal fundraising body VAPOLD and the Cormack Foundation whilst WMC CEO Hugh Morgan was appointed by Costello to the Reserve Bank board and organised the farewell to Jeff Kennett fundraiser in 2000.

Both bet massively that the dollar would stay above US70c and Morgan placed some of these bets whilst being on the inside of the Reserve Bank.

This will be a difficult list to compile but let’s work out who has lost the most amount of money over the past 5 years punting the dollar since it completely fell out of bed. And let’s not tolerate any claims of complexity? The simply question for big corporates is this: How much more money would you have made over the past 5 years if you had not hedged anything in your business? These are my best guesses to kick this off:

1. Costello’s Treasury: $4.8 billion

2. WMC: approx $3 billion

3. Woodside Petroleum: approx $3 billion

4. MIM: approx $2 billion

5. BHP: approx $1.5 billion

6. Pasminco: approx $1.5 billion

7. Newcrest: approx $1 billion

Even silly old SOCOG dropped a couple of hundred million by partly hedging their $US700 million in television rights monies at about US70c when the dollar was almost down to US50c when the cheque arrived.

In fact the list of hedging disasters in Australia is just massive. Crikey’s best guess would put the total cost to our governments and corporates at more than $20 billion which puts it up there with the bad debt binge of the early 1990s in terms of economic disasters.

I can only point you to what Spotless executive chairman Brian Blythe said last year when I asked him whether the company was going to lock in US dollar earnings when the Aussie was pushing 50c.

“We at Spotless understand cooking and cleaning, we don’t know anything about hedging so we don’t do it. The only people who make money out of hedging are banks,” Brian said.

Could everyone from the Treasurer down please take note of that.


Now check out this very interesting theory on what happened.

Banks forced offshore so miners covered them


The real question that needs to be asked regarding the hedging losses of the mining companies that you mention, and others, is why were they hedging at all, and when did they start.

My understanding (and this is the bit that needs checking) is that first Keating and then Howard decided that keeping that National Debt down by forcing Australian banks to borrow offshore was a good idea. So the Reserve Bank stopped borrowing in $US to lend to Australian Banks, and sent them offshore to borrow their funds.

This, of course, created a huge exposure to a weakening $A for the banks, who were borrowing $US to lend $A. The banks, being crafty buggers, decided that the cheapest way to hedge this exposure was to make exporters from Australia (read miners) pay for the privilege of covering the banks collective arses.

So, bankers at all levels, including of course the Boards of Directors of any mining company that you care to name, started insisting that the miners had a huge exposure to a strengthening Australian dollar, and that they needed to go out and hedge this. Juniors like Western Metals found themselves forced into hedging their $US income as part of their financing deals, majors like BHP just found that all of a sudden the Board thought it was “A good idea”.

Perhaps the most ridiculous thing about this is that the miners missed an important link in their own businesses – basically, the most likely reason for the $A to strengthen was that commodity prices were strengthening, so they were already hedged. When you add in the fact that all the research that the miners were relying on was sourced from…the banks you get the makings of a nice conspiracy theory.

Regards and all the best with the court battle, Andrew

The feedback is also coming in on other hedging losses as follows:

Iluka and Cochlear the latest victims

* Iluka in its half-year accounts to June 2001 said that “speculative losses from closing out hedging positions acquired from the former RGC Limited in 1998 amounted to $9.9 million”. In August last year the company said: “We’ve only around US$300 million in forward hedges remaining and that’s spread over the remainder of 2001 to 2005. Most of our unfavourable hedge positions will unwind over the next 12-18 months.”

* And Cochlear said in August (for the June 2001 full-year accounts) and just recently (for the December 2001 half-year accounts) that profits would have been higher but for unfavourable hedging. It has not, to my knowledge, given actual amounts.

Treasury clearly on the punt


the disussion so far on hedging (real hedging not punting) is only looking at it from one view point – the exporters.

Of course they have hedging losses, the Aussie Dollar has fallen. My understanding is that in a company’s accounts gains and losses on currencies must be highlighted, while any advantage gained in the pricing of the goods/services being dealt with are absorbed into the Proft & Loss account. In fact if it is a true hedge the nett effect is zero. (I can go into the mathematics of it all but that is perhaps for another time.)

But remember, Australia imports more goods and services than it exports so importers would be showing hedging profits. Heard any complaints about hedging profits?

Also, we are are looking at it with the benefit of hindsight. It is easy to say, after the currency has plunged – “Why did you hedge?”. To be fair, ask yourself now if you think the Aussie is going to go up or down over the next year.You can ask six experts and you will get seven differing opinions.Nobody knows what a currency is going to do in a day let alone in 1, 2 or 3 years. This is why companies hedge.

There is a multitude of importers/exporters of all sizes using legitimate hedging techniques, to protect their pricing structures and their bottom lines, and doing so successfully. But they are legimate hedges not punts.

Needless to say in my 30 years in the treasury of international banks I have seen some god awful punts taken by companies under the guise of hedging and I suspect that is exactly what the boffins in Treasury have done – punted. Do you know if the details are public I would love to have a look at the rationale and the maths of it all (I do have a life – really).

Keep up the good work.

Peter M

Peter Fray

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