The NAB Board is showing all the signs of being in a cultural time
warp. The imminent release of the report by APRA and the hot breath of
the UK FSA’s Managing Director Michael Foot on NAB’s neck reflects
persistent market concerns and media suspicions that the old, now
disgraced NAB culture, not only survives, but is embedded. This is
despite a fresh CEO and a Damascus-like conversion routine from the
new NAB chairman.
The incumbent members of the NAB Board are said to be the keepers of
the cultural tone at the top. But there are no signs of the members
falling on their swords. Volunteers are scarce if not downright

Long time NAB director, Catherine Walter, seems reluctant to ‘do
an Oates’ and step outside the tent for some time as it were. She may
reflect that even if she did step out of the hot board tent into the
blizzard, this would not sate the rather ugly mood of the market gods
and regulators. And why, she might reason, should she take the fall for
the other equally responsible and accountable Board members.

NAB’s new CEO, John Stewart, is a cautious man, as befits his Scottish
and banking heritage. His public insurance policy has been to hedge his
bets on the report by PwC. This was a creature of the pervasive NAB
culture. It was directed to NAB general legal counsel, David
Krasnostein, late of Telstra fame.

As Stewart previously announced, his insurance is to engage a
world class firm to conduct a thorough review, independent of
NAB’s senior management, into his bank’s risk management procedures.
This may turn out to be the best investment and risk management
decision he ever makes for his shareholders. The report will join the
PwC, APRA Laker report and possibly a FSA report from the UK

The way things stand, there are similarities with HomeSide that are major concerns.

It will be recalled that a series of data entry errors on interest
rates were claimed to have been instrumental in ringing up losses of
some four thousand million dollars. The HomeSide computer system and
its use or misuse, and several US-based executives, were blamed.

The CEO, Frank Cicutto, existing CFO McKinnon and the since retired Bob
Prowse were at the HomeSide wheel. Were they asleep? Not according to
the useful, but unreleased, report by US law firm Wachtel Lipton Rosen
and Katz who investigated HomeSide. Apparently, no-one in the
wheelhouse was to blame for HomeSide becoming a salvage job. The
National’s Board, including many of the current incumbents, obviously
had full confidence in the steerers of HomeSide because Cicutto
and McKinnon not only retained their jobs, but had their compensation

Fast forward to the latest crisis.

Curiously, PwC also reported to the bank’s Chief Legal Counsel, David
Krasnostein. Why was PwC not reporting directly to the Board, like
Deloittes and Blake Dawson Waldron? Echoes of HomeSide, where the
investigating report was also firmly with the lawyers.

One might expect Stewart to insure himself by instructing the
independent lawyers on his world class ferret team to investigate and
review the role of the NAB’s legal department in the flow of critical
information up the command chain to the Board members, its impact on
risk management decisions and the results. As Stewart himself says, he
is a retail banker, not a wholesale banker, and he will not want to be
looking over his shoulder. Nor as he also says is he a lawyer. He may
decide to increase his insurance policy coverage and peace of mind by
bringing in senior legal people he has known for a long time. It’s
really just a matter of getting the culture and behaviours that he and
the market at large is comfortable with.

And like HomeSide, a computer system is again the culprit vehicle for
use and abuse, this time by cultural misfit traders to boost
their bonuses by some over exuberant currency trading that the bank has
branded ‘dishonest’.

The National’s Board seriously asks the market to believe that
incorrect rates, one sided trades and seriously out of run-of-market
trades were able to be entered into the governing computer system over
a long period and no-one in the 138 person operations division and 95
person finance division saw or knew anything? Is it really
possible they were all asleep?

As for the one hour window proposition expounded upon by PwC, the
traders are said to have been able, not only to come and go from the
controlling computer system without anyone knowing, but to also somehow
keep a second set of books on the true position of hundreds and
billions of dollars of currency trading exposures, over months if not
years. And all between 8.00am and 9.00 am every day? And no-one
knew except the cultural misfit traders? Were they the only ones
not asleep? Maybe these extraordinary fellows should be rehired to
find any other holes in the NAB systems and to give lessons on
how to say awake and alert.

No-one outside NAB knows how badly the HomeSide computer system worked
because the NAB Board hasn’t released the report. Four thousand million
dollars down the gurgler suggests not too well. But the following
extract from the PwC report suggests a systemic cultural defect, apart
from possibly a chorus of snoring in the NAB IT department, wheel or no

Testing and implementation

This work was reviewed by MR&PC. The National was unable to locate
details of the testing performed for the implementation of Horizon, and
we are therefore unable to conclude on the completeness, accuracy or
appropriateness of testing of the new system.

[It would be interesting to hear from Crikey readers expert in
financial computer systems controlling huge financial exposures about
their views on how reasonable it is for a major institution to be
unable to locate such critical documentation. If the tests cannot be
replicated, how does anyone ever know whether the system once worked.
Did someone make changes, even perhaps authorized changes, that enabled
a fraud to be perpetrated? And what about the rest of the

No doubt Stewart’s team of world class ferrets will find how the
testing documentation went missing, locate any wheels in the National’s
IT department, find out if anyone was sleeping at them and what
inquiries the National’s board and its risk and audit committees had
made about the integrity of the systems they relied upon to properly
fulfil their duties.

What is one to make of the theme in the PwC report that good news goes
like lightning to the top, but bad news gets suppressed? In the
currency trading saga, the facts seem to be that the bad news actually
came in at the top direct from APRA to then Chairman Allen in January
2003. How can it possibly be that neither he nor the Board were aware
of it and more to the point, failed to diligently act on it? How can it
be a matter of style between the previous chairman and the new
incumbent if that is what is being suggested?

Later, in November 2003, the Board blissfully endorsed the CEO’s
declaration to APRA that all was well at NAB when it is now clear that
was incorrect

Stewart must know that there is a fair chance that in the current
pervasive NAB culture, key correspondence from the outside world
addressed to directors that they should see they apparently don’t see.

By now, he may suspect that he doesn’t know what other Board members
may know or are supposed to know about, but worse, they themselves
don’t know what they don’t know, and nor does he. The juxtaposition of
Moss in the “senior independent director” role may exacerbate an
existing communications problem. It seems an honest but misplaced
attempt by the Board to fix the wrong problem.

As a result, one could expect Stewart to instruct his world class
ferret team to locate every piece of correspondence over the last
several years addressed to directors or the Board, have the
correspondence independently reviewed and sorted according to risk and
reputational materiality and have it report its findings directly to
the Board.

And from now on, it will not be surprising if he directs that
every piece of mail addressed to directors be logged and a directors’
reader file established. He and the other directors will certainly want
to see what mail the shareholders’ friend, ‘lightning rod’ Ken ‘Boral’
Moss is getting or maybe not getting.

The question of Mrs Walter and her position on the Board would appear
to be no different from any of the other directors, Stewart excepted,
because he resided in the UK and is relatively new on the Board.

It is difficult to see how Stewart could have any confidence in the
Board he has inherited. Chairman Kraehe’s platitudes look increasingly
hollow as people reflect on his time on the Board and his and his
colleague’s performance over a number of years as they presided over a
series of damaging reputational misjudgments that have cost the bank’s
shareholders a large fortune. It is ironic that Mr Kraehe’s nominated
area of expertise is in turnarounds of troubled companies. Is he really
the fire brigade chief for this job after a series of horrific fires on
his watch as a director?

The bottom line is that the directors of a bank the size of the
National in Australia have significant responsibilities to actively
ensure that they know what their management is doing, provide active,
firm direction and operate fairly, openly and transparently. Mouthing
the words is not enough.

If PwC is correct that the tone of the organization is set from the
top, Stewart’s world class ferret team will need to come up with a new
Chairman and Board in double quick time. Stewart will probably
know from experience that this is the fastest and possibly the only way
to bring about decisive cultural change at the National and end the
continuing reputational damage and speculation. What makes the rest of
the Board different from Charles Allen and Frank Cicutto who both bit
the bullet and resigned for the good of the bank?

If Stewart can locate enough good candidates to fill the positions on a
new six-member board team, with a well regarded Chairman of
international standing as part of his insurance package, the
institutional investors may rest much easier. There is obviously no
percentage in waiting for the next AGM or far off mid year review. The
market in its present mood is unlikely to give him that much time.

And finally to the National’s exposure in the United States and the UK.

In the US, Eliot Spitzer was on CNBC late last week talking about his
three-pronged attack on investment banks, mutual fund managers and
boards, and his relish for taking on boards that he see sees as

With 300 million of the National’s shares in ADR form traded on the
NYSE, and the attention the National is getting from the SEC on the
KPMG, currency, HomeSide and possibly other matters, the National’s
incumbent Board is fair game, in the cross hairs, and expendable

As for the UK, the FSA certainly has an interest because of its
regulatory powers over the NAB’s four UK banks. It will be interesting
to see whether it becomes the defacto bank regulator of NAB and the
APRA report sees the light of day through the UK back door if not in

Is there the prospect of a regulatory race between APRA and the FSA to
secure enough of the NAB’s capital in the UK to put the position of its
UK banks beyond question? It would be ironic indeed if NAB ends up
going down the AMP path. It is giving every indication that it
might unless it gets a very rapid culture transplant very soon.

John Stewart has told the market that things at the NAB under his watch
are going to run properly and that’s what he is paid for, right? He
undoubtedly knows what has to be done. His existing Board is now a lame
duck and he pretty much has carte blanche to get the NAB out of its
cultural time warp. The market is just waiting for him to get on with
it and earn his pay.

Peter Fray

Fetch your first 12 weeks for $12

What a year. Here at Crikey, we saw a mighty surge in subscribers throughout 2020. Your support has been nothing short of amazing — we couldn’t have got through this year like no other without you, our readers.

If you haven’t joined us yet, fetch your first 12 weeks for $12 and start 2021 with the journalism you need to navigate whatever lies ahead.

Peter Fray
Editor-in-chief of Crikey