The list of troubled Reserve Bank directors I produced yesterday had
one glaring omission. Bob Hawke’s late mate Sir Peter Abeles was one of
several utterly inappropriate appointments to the Reserve Bank board
made by the previous Labor Government.

Whilst both sides of politics have been guilty of making blatantly party political
appointments such as Bill Kelty and Hugh Morgan, they have agreed that
any director of a bank should be ruled out by way of conflict of
interest. The theory here is that the RBA stands behind the banking system
and helps regulate it, so no director of a bank should sit on the

However, even the theory isn’t strictly followed because the Bracks
Government in Victoria appointed RBA director Donald McGauchie chairman
of the Rural Finance Corporation in 2003. The RFC is a major
government-owned lender in Victoria but because it is not technically
an RBA guaranteed bank, the conflict apparently doesn’t arise.

The ban on bank directors is good and well, but several RBA directors
have had far
bigger conflicts than just being a non-executive director of a bank.
When you borrow billions of dollars and hedge currencies around the
world, surely it is a conflict of interest to sit on the board of the
body which sets official interest rates and sometimes intervenes in
Australia’s foreign currency trading.

Take someone like Sir Peter Abeles, whose transport giant TNT almost
went broke in the early 1990s under a mountain of debt which peaked at
close to $10 billion. Abeles was appointed by Bob Hawke in 1984 and sat on the Reserve Bank
board for 10 years until 1994 – two years after he was deposed from the
TNT board as it grappled with a debt crisis.

Abeles was able to use this privileged inside information to manage his
interest rate and currency exposures at TNT. We all know that Abeles
was extremely close to Rupert Murdoch throughout this period and it is
interesting to consider News Corporations’s reported foreign currency
trading gains in the 1980s:

1981-82: $2.31m profit
1982-83: $3.11m profit
1983-84: $38.84m
1984-85: $11.25m loss
1985-86: $84.67m profit
1986-87: $1.54m profit
1987-88: $86.20m profit
1988-89: $32.84m profit
1989-90: $13.17m profit (first half)

Cumulative brilliant performance on forex trading of $173
million during this period is a remarkable performance from a media
company so far removed from the capital markets. We all know Rupert is
a genius, but how did he so comprehensively out-perform the
professionals in the zero sum game of currency trading. Did Rupert have
an impeccable source? Someone who jointly owned Ansett and the global
AWAS aircraft leasing business with News Corporation.

The same issue arises with current director Frank Lowy, who retires in
the next fortnight. Frank owns 11% of shopping centre giant Westfield
which manages Australia’s single biggest corporate debt.

Westfield’s gross assets of $36.42 billion are supported by a whopping $19.3
billion in liabilities. However, the Lowys sure know how to borrow
well, as only about $5 billion of this is secured and the average
interest bill is a very skinny 4.25%.

It sure must be handy for
Frank to be sitting on the Reserve Bank board as he skilfully plays the
global debt and currency markets to achieve a remarkably low cost of
funds on largely unsecured borrowings. Other stable democracies would
never allow the person with the biggest interest in central bank
deliberations to sit on the board but, hey, this is Australia.

The same goes for Janet Holmes a Court and Solomon Lew, who were both
struggling with their bankers when appointed to the Reserve Bank board
by Paul Keating in 1992.

As John Howard and Peter Costello contemplate appointing new
directors, they should avoid Labor’s mistake of giving highly indebted
Rich Listers a special inside view.