In what is obviously pure coincidence, it was reported at the weekend that Liberty Financial, one of Australia’s largest sub-prime lenders is investigating doing an IPO.

Sub-prime lending is generally defined as lending to people with insufficient or poor credit history at higher than standard rates.

The coincidence being that this interest in a market listing follows the catastrophic meltdown of the US sub-prime market in recent weeks, with even GE on Friday announcing that the sub prime crisis had wiped $373m from their profits for the first-quarter.

Now while it is likely the case that Liberty management has been investigating the possibility of an IPO for some time, financial journalists and investors should be asking some hard questions if a share sale to investors proceeds.

As a young Investment Banker learning the techniques of the trade in New York, the key phrase I learnt when you were looking at doing an IPO was finding a “window of opportunity before the market shuts down.”

Translated into layman’s terms that means sell for the highest possible price while you can.

Given the excess of global liquidity at the moment, now seems a good time to float a company with these kinds of risks.

The fair question one can therefore ask is that given Australian financial institutions have loosened their lending criteria to the extent that everyone except David Hicks and maybe some Christmas Island detainees can seemingly get a home loan, is this a classic case of looking at getting out while you can.

Industry players in Australia of course get quite indignant when you question the stress testing done on their loan books.

However does anyone with any knowledge of economic cycles seriously think that with unemployment at 30 year lows, the economy ticking along nicely and Australians leveraged to the hilt , the sub-prime market lending fundamentals can get any better in the near-medium term?

Those that do were probably also urging mum and dad investors to buy internet stocks in February 2000 and going long the market in September 1987.

Given the US sub-prime collapse seemed quite sudden and even the dark blue of blue-chip Dow companies such as GE failed to anticipate its severity, why should Australian sub-prime players be any different?

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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