News Ltd’s Terry McCrann had an interesting column this morning downplaying the current financial shake-out and pointing out the key differences with the carnage of the late 1980s.
Frankly, I reckon there are loads of similarities today with that remarkable period from the stockmarket peak in October 1987 through until Paul Keating’s “recession we had to have” in 1991.
For starters, we’ve had another boom driven by easy credit. In the 1980s it was the entry of foreign banks and this time around it was global securitisation where just about any dodgy credit could get a loan which was then packaged up and sold off as a mortgage-backed security.
We’ve had a crazy equities and property asset price bubbles fuelled by debt and are now sitting vulnerably owing the world a staggering $600 billion with a local banking system that only sources 20% of its funds from local deposits.
In the 1980s, banks of all persuasions were falling over themselves to finance frenetic asset trading and paper shuffling entrepreneurs such as John Elliott, Alan Bond and Christopher Skase.
The only difference this time is that the debt-laden, asset trading paper shufflers in the 21st century are institutions like Macquarie Bank, Babcock & Brown and Allco.
It’s quite spooky how you can even line up some of the players.
Centro is George Herscu’s Hooker Corporation – both have hit the rocks after paying too much for US shopping centres.
MFS is Christopher Skase given the Gold Coast connection and the common ownership of the Port Douglas Mirage.
Victoria’s failed merchant bank Tricontinental is Tricom – lending to everyone and everything against not much more than paper, although there’s no way Tricom will be writing off $1.7 billion in bad loans.
The battles between Macquarie Bank and Babcock & Brown are equivalent to the rivalry between John Elliott and Robert Holmes a Court with the tilt at Qantas being the equivalent of the battle for BHP.
Elliott went broke when the regulators forced him to make a full takeover bid for Elders just as it was imploding under too much debt. Macquarie and Babcock carry precisely the same risk with their debt laden funds.
Babcock has already made a rescue bid for its Environmental fund at 50c versus the $1 float price. Babcock & Brown Power shares tumbled another 8c to $1.90 today and Babcock is losing plenty on its 9%. A similar rescue takeover bid would bring BBP’s enormous $3.3 billion debt onto the broader Babcock balance sheet. No wonder Babcock & Brown has plunged another 6.7% today.
The tumbling share prices of listed property companies point to similarities with the 1989-90 property crash, which came at the end of an enormous jobs and consumption boom which triggered inflation and a deteriorating current account deficit. Sound familiar?
However, the three biggest and most important differences are a $1 trillion pile of super, lower interest rates and surging commodity prices. China is booming today, whereas on June 4, 1989, the government slaughtered hundreds of protesters in Tiananmen Square.
The balaclava is on in today’s Mayne Report video on the Skilled Engineering EGM.