Financial Year 2008 certainly won’t be remembered by investors in the same way that wine lovers think of 1982 Chateau Mouton-Rothschild or a 1990 Romanée-Conti. Perhaps a 2004 Spumanti would be more apt. In fact, everywhere investors looked, there seemed to be charlatans, smooth talkers or just out-right crooks.
It is hard to believe that a mere twelve months ago few had ever head of the words sub-prime, private equity was something to be proud of, Opes Prime was the name of a Transformer and the All Ordinaries was trading at around 6,400. Since then, we have seen Centro implode, MFS self-destruct, Allco decimated, the Macquarie Model pilloried and ABC Learning Centres sent by investors to the naughty corner.
One of the most egregious examples of corporate malfeasance in FY08 was ANZ’s conduct in the Opes Prime fiasco. ANZ allegedly strong-armed Opes Prime’s financially crippled directors into providing them with a charge over Opes assets a week before the securities lender went belly up. If former Opes director Julian Smith is to be believed, ANZ dangled a $95 million lifeline in front of the directors in the same way that a drug pusher tempts an addict with one more hit. Conveniently, Opes Prime didn’t last the week and ANZ swooped on $200 million of security for their troubles. You would hope for slightly more moral behavior from a government regulated bank. That said, former ANZ CEO John McFarlane hadn’t even heard of Opes Prime despite spending almost a decade as head of the bank, and earning around $50 million along the way. Perhaps he was too busy ensuring his office had been adequately feng shuied.
Then there is the perfrormance of our auditors in FY08. These are the pin-striped accountants from big, international firms like KPMG who collect millions each year from shareholders to make sure their hired help (also known as ‘senior executives”) aren’t cooking the books. For that kind of money, you would think these guys could count. They can’t. KMPG failed to pick up a simple arithmetic error in CP1’s financial reports and didn’t notice a couple of billion of Allco’s debts. Auditors also completely lost the plot at MFS and Centro.
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Of course, you can always rely on your local financial planner. Well, unless they receive massive commissions (both upfront and trailing) to recommend “safe” and “high yielding” investments. While the planners would no doubt disclose their commissions somewhere in a 50y page Financial Services Guide, that doesn’t help their unsophisticated client who invested their superannuation in Westpoint and MFS Premium Investment Fund while the planners takes home a 10% kicker.
Even if your financial planner doesn’t recommend a high risk mezzanine fund, they could helpfully suggest a managed fund. Managed funds are great, so long as you don’t mind paying exorbitant fees to fund managers to generally under-perform the market. Even Warren Buffett, a man who has made $60 billion from market inefficiencies recommends that investors are better off simply buying an index fund than actively managing a portfolio. Financial planners don’t like index funds, not because they provide low returns, but because they provide terrible commissions.
FY08 has been even worse for the US. Crooked mortgage brokers convinced mid-Western hicks to take out 100% step-up loans which led to the biggest housing bust since the Great Depression. With property down 15%, the banking system is in turmoil – largely because the banks themselves thought it apt to purchase the very toxic mortgages they were selling. A bit like a murderer mistakenly drinking his victim’s cyanide. Talk today was that banks are slashing 175,000 jobs, which makes you wonder exactly what they were all doing.
Meanwhile, Fed boss Ben Bernanke has lowered interest rates so far to bail out his friends on Wall Street (Bernanke is advised by, among others, a hedge fund operator) that the US has negative real interest rates, a dollar which is crumbling and actual inflation believed to be upwards of 10%. Perhaps bumbling Ben was jealous of his predecessor, Al Greenspan. Greenspan is feted as some kind of economic genius, despite being directly responsible for the dot.com and housing bubbles.
Not to be left out, Bernanke’s looseness with the money supply has also led to a commodities bubble which has forced up the price of oil and other raw goods. The Fed meanwhile continues to print money so that it can bail out the likes of Bear Sterns – a bank run by greedy fools who lost billions on sub-prime while the CEO, Jimmy Cayne, collected hundreds of millions dollars to spend most of his time playing bridge.
Banks, brokers, financial planners, investment bankers, auditors and even the Fed – yes, 2008 will be remembered as one very ordinary vintage.