We’ve seen it all before, back in the 1970s, late 1980s and early 1990s — worries about the stability of financial institutions generating nervousness as investors who rejected the relative safety of banks and chased higher returns suddenly get all conservative and run for cover in the bigger, sounder banks.

It happened with the building society and finance company problems in the 1970s, the finance company and property trust disasters in the late 1980s and early 1990s (anyone remember Estate Mortgage?) and it is happening now with mortgage funds, except for one major difference.

This time the problems are being generated offshore. There’s little damage being done here, except among the financial engineers and companies who ventured off in search of higher yields and return; such as Allco, GPT, Mirvac, Centro, MFS, City Pacific, etc etc.

So the moves by four fund managers, Perpetual, Australian Unity, Axa Australia and Challenger Howard (with more expected today) to freeze their mortgage funds is nothing but a reaction to the nervousness about money, the guarantee to the bank deposits and also the slump in the home building and commercial property markets.

The home building and commercial property sectors have been hit by collapses, big losses and doubts about the stability of many player. Collapses like Westpoint and Fincorp have hurt confidence, and now the financial market turmoil and the guarantee given to bank deposits have forced those yield hunters to become all conservative and bolt for the banks.

Perpetual has had its own bad news. Its funds under management has fallen by $10 billion and more in the past year from outflows and falling share prices. It has had problems with its exact cash management fund which invested in subprime related paper in the US and realised and unrealised losses have topped the $20 million mark. But Perpetual says fund inflows have remained strong with $2.3 billion in deposits at September 30.

Yesterday’s announcement from the company didn’t mention that fund and whether there had been any outflows, and yet it’s the one that has had the worst publicity because of the losses. If it’s not losing money, or if the losses are not significant, does that tell us something about what is happening at Perpetual?

AXA has been forced to freeze a NZ mortgage fund with $117 million in it at the time, the AMP has also frozen a Kiwi fund.

Mirvac has frozen redemptions from property funds it is associated with. It’s not as though the problem has suddenly emerged with the guarantee on bank deposits, as The Australian’s coverage seems to imply.

This has been happening since the crisis started in August of last year, and it has accelerated since the guarantee was issued on October 12.

But we have seen it before. The people who spurned the safety of banks and chased the higher returns from investing in mortgage and similar market linked trusts, who sought big capital gains in shares and groups like Allco and Babcock and Brown, now want the Government to save them from their greed.

That would also penalise the people who have been consistent savers in the banks through term deposits. They were derided as being boring, but today they look like the smart ones. And what about the financial planners who recommended investing in these funds for the higher returns, and pocketed commissions?

Guarantees weren’t handed out in the late 1980s and early 1990s as Estate Mortgage, Trico, the State Bank of Victoria, Pyramid and the State Bank of South Australia fell over, so why now? They were far more devastating, with actual huge losses. Go and ask the people of Geelong about the damage Pyramid did to them. So why the special pleading now. Is it another example of the Australian media’s over the top, don’t stop and think approach to news, especially The Australian?

The banking and financial systems all survived the implosions of the early 1990s and will do so again. If those companies like AXA, Perpetual, Challenger and the like are really interested in helping people, they could arrange loans, using their credit ratings, to their mortgage funds.

The trouble is they don’t want to and won’t because they are still run by people who believe in the financial engineering and leveraged investment approaches of the easy credit days.

They should own up and tell everyone that their funds are all highly illiquid because they can’t sell the assets to raise the cash to payout redemptions. Investors should realise that as well, instead of charging blindly off in search of yield.

Peter Fray

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