Perhaps Business Spectator’s legendary columnist Robert Gottliebsen isn’t reading Steve Keen’s columns (or these ones) particularly closely. If he did, he probably wouldn’t be blaming the bankers’ communication skills for their current public relations foibles. If anything, Australia’s bankers have been remarkably adept at hiding the fact that they are essential giant hedge funds taking massive risks while being backed by taxpayer guarantees.
In Business Spectator on Wednesday, Gottie noted that:
Politicians will want to satisfy the bank-bashing demands of the electorate and are likely to win. The four major bank CEOs — Cameron Clyne, Gail Kelly, Ralph Norris and Mike Smith — all know the banking business backwards and know how to run their companies. When they were appointed, they met the criteria set by their boards and, by conventional CEO measurements, were excellent appointments.
This is a semi-reasonable assessment. Clyne (who actually came from an accounting/consulting rather than strictly a banking background, joining NAB from PwC in 2004) hasn’t been in the job long enough but hasn’t committed any serious missteps other than wasting shareholders’ time and money with a botched bid for AXA Asian Pacific. Kelly undertook a bid for her old bank, St George, which she was able to get through due to an incompetent ACCC, while Mike Smith cleaned up the mess left by his predecessor John McFarlane (in the form of Opes Prime, Chimera, Tricom, Bill Express, among others) before undertaking a risky frolic in Asia. While heavily criticised in recent months, Ralph Norris appears the most impressive of the quartet, leading a vast improvement in Commonwealth Bank’s customer service standards (although his and the bank’s reputation took somewhat of a hit last week after it hiked mortgage rates within an hour of the RBA’s Cup day increase).
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But Gottie then fell into the PR hype, espoused by the likes of the Business Council and company directors, when he started defending banker salaries, claiming:
Bank CEOs would need to be able to simply articulate the costs of money borrowed from overseas and from local depositors and the returns from housing loans. These can be powerful arguments. And when it comes to the bank CEO salaries, the simple situation is that the boards offered these sums and they are not high by world standards.
One of the reasons Australian companies have performed much better in recent years (and therefore have boosted superannuation returns) is that they have recruited better chief executives by paying closer to world rates.
For a start, Australian CEOs are very well paid by world standards — even the US, not known for its remuneration restraint, pays few commercial bankers what our Big Four CEOs receive. For instance, last year Goldman Sachs boss Lloyd Blankfein was paid $US9.6 million — far less than Ralph Norris’ $16 million. Deutsch Bank’s Josef Akermann was paid about €9 million, also less than Norris. Jamie Dimon, head of the massive JP Morgan Chase collected $US17 million this year, after receiving $US1.3 million in 2009. However, only $US1 million of Dimon’s wage was in cash salary, the remainder was in stock — by contrast, the Australian bank executives receive multimillion dollar cash payments each year, regardless of the performance of their bank.
More importantly, not only are Australian bank CEOs paid extraordinarily large sums (by international as well as local standards), but they are presiding over incredibly risky businesses. The Big Four banks have about 60% of their assets in the form of loans made on residential housing (CBA is most exposed to housing). In fact, the banks have lent so much money to residential borrowers in the past 20 years that they can’t even come close to sourcing those funds locally, needing to borrow about 30% from overseas lenders. (Incidentally, mortgage debt as a percentage of GDP has rocketed from about 20% in the mid-1990s to almost 90% now).
If the housing market stumbles (and signs of that are already appearing, with Melbourne’s auction clearance rate slumping to only 60% last weekend — the lowest level in years, and mortgage stress continuing to worsen), Australian banks may well find themselves in a similar position to Irish lenders. That is, they lent far too much money to housing speculators who paid far too much for houses than their intrinsic values. But as Bernard Keane correctly pointed out in Crikey — Australian banks are too big to fail and taxpayers will pick up the tab should their quest to become growth stocks go awry.
While Australian bankers are taking huge risks with shareholder monies and taxpayer guarantees, their bosses appear either willfully blind or completely ignorant. For example, the CBA produced an appallingly researched shareholder presentation denying the existence of a housing bubble while using misleading data.
Australian banks may have been justified in raising variable mortgage rates, but they have no excuse for lending so wantonly to home buyers. While expansion of the banks mortgage lending has been a key driver of bank profits, that lending has also led to the Australian banks being incredibly risky institutions, now highly leveraged to a sector whose values have long since departed from any reasonable measure (and which was dubbed by the Economist as the world’s most expensive housing market).
Sorry Gottie, Australian bank haven’t out-performed because of skilled executives — they have out-performed because our housing bubble is yet to pop (unlike the US or Ireland) and their risky behaviour is being back-stopped by unknowing taxpayers.