Sometimes important corporate news is ignored. Shareholders miss it, companies hide it and governments fail to publicise it. Because of its nature, most people often won’t understand its implications anyway. Take for example, the extraordinary activities of the US Federal Reserve, the bankers’ banker — which, during the height of the global financial crisis, was handing out tens of billions of dollars in emergency funding to financial institutions. Just to be clear, this wasn’t the well publicised TARP monies, but an altogether different loan that was given in secret, and only made public earlier this month when the Fed was forced to disclose which banks used its credit and liquidity facilities.
One of the biggest beneficiaries of the Fed’s largesse was none other than the venerable Goldman Sachs. Strangely, at the same time that Goldman was borrowing $US24 billion from the US Fed in single day, its CEO was telling Vanity Fair that Goldman would have survived without government help. Goldman wasn’t the biggest borrower though, Morgan Stanley, Goldman’s long-term rival, borrowed $100 billion from the Fed.
These firms, which presumably needed the money desperately for survival, didn’t bother disclosing any of these details to shareholders. Nor did the Fed — it only disclosed it earlier this month because it of the new Dodd-Frank Financial Regulation law.
However, it wasn’t only US investment banks that were surviving courtesy of the American taxpayer — two of the big Australian banks, those institutions which supposedly “saved” Australia from the GFC, were also getting in on the act.
Not only did two of Australia’s largest banks, Westpac and NAB, borrow billions from the US Federal Reserve during the GFC, but neither has uttered a word about it to shareholders.
In fact, Westpac chairman Ted Evans, when questioned about the bank’s borrowings at its recent annual general meeting, expressly refused to provide any details to shareholders. When asked why Westpac didn’t disclosed to the market that it borrowed $1 billion in emergency funding from the US Fed (and pledged $3.3 billion in collateral), Evans refused to even reveal to shareholders the total value of the emergency funds sourced. Evans claimed that the information wasn’t disclosed because the Westpac board (no doubt, based on legal advice from highly paid lawyers who role is to first and foremost exculpate the directors from any personal liability) felt that a reasonable person would not expect it to have a material effect on share price so they were not required to inform the market.
Evans was of course referring to the continuous disclose rules required by the ASX, which demand that once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.
Evans, who is paid $736,000 to chair Westpac, last year interestingly chose not to rely on the usual “carve-out” that allows corporations to refuse to disclose material information on the basis that it is confidential — instead, Evans claimed that a reasonable person wouldn’t think it material than a financial institution such as Westpac was in such dire need for funding, that it needed to borrow from an overseas central bank.
It would appear that such information would be, to many investors, highly material. Banks are inherently insolvent institutions, Westpac for example, has almost $600 billion in mostly longer-term liabilities (including on-call deposits) but only $5 billion in cash (and a relatively small amount of other liquid instruments). Like most banks, the vast majority of Westpac’s assets are housing and business loans. If one was deciding whether to purchase Westpac or say, Commonwealth Bank shares, the fact that Westpac was needing to tap the US Fed would certainly be a material piece of information that may alter that person’s investment decision. Similarly, the decision to sell Westpac shares (or write call option or purchase a put option over Westpac) would be most certainly influenced by Westpac’s urgent need for funding. According to Evans however, such information is immaterial to shareholders.
A spokesperson for the ASX, the entity responsible for enforcing its continuous disclosure listing rules, told Crikey that it is unable to comment on specific supervisory actions or at this stage, confirm whether it is investigating Westpac (or NAB) for possible breaches of the continuous disclosure rules.
Meanwhile, the CEO of Westpac, Gail Kelly, was paid $9 million this year and $10 million last year to oversee an institution that required billions of dollars in funding from an overseas central bank.