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Jun 7, 2012

Gottliebsen: blind to a global banking disaster

Too many political leaders around the world have very little understanding of how the banking system works, writes Robert Gottliebsen, of Business Spectator.

Too many political leaders around the world have very little understanding of how the banking system works. And, as I will discuss, global sharemarkets gyrate between having faith in politicians to solve the European problems, to utter despair of the political process.

The European political leaders concentrated on countries and austerity, not on the effects the actions taken in relation to this would have on banks.

Contributing to the problem, the ratings agencies have been too slow to recognise the enormous paper losses buried in the European banking system. Last night’s action by Moody’s to downgrade German banks, led by Commerzbank, was long overdue. Eventually the ratings agencies will face up to the problems of Germany’s largest bank, Deutsche Bank.

Instead of making sure European banks raised large amounts of capital when markets were higher, authorities, backed by the politicians, kept lending the banks money to keep the doors open. It did not help the long-term problem of loss of banking capital created the European recession and decline in asset values. And sitting over the whole potential mess are the staggering losses that will be incurred if the euro breaks up.

In Australia, our banks depend on the European banking system for large amounts of their deposits. Our treasurer and finance minister simply ignore this problem when they urge banks to pass on all of the Reserve Bank’s interest rate cuts. The public are left with the impression that the banks are gouging them and keeping the extra profits in the vaults. As in Europe, our politicians will not come to grips with the real banking problem.

As I wrote at the beginning of the week (Business braces for a triple threat), sharemarkets were ready for a major correction rally because they had been oversold. And rallies, of course, gather their own momentum as those who were shorting the market suddenly go long. The current big rises are based on the belief that the European politicians will solve the problem by spreading all around Europe the German wealth built up over six decades.

A lot of the German wealth has already been sent down the European toilet and it is possible that when the German politicians wake up to the depth of their banking crisis, they will flush the rest of Germany’s wealth down the same money-printing drain.

That’s what the market believes will happen and maybe they are right, but there is high risk that this is simply a technical correction. Such corrections can sometimes be major rallies.

In fairness to the politicians, the statistics they have to work with do not always reflect what is happening. Back home, I obviously have no way of checking the latest Australian ABS growth figures. As I move around eastern state businesses, I find a large number of enterprises struggling. Many listed groups are slashing their profits. And then the growth figures show that this is all a mirage and that we have never had it so good. The figures do not reflect what is happening to non-mining Australia and they are very dangerous because they lead politicians into thinking that no actions are required.

It’s the same approach we’re seeing to the global banking system, all over again.

*This first appeared on Business Spectator.

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8 comments

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8 thoughts on “Gottliebsen: blind to a global banking disaster

  1. Damien

    Robert, I could accept your argument about the misunderstood and pilloried banks if there was one skerrik of transparency in the whole process. I simply don’t have any information on which to form a reasoned view except this – the banks have a history of gouging customers when ever they find an opportunity to do so. They could, at least provide an account of why it’s necessary to increase margins. Or maybe the cash rate isn’t the benchmark we’ve all been told it is. Maybe it’s the median primary residence mortgage rate?

  2. mick j

    I venture to say that there is more than likely plenty of local money for governments and banks to accessi if they so choose. The problem I believe is that like imported labour European money is more than likely cheaper, so why use the nation’s currency if you can get a good deal overseas.

    The same is true of Venture Capital. There is money available locally through Superannuation Funds and from private investors who want to back sound Australian projects. The trouble is that anything worth marketing is taken overseas because the Australian marketplace is perverse preferring to invest in proven companies, bonds and bank deposits rather than future money spinners.

    So don’t side with the banks Robert. They have shown themselves to be bastards on more than the odd occasion. Just ask Bankwest customers whose lives were intentionally destroyed by Commonwealth Bank action which terminated perfectly viable loans because they did not fit the bank’s profile when it took over Bankwest. It ain’t kosher my boy.

  3. Dogs breakfast

    “In Australia, our banks depend on the European banking system for large amounts of their deposits.”

    What?

    Europeans are putting their pay and savings into Australian bank accounts? Is that true? I think you have made that up Robert.

    Now if you said that our banks relied on Europe for large amounts of their loans, I could accept that, but deposits? I’m not across the details here, but if that ain’t wrong I’ll walk to the moon.

    The fact that Oz banks make loans from Europe banks is germane, but not quite the weight that you have given it. If the Reserve Bank tells us that the bank margins, which I have to assume is the difference between the cost of loans and the rate they are lending, then I am going to believe an independent reserve bank over the claims of the Australian Bankers Association (Trade Union) or any individual bank.

    In any case, loans from European banks only make up a portion of their overall funding base, and they have benefitted from large increases in deposits from Australians, to whom they largley pay a pittance.

    So the mix of their funding is shifting, the Reserve has examined it and shown that their margins are close to all time highs, and the banks are reporting record profits quarter by quarter for doing what is effectively a risk-mitigated business

    So what is the point of this article exactly? Is it an apolgia for the fact that Oz banks live possibly the most comfortable existence in the advanced economies of the world while still hauling in record profits, and if Wayne Swan or anyone calls them on it, you are defending them with arcane references to European banking, which our banks claim themselves to hav elimited exposure to.

    Harrumph, these things don’t add up.

  4. Recalcitrant.Rick

    I haven’t listened to Robert Gotliebson since he told us in a breathless voice about the unlocked potential in a privatised Telstra, and how we would all be RICH! That was my cue to sell @ about $9.25.

  5. Paracleet

    The man is an tool.
    Back home, I obviously have no way of checking the latest Australian ABS growth figures. As I move around eastern state businesses, I find a large number of enterprises struggling.
    The official statistics don’t suit your argument so you prefer anecdotal evidence. Not just any anecdotal evidence but your own personally collected anecdotal evidence. You don’t like or trust the ABS stats so how about demonstrating where the methoology is incorrect or how the data is interpreted selectively (in your opinion). No! thats too much like hard work. I’m just going to assume what I believe is true on the basis of chatting to a Sydney Hat-Blocker and discovering that the topper market is tanking…

    He got paid to write the codswallop?

  6. drmick

    Yes. He has been feeding this crap to the bottom feeders and putting it in single syllable bites for lard claker and monkey boy to mouth. As I said in another post; this deliberate misinformation that harms our economy by talking it down is treasonous and in another time would have led to a blessed early end to a national traitor.
    Nice one Paracleet; he still ignores the GFC he helped create, and then couldn’t foresee.

  7. Hamis Hill

    If Gottliebson is right it is overexposure of the banking/housing pricefixing cartel to the failure of their bank lending induced ever increasing capital gains balance loan repayments model.
    This involved Asset Price Maintenance and Asset Price Inflation, one illegal and the other overlooked in any analysis. In short the banks have killed their customers with unaffordable loans on non-wealth producing assetts. There are two parties to these failed contracts and the forlorn struggle
    entails bank shareholders trying to pass all pain and responsibility onto the other parties to the loan
    contracts. and the crap will continue until bank shareholders take a hit. As for the money itself it is only a lubricant to business activities not the activities themselves. A RollsRoyce with a crankcase empty of oil is still a Rolls Royce. It is only going nowhere if no other lubricant can be found.
    If all the money disappeared bartering would keep the economy moving. So this continuing crisis is
    just subterfuge to create a monopoly on certified paper. A glimmer of the new economy appears through the crack in the Banks as gods charade. Wealth creation will be facilitated differently after the speculation and sin of usury model of banking most righteously disappears.
    Not without a few jackboots and a bit of blood in the streets as the the old gods die! They did commit
    the deadly sins afterall.

  8. Steve777

    I don’t doubt that a proportion of the banks’ funding costs have increased. But that’s their problem. Bank shareholders (and I am one) don’t have a God-given rate to maintain or increase their rate of return. Perhaps we would have more sympathy for the big banks’ concerns about funding rates if they behaved less like a cartel. Profits have gone up year by year at a rate much higher than GDP growth or inflation. Banks were highly profitable when fees and charges were fewer and much lower, when they paid interest on transaction accounts and when the credit card interest rate was 5% to 10% above the rate of inflation.

    Australian bank profits now are about $20b per annum, equivalent to about $2,000 per annum per Australian household. Some of this comes from overseas. However: the highest fees and charges in the world, many of which I regard as little more than legalised pilfering; usurious credit card interest rates; widening margins between deposit rates and loan rates; and the elimination of deposit interest on day to day accounts, all indicate a lack of real competitive pressure – a cosy oligopoly. On the plus side, I suppose this has reduced the incentive for Australian banks to indulge in the sort of high-roller gambling that brought down so many European and American financial institutions during the GFC.

    A big bank is not like any other business. They are in a highly privileged position in our national economy. We need to look at how we can make the system more responsive to the genuine needs of individuals and business. A more competitive environment would be part of the mix.