Thursday, August 12, 2010

$6 Billion Profit and Bankrupt!

Here is a news release fromThe Citizens Electoral Council of Australia. It makes very interesting reading and if it isn't true, you would think the CBA would sue the arse of The Citizens Electoral Council of Australia for defamation!

Funny, but I am yet to see this information in the mainstream media.

"CBA has announced a $6 billion profit for 2009-10, which, at around 17 per cent return on investors’ funds, must surely rank as a “super-profit”.

But being able to gouge $6 billion out of its customers through bank fees and interest margins, whilst under the protection of the government, isn’t enough to alter the fact that Australia’s biggest bank is, indeed, bankrupt. As are the rest of them.

How can that be? Well, putting aside the off-balance-sheet derivatives exposure which alone renders CBA and the rest of the banks bankrupt, just look at what’s on the balance sheet.

(Note: a profit and loss statement isn’t the same as a balance sheet. The profit may be spectacular—to the shareholders, not the vict…, er, customers—but the balance sheet is shot. Also, don’t take their word for what is written on the balance sheet—put the figures in the context of what is known about the economy.)

Sixty-five per cent of CBA’s loans are domestic mortgages—it’s the leading mortgage lender in Australia. A bank’s loans are its assets, so domestic mortgages comprise the single biggest component of the assets side of CBA’s balance sheet.

As for liabilities, 50 per cent of the money CBA has lent out as mortgages comes from its depositors, but the other 50 per cent comes from overseas borrowings. This means that half of the money it has loaned out as mortgages it has to repay to its foreign creditors. From previous research, it is known that the great majority of those foreign borrowings are very short-term loans, usually on terms of 90 days. Between them, Australia’s banks share foreign liabilities of over $440 billion, on 90-day terms.

This foreign exposure is a huge vulnerability, and was the reason for Rudd’s bank guarantee in October 2008. It is now known that when foreign creditors refused to roll over their loans to Australia’s banks in October 2008, the panicked banks begged the government to intervene with the guarantee, or “they would be insolvent sooner rather than later”. Of course, Rudd did, but it’s still a vulnerability: according to The Age, 6th August, visiting HSBC senior executive Sandy Flockhart noted that the heavy reliance of Australia’s banks on overseas borrowings to fund domestic lending leaves them exposed to shocks in global credit markets.

If you managed CBA under these circumstances, you’d think you’d want to make sure that you have on-lent the foreign money you borrowed into investments that are rock-solid. But instead, CBA has lent it straight into a bubble—domestic property. The assets it has lent against are over-inflated in price, and when the bubble bursts, and those prices collapse, CBA will not be able to recoup the value of its lending from the sale of the collateral.

How inflated is the bubble, i.e. how overvalued is domestic property? In June, American fund manager Jeremy Grantham bluntly pointed out that over the long term, housing values are a multiple of 3.5 times household income, but in Australia, they have spiked to 7.5 times. Predicting a close to 50 per cent collapse in Australian property prices, Grantham took a swipe at the “supply and demand” delusion, pointing out that if the Australian property bubble didn’t collapse, “it will be the first time in history”.

Under this scenario, CBA faces the prospect of the value of 65 per cent of its business being slashed by nearly half—a $150-$200 billion hole in the assets side of its balance sheet. That means bankruptcy, any way you cut it. And the bad news? It’s probably not the worst of the Australian banks. CBA is being singled out for example here, because the other big three don’t announce their profits until October.

Citizens Electoral Council leader and candidate for Wills, Craig Isherwood, said today, “If Rudd hadn’t intervened in October 2008 with the bank guarantee, Australia’s banks would have gone bankrupt then—just like the banks on Wall Street and in London. They were not ‘sound’ then, and they are not ‘sound’ now.”

He continued, “The issue is not the management of any one bank—the banks are bankrupt, because the entire global, monetarist system is bankrupt. They aren’t part of a credit system, which finances the production of real wealth, they are speculators and gamblers, which want to take your shirt, because they’ve lost their own."'

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