Dr Evan Jones 8 April 2014
Late on the night of 25 March, Senator Alan Eggleston (Liberal, Western Australia) made a speech in the Senate effectively accusing the Commonwealth Bank of Australia of corrupt behaviour. What could have motivated this unprepossessing Senator, formerly a medical practitioner and little known nationally, to make such a speech?
The CBA acquired BankWest from its failing parent Halifax Bank of Scotland in December 2008. It quickly proceeded to default hundreds (possibly 900?) of BankWest borrowers, mostly developers and hoteliers. The gambit was transparently fraudulent, and its scale unprecedented.
Senator Eggleston was a sitting member of the Senate Economics References Committee when it presided over the 2012 Post-GFC Banking Inquiry. I have written about this Inquiry process, in ‘The Commonwealth Bank takedown of BankWest customers’, in four parts – here, here, here and here.
The CBA/BankWest mass foreclosures
At Inquiry Hearings, the Senators were exposed to accounts of the defaults and foreclosures from select ex-BankWest borrowers (Sean Butler’s telling testimony is captured live here). The Senators also had at their disposal many submissions from defaulted borrowers. In the 25 March speech, Eggleston claims:
… many of these Australians [defaulted BankWest borrowers], who owned valuable properties, consistently and repeatedly provided examples of how those same assets were devalued and sold by the Commonwealth Bank and Bankwest for what they said was 'no apparent reason'. Such forced sales, known as 'fire sales' in the industry, caused witnesses a great deal of anguish and financial hardship. Many were left bankrupt, others were made destitute and some were mentally broken.
What makes this conduct seemingly inexplicable is the fact that many of these customers had not missed any mortgage payments, were not in any financial difficulty and were otherwise commercially viable. … The actions of the Commonwealth Bank, as owners of Bankwest, in foreclosing on so many clients seemed incomprehensible on the face of it. …
The fact that CBA and Bankwest appear to have so easily been able to misuse the provisions within their credit contracts for non-monetary defaults raises the question of whether there is an urgent need to address the severe imbalance between the power of banks and the rights of small businesses to whom they have lent money. The implications of this conduct are profoundly serious …
Profoundly serious indeed. Eggleston’s speech is devoted mostly to technical issues – on the possible purchase terms between the CBA and HBOS, and whether these terms might have ultimately driven the widespread defaults by the CBA of BankWest borrowers.
Was, for example, the ultimate price paid by CBA linked to the quantum of impaired loans that CBA could find (manufacture) on BankWest books post-purchase? Was the CBA driven to ‘lighten’ its loan book to ensure a capital / risk weighted assets quotient necessary to satisfy more demanding ‘Basel’ requirements dictated by the Bank of International Settlements? (Some have suggested that the CBA’s contemporaneous cleanout of Storm Financial and its investors was driven by the same imperatives.)
We don’t know, because the CBA is denying everything, naturally, and nobody outside the bank has the answer. Some victims have tried to infer details of the purchase terms, not least from fragments contained in CBA / BankWest / HBOS annual reports – hence the propositions presented by Eggleston in his speech.
But we don’t know. The secrets remain to be exposed. My view has always been that what is available publically is enough to hang the CBA. The appalling treatment of ‘sizeable’ customers, Sean Butler (hotelier) and Rory O’Brien (resort developer), as outlined here, is representative of the crime.
The BankWest borrowers experienced in common a quick series of events – dramatic devaluation of their properties/projects by valuers hired by the lender (as customer expense of course); functional communication with the borrower cut off; high penalty interest rates imposed; default and receivers sent in; plundering of borrower businesses by the receivers themselves; non-payment of borrower projects’ GST to the ATO; bank plundering of borrowers’ other liquid assets; and sale of borrower properties markedly under value. The Senate Committee’s Post-GFC Banking Inquiry Report briefly outlines the trajectory (pp.116ff. & 147ff.), with some borrower vignettes providing substance to the generalisations.
A brief article referring to Eggleston’s speech appeared in the Sydney Morning Herald and the Age on 26 March. It began: “In an extraordinary late night speech to parliament …”. There was nothing ‘extraordinary’ about the speech’s content. Rather, what is extraordinary is that Fairfax should deign to cover the subject which it has comprehensively ignored for the last several years (by contrast with its exemplary coverage of the Storm Financial scandal, also centrally involving the CBA). Even then, the article is merely a reproduction from the Australian Financial Review, and was placed on an inside page of the Business section. Fairfax’s cost-cutting has its casualties.
Coverage by both the Fin (John Kehoe) and the Murdoch press (Richard Gluyas in the Australian) of the CBA/BankWest scandal has occurred but (especially in the case of Fairfax) has been desultory. It is a scandal in itself. The bulk of the coverage has been oriented not to the broader issues but to fragments of the ongoing court battle between O’Brien and the CBA. Some of the dimensions of this battle, especially the diversionary legal issues, are covered here. O’Brien returns to court in May, and the outcome of that battle will be of substantial significance for the hopes of other borrowers foreclosed by the CBA.
The other ‘extraordinary’ aspect of the Eggleston speech is that he has belatedly come out in favour of the defrauded borrowers in spite of him being a co-signatory to the Post-GFC Banking report which is an exemplar in pusillanimity on the CBA/BankWest issue. Better late than never.
The Post-GFC Banking Inquiry report
It is instructive to recover some bons mots from this report, which immediately and deservedly fell into total obscurity. As a preface, the remarks of the Committee Chairman, David Bushby (Liberal, Tasmania), at the presentation of the report to the Senate, 28 November 2012, provide a foretaste of the report’s thrust.
The committee received sad and distressing submissions from many former small business and property developer customers of Bankwest who ultimately had their loans terminated after the takeover. Besides losing their business, many also lost their home and were made bankrupt, and now rely on family, friends and government assistance. …
In the opinion of many borrowers, Bankwest was unwilling to work through the issues and receivers were instead appointed. Separate issues about the conduct of receivers were also received. Of course, there are two sides to every story. The sectors and regions involved were generally experiencing tougher times, and the aftermath of the GFC cannot be dismissed. Banks also are not charities. They have responsibilities to their depositors and shareholders, and should direct credit to where it will be the most effective. …
A Senate committee is not a court, and this point was emphasised by the committee throughout the hearings and in the report. Individual disputes will need to be considered through appropriate processes.
There are two sides to every story, no matter that one side’s story is a lie. That is, the victims, for whom we have shed crocodile tears, can suck eggs.
But to the report itself.
Banks are large organisations. No bank will be able to control the actions of each individual manager and, based on probability alone, there could easily be individual cases of questionable conduct by the bank's employees. Another point that needs to be recognised is that many commercial and business clients get into difficulty due to market factors, unreasonably optimistic expectations about the strength and potential of their business, poor management or inexperience and other reasons not related to their relationship with the bank. [pp.132-3]
Disputes between parties to a contract that cannot be resolved through other means need to be dealt with through the judicial process. … The committee has accordingly reviewed the evidence from a broader, systemic perspective. …
The main role of the committee in this inquiry has been to ensure that the regulatory settings governing the financial sector are appropriate and that the government agencies charged with administering and enforcing these regulations are effectively performing their role. It is not automatically the case that a collection of disputes, even if they share certain characteristics, should trigger regulatory change that would impact entire groups of borrowers. While there are many sad and distressing stories now on the public record, the committee cannot help but observe that, in some cases, although the aggrieved borrower may have been able to operate successfully during periods when the business environment was relatively good, the more challenging times presented by the global financial crisis placed extra stress on less robust and more speculative projects. In many cases, loans were sought for ventures that were a considerable risk even during the more stable economic environment that existed prior to the global financial crisis; this is evidenced by the cases where banks other than Bankwest had refused to finance the initial loans. Following the crisis, the decisions of the other financial institutions have probably been justified. …
When its small business borrowers are experiencing difficulties, Bankwest has a duty to make genuine attempts to work with the borrower, to clearly explain what is happening and why, and to treat them with courtesy. [p.163]
The recommendations made by the committee are accordingly directed towards changes that will support more equitable dealings generally between small businesses and banks and that can apply to a broad range of future situations. [p.164]
In short: This is not a court. Aggrieved borrowers will have to fight their case in the court, or through some other dispute resolution channel. Which might involve dealing again with BankWest, which we note ‘has a duty to make genuine attempts to work with the borrower’, even though we admit that there hasn’t been any evidence of that to date. In any case, we implicitly think that the representative borrower hasn’t much chance of redress as their unfortunate demise has essentially been due to the onset of the GFC (which possibility the astute borrower should have previously accommodated).
There is the manifest cowardice of the Senators here displayed. But there is also a marked ignorance of the efficacy of the channels that the report outlines as possible means for foreclosed borrowers to pursue their grievances. There are the courts. There is ASIC, empowered by sections of the ASIC Act pertaining to misleading or deceptive conduct/representations and to unconscionable conduct. There is the Financial Ombudsman Service. There is the Code of Banking Practice. And the Committee wants the Australian Bankers’ Association to develop a ‘voluntary code of conduct for small business lending’ to supplement the aforementioned.
The proper channels for complaint are completely clogged
The outlining of the possibilities for borrower redress reads like a sophomoric undergraduate essay (or likewise a banking law textbook!). The Committee members appear to be unaware, or prefer to be unaware, of the dysfunctionality of the institutions and mechanisms listed.
In general, the courts, in spite of long exposure to bank litigation, don’t understand the bank-borrower relationship and are perennially partisan towards the bank in their judgements – indeed often complicit. Amoral law firms acting for the banks with their bottomless purse enhance the asymmetry.
As for ASIC, the Committee heard from ASIC itself that it saw no reason for action with respect to BankWest victims. The Inquiry Report noted (p.157):
On the Bankwest issue, based on the legislative boundaries in place and the resulting matters that fall within ASIC's jurisdiction, as well as the number of complaints it has received, ASIC advised that it considers it has not 'received any evidence to suggest some sort of systemic misconduct by Bankwest', nor as at August 2012 [Inquiry hearings testimony, 8 August], has it received 'anything that warrants further pursuit'.
The Committee should also know that since ASIC acquired from the ACCC operational responsibility for business to business unconscionable conduct in financial dealings in March 2002 ASIC has pursued not a single case against a bank, in spite of being inundated with complaints by SMEs and farmers (this document tells the story to 2010, but nothing has changed in the interim).
Regarding the Financial Ombudsman, the report acknowledges the structural limitations that FOS faces in handling SME/farmer complaints – the dispute must involve claims of less than $500,000, and the maximum compensation payable is $280,000 – and it recommends a lifting of these limits. But the report does not confront that bank-financed FOS has been actively complicit in bank malpractice, as was brought out by victim submissions in the inquiry – a situation I emphasise in my submission to the current ASIC Inquiry.
The Code of Banking Practice was nobbled from its inception in 1993. When the small business sector was belatedly introduced into the Code in a 2003 rewriting, the entire Code itself was soon secretly emasculated. The Priestley farming siblings, having been foreclosed by the NAB, uncovered the scam.
Why would the report recommend the creation of a voluntary code of conduct for small business lending? For a start, no code of conduct that is voluntary has ever worked – corporate self-regulation is a contradiction in terms. Next, the 2003-04 Code of Banking Practice already had SMEs and farmers included, a key reason why it was emasculated. (The replacement 2013 Code is an overweight bureaucratic nightmare, guaranteed to be unfathomable and unworkable – as is intended.)
The bank lobby and its satraps kept small business out of the recently legislated National Credit Code. Small business and the family farmer are a guaranteed source of easy plunder – we can’t have any legislative and regulatory impediment to that god-given right.
All the mechanisms that the report highlights for possible amelioration of the lot of bank borrowers with grievances have been neutered. The existence of widespread despair by BankWest victims is precisely because of the legal and regulatory impasse. This state of affairs would be well known to one Committee member, Senator John Williams (National, NSW). Williams and his family were themselves victims of the CBA, caught up in a foreign currency loan. Moreover, Williams’ office is regularly the recipient of bank victim complaints (especially from farmers). CBA/BankWest victims pushed for this particular Senate Inquiry to be established precisely because none of the prevailing mechanisms work.
The Inquiry was duly established but the Terms of Reference were changed, such that the BankWest issue was curiously missing, with the emphasis re-oriented to the stability of the Australian banking system post-GFC. Who directed those changes? I highlighted this sleight of hand in my 3 May 2012 submission to the Inquiry. I concluded my submission with the following:
The outcome of BankWest’s victims’ struggle for justice against the now integrity-free elephant that is the Commonwealth Bank is of enormous significance to the prospects of a functioning financial system in Australia in the immediate future.
This Inquiry constitutes a pivotal moment in that struggle. The 1991 Martin Inquiry and Report legitimised bank incompetence and corruption. Those in authority have head their collective head in the sand on the issue ever since. Those on whom the authorities rely, by default, to deliver justice have facilitated the entrenchment of injustice. The contemptibly corrupt legal profession draws its ill-gotten pay and the complicit judiciary resides (with rare individual exceptions) in self-satisfied immunity. …
An Inquiry that whitewashes the problem is far worse than no Inquiry at all. If this Inquiry lets the CBA off with another Storm Financial-type mild rebuke, the green light for lax practices and corruption will flash throughout the financial sector and the legal fraternity. We can expect a continuation of the endless cycle of scam-based destruction of customer wealth and small business sector functionality into the indefinite future.
The CBA as habitual criminal
And thus it has come to pass. The bulk of my submission was devoted to a history of 30 years unconscionable and/or fraudulent practices by the CBA, reproduced from a March 2012 document, The Dark Side of the Commonwealth Bank. There has been the ongoing malpractice by the CBA against SME/farmer borrowers. But there have also been specific and often large-scale corrupt affairs, namely:
• Pushing of foreign currency loans, ultimately at borrower expense, 1980s
• Corrupt foreclosure of Commonwealth Development Bank borrowers, 1990s
• Back door participation behind corrupt brokers in the Gold Coast ‘two-tier’ property scam, early 2000s
• The major force behind the Storm Financial margin-driven investment scam, 2000s
• The locking out of investors from their savings in the Colonial First State’s Mortgage Income Fund, late 2000s
• The defrauding of investors through the advisory network of Commonwealth Financial Planning
The Committee blamed the GFC and the BankWest borrowers themselves for the latter’s demise, even if it found that CBA/BankWest was a bit rough in its treatment of them. The point of my submission was to highlight that the CBA had been engaged in corrupt activities for decades and that the BankWest foreclosures had to be understood in that light. The presumption of guilt should have been with the bank. Every time the CBA got away with a major scam, its confidence was enhanced to proceed with the next one. Thus the BankWest borrower takedown.
But my submission was held in camera and its contents ignored. The Senate Committee and its earnest Secretariat were just going through the motions.
The Parliamentary Committee system as diversionary
Then why did the worthy Senators get the inquiry up in the first place, given that the Committee kept emphasising that it is not constituted as a court? Substantial resources were consumed in the process. With the fatuous recommendations, the major effect of the inquiry and of the report has been to further whitewash the CBA’s crime and to further legitimise the banking sector’s transcendence of the law in this country. Hence the CBA’s current arrogance and disdain on the BankWest affair.
The only positive outcome of the Inquiry is that much substance of the CBA/BankWest victims’ treatment has been made public. But the victims experience a roller coaster of emotions, with expectations raised and then hopes dashed again. More, the general population (here media non-coverage is of crucial relevance) will be none the wiser of the accessibility and significance of the victims’ experience. The fury in victim land is palpable.
A book has just been published in France by one Pierre Conesa (a former official in the Defence Ministry), whose title could be roughly translated as Above all, do nothing: a politician’s survival manual. Notes Conesu, the politics of non-decision is an ideal method of government. Quite. No need for a translation as the rule is already well known in the Antipodes – albeit it is one of a pair. Scurry to cater to the Big End of Town yet work assiduously to practice inaction in delicate matters that threaten the prevailing power structure.
I foreshadowed the desultory outcome of the Post-GFC Banking Inquiry in my June 2012 ‘Banks, Parliamentary Committees and the little person’. The alteration of the Terms of Reference to obliterate the CBA/BankWest foreclosure massacre was a giveaway regarding intentions. The entire Parliamentary Committee system is increasingly serving to reinforce, rather than counter, lack of accountability from the centres of power. (The outcome of this same Committee’s current inquiry into ASIC will be little different.) I concluded that article with:
The CBA/BankWest victims’ accounts expose indirectly what extraordinary discretion that banks have in their ‘contractual’ dealings with small business clients. This saga merely provides a window into an asymmetric commercial relationship probably second to none in industrialised countries … In short, for Senate Committee members to adequately understand how many hundreds of BankWest customers could be defaulted in the twinkling of an eye would involve opening a Pandora’s Box that they would prefer to keep firmly closed. Their own comfortable place in the political firmament would burst asunder. Is it possible that this membership, cognisant of its terrible responsibilities, could rise to the occasion?
The answer, unfortunately, was no.
Yet here we have Senator Eggleston re-appearing, and standing up for the BankWest victims. Little understood by the public, it takes much courage for a Parliamentarian to get up in one of the chambers and declaim support for bank victims. They face ridicule, even potential excommunication from their tribe. Democrat Senator Paul McLean, the quintessential bank victim champion, suffered appalling abuse and he resigned prematurely in late 1991. Occasionally a backbencher will do the honours, especially for a constituent. Statements to the House in late 1995 by Ken Aldred (here) and Ray Braithwaite (here and here) regarding Westpac’s brutality in foreign currency loan litigation had Aldred & Braithwaite challenging the right of Westpac to hold a banking licence. An appropriate proposition and courageous. But such speeches are rare. So kudos for Eggleston.
Eggleston concludes his speech with “… it has been suggested that the matter can only be resolved by establishing a public inquiry to establish the facts …”. But we just had an inquiry, in which the Senate Committee (including Eggleston) claimed that, not being a court, it could not establish these very facts. Bizarre. The CBA has kept the relevant facts under wraps.
Public acquiescence in the service of private corruption
How does one gain redress against white collar crime, rampant behind the corporate veil? Senior executives insouciantly use corporate muscle for corrupt purposes. Lesser individual employees kowtow, prostituting their integrity for their employer, protected by corporate resources and regulatory, judicial and political cowardice and complicity. Whistleblowers are pursued mercilessly.
How does one obtain the material disclosing the terms and the strategy behind the CBA’s takeover of BankWest and the subsequent borrower cleanout? In principle easy – send in the police, or establish a Royal Commission and have the material subpoenaed (including that from corrupt receivers). But the police won’t act – on the rare occasions when fraud squad personnel delve into the activity of ‘respectable’ major banks, the investigations dry up. The current Coalition Government has readily established several Royal Commissions, with full investigatory powers. But trade unions and the policies of the previous Labor Government are fair game, not in the same category as the untouchable banks. There will be no Royal Commission into the BankWest purchase, and there will be no Royal Commission into the banks sui generis.
Senior CBA managers – Ian Narev (takeover strategist and current CEO), Ralph Norris (previous CEO), David Cohen (Chief General Counsel) and Jon Sutton (sent in to clean out the purchased BankWest) – should all be in the dock. A large-scale white collar crime has been committed, the bodies are there in plain view strewn across the landscape, but nobody will follow the leads to determine whodunit. The Committee succumbs to bank claims that it was an uncontrollable plague (the GFC), while ignoring the evidence before it of foul play. Peter Temple’s Jack Irish could solve the case hands down, but that’s in fiction. Jack Irish is fictional precisely because one has to use fiction to tell the truth. In the real world, the truth remains shrouded in mystification.
It has to be remembered that the then Labor Government and the major financial regulators (the Reserve Bank, APRA and the federal Treasury) fostered and facilitated the CBA takeover of BankWest. The CBA already wanted BankWest, for ready access to the boom State of Western Australia. Here was the chance to get it on the cheap, which it did.
Did the authorities countenance an alternative foreign buyer – not least locally-based Citibank? No, the authorities dictated to Graeme Samuel at the ACCC to find that the takeover was not anti-competitive, which he did. Samuel already had form in finding that the Westpac takeover of St George was not anti-competitive. On the contrary. Both were anti-competitive. Six months later, Samuel admitted that he probably did the wrong thing, but he did it under pressure. And to hell with the brief that underpins the existence of the competition regulator. Then in June 2011, on the occasion of Samuel’s retirement from the ACCC chairmanship, we have Samuel claiming that the BankWest takeover wasn’t anti-competitive after all. Samuel did a job and he was belatedly attempting to cover his tracks. Samuel’s eight years at the helm of the ACCC were an unmitigated disaster.
The authorities used the CBA as a private vehicle for the ‘public purpose’ – to ensure stability of the banking sector. But the CBA acted only in its private interest, and the authorities were caught with their collective pants down. Thus the authorities are all implicated in CBA’s subsequent crimes.
Given that the authorities care only for the stability of the banking system (read the profitability of the Big 4), and care not at all for borrower victims (witness senior Treasury official Jim Murphy’s testimony during the Post-GFC Banking Inquiry hearings, 8 August 2012), they have not thought through the implications of their being implicated. But they have lost no sleep.
Yet the fact of myriad authorities being implicated in the CBA’s crimes against BankWest borrowers highlights why there will be no police investigation and/or no Royal Commission into the CBA purchase of BankWest and of the crimes against BankWest borrowers that ensued from this purchase.
In the meantime, CBA criminality rolls on. The foreclosure of Western Australia wheat farmer Peter Repacholi is representative of the collateral damage arising from the authorities handing the CBA a blank cheque. The ABC reports CEO Narev as claiming that ‘foreclosure was a last resort and the bank tried to be more compassionate to farmers in drought.’ The amoral Narev, nurtured at McKinseys, is not a banker but a man presiding over a racket – a worthy inheritor of the legacy of the privatisers and deregulators of once cherished public institutions.
There are numerous CBA/BankWest victims currently suffering through the court process, unnumbered and unheralded. But the one to watch is O’Brien v Bank of Western Australia. It returns to court in May, and it will be reported. There is a chance that the victim will not merely land some telling blows but might even (improbably for bank litigation) emerge victorious. Millions are at stake in the first instance, but much more.
The integrity of Australia’s banking system and the reputation of the financial regulators are at stake. There can be only one just outcome. It will be a David versus Goliath battle, and we can only hope that the biblical parallel is replicated in the here and now. All the bank victims of the profoundly corrupt Australian banking system deserve, for once, to be on the winning team.
In the meantime, is there anything more to be heard from Senator Eggleston?
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Dear Diane and Max, Unfortunately all settlements of this nature are confidential, so that the prospect is that the truth won't come out. That's the reason why banks make settlements when they know that they're likely to lose in court. No dirty deeds exposed, no judicial precedents established. Criminal. The settlement does however prove that the CBA was guilty as charged. But the CBA will continue as usual, even though its corrupt activities on the advisory front are being exposed on a regular basis (no such luck with the SME/farmer sector). There will never be a royal commission into banks (the last one was in 1936-37, when member Ben CHifley confronted that fundamental reform was essential, which he legislated in 1945. Since then, all down hill.Report