Dr Evan Jones 12 December 2007
Why an Australian Bank Might Spell Doom for the American Farm Belt
The privately held Great Western Bancorporation has just been bought by the National Australia Bank for $798 million. Great Western, chartered in 1907, is a successful byproduct of American populism. The NAB is a successful byproduct of Australian corporatism writes Dr Evan Jones.
With head office in South Dakota, Great Western’s 100 branches span Iowa, Nebraska, Kansas, Missouri, and a foothold in Arizona. Last financial year GWB earned $35 million net profit on a deposit-based $2.6 billion loan book (83% of which is business lending including 11% agricultural), with $3.4 billion gross assets and net equity of $223 million. GWB appears to be a smartly and conservatively managed institution.
To September 2007 NAB delivered A$4.6 billion (approx. $4 billion) net profit on a A$395 billion loan book and A$565 billion gross assets with net equity just under A$30 billion. The NAB is the largest of the four deposit-taking commercial banks that dominate Australia’s financial sector. A relative giant is taking over a minnow.
The NAB is Australia’s largest agribusiness lender (A$41 billion) and the largest lender to ‘small and medium enterprises’. GWB is community-oriented, and NAB also spends on community activities. Is NAB a suitable parent?
The NAB is a complex beast. The profit mass indicates that the bank must be doing something right. But the bank has its thick dark side. The NAB has been a persistent exemplar of managerial incompetence and malpractice. Do GWB management and customers know what is in store? Some examples:
In 1996, NAB entered into a contract with Idoport to purchase the latter’s AUSMAQ software and associated management to streamline managed funds administration. The relationship soon soured dramatically, and Idoport principal John Maconochie sued NAB for breach of consultancy and technology contracts.
The case still simmers, with NAB having run up an estimated A$80+ million in litigation costs.
In 1997, NAB bought a US mortgage processor called HomeSide. The presumption was that HomeSide’s technology would provide a common platform across the bank’s global operations and savings in home mortgage offerings. NAB was finessed by its vendor, as goodwill constituted 65% of the $1.7 billion purchase price. HomeSide was an early securitizor. But the model was both complex and fragile, and the value of the ‘mortgage servicing rights’ package underpinning block securitization varied dramatically with interest rate changes, supposed to be offset by sophisticated hedging. Losses escalated in the early 2000s. HomeSide operated from Florida (on the highest salaries in the entire company) without internal risk management procedures and without oversight from Australia. Homeside was eventually sold by late 2002, with NAB running up over A$3.6 billion in losses. Curiously, the financial brokers that took NAB into this fiasco, Keefe, Bruyette & Woods, are the advisors on the current takeover of GWB.
In 1999, NAB bought SAP software off the shelf with the aim of integrating the myriad personnel and ledger systems operating domestically and across its acquired overseas subsidiaries. The ‘integrated systems implementation’ process was an expensive fiasco, with multiple external consultants benefiting without delivering, and write-offs of at least A$400 million.
In the late 1990s, NAB lent a certain Tony Mokbel A$5.7 million to pursue various business interests. The suburban Melbourne bank manager’s credit reports described Mokbel thus: ‘Visionary Mokbel’s integrity is beyond reproach Business associates hold Mokbel in the highest esteem’. Part of the credit involved unauthorized overdrafts and an unsecured loan. Mokbel was arrested in 2001 on drugs charges and his assets frozen, prompting NAB to review its credit evaluation. Mokbel, described by the media as ‘the state’s most prolific amphetamines manufacturer’, fled Australia and is currently fighting extradition from Greece.
Anthony and Peter King ran a successful bus company in regional New South Wales. In 2000, NAB finalized a total loan of A$100 million to the King’s company by signing off on A$44 million for the purchase and leaseback of 140 buses. The problem was that the Kings didn’t own the buses but NAB managers didn’t check the proffered documentation. The business collapsed in 2002, and NAB has spent the succeeding five years chasing the King brothers via expensive litigation to overcome its managers’ laxity.
To feed a ‘comfort shopping’ addiction following a failed marriage, NAB employee Catherine Asley stole $1,126,000 from her suburban Melbourne branch from 1994 over four years and covered it up by creating false accounts. Keith Benning, business banking manager at regional Kilmore, Victoria, stole A$5.7 million over four years from 1998 to feed a gambling addiction. Employee fraud is a perennial dilemma in banking, but four years is a gracious period to feed one’s habit.
During 2007, suburban Melbourne business banking manager Akshay Batra had gradually misappropriated A$22 million, directed into false loans and channeled through a migration agent associate. The loans were used to purchase government bonds by which potential (Indian) migrants would beef up their reported capital assets to enhance prospects of a successful migration application. NAB is currently pursuing Batra in the courts, but immigration authorities have accused NAB of delaying notification of the fraud and thus impeding detection.
Institutional fraud, deception and laxity
NAB’s Irish subsidiary, National Irish Bank, was discovered in 1998 to have been evading taxation and overcharging its customers, via deceptive accounting practices, for at least the previous ten years. A six year investigation by the Irish regulatory authority brought down a condemnatory report in July 2004. The authority’s Director noted ‘the report is deeply disturbing in revealing the extent to which illegality and bad practice was tolerated (and to some extent encouraged) within the organisation between 1988 and 1998′. Tax evasion was then widespread in Irish banks, but the NIB had institutionalized shonky procedures.
The authority’s report faults the bank’s culture: ‘The branch network was target-driven but limited support by way of systems of training to enable the achievement of these targets. Managers felt under pressure to meet these targets, in the setting of which they had negligible participation and which many considered unreasonable; they feared criticism and possible humiliation before their fellow mangers if they did not meet the targets set’. NAB countered with a report from the now discredited and defunct Arthur Anderson, and sued the public broadcaster for libel, but lost the battle. NAB incurred costs of $110 million in tax payments and customer remissions.
Over 2002-03, NAB’s dealing room traders bet heavily that the Australian and New Zealand dollars’ rise against the US dollar would run out of steam. The rise continued, losses mounted, and the traders sought to cover their losses with fictitious trades. Stop-loss safeguards (capitalizing to-date losses) were ignored.
Key traders had been brought over as a bloc from another bank but standard recruitment processes were bypassed and their reputation for aggressive trading was ignored. There was no independent back office to monitor trades (a comparable failing destroyed the famous British merchant bank Barings). Losses were belatedly estimated at A$360 million. When the fraud was exposed, senior management attempted to minimize its significance. At least in this case, both the Chief Executive Officer and the Board Chairman ultimately fell on their swords and were replaced.
NAB owned a subsidiary in Northern Ireland called Northern Bank. In December 2004, a raid on central Belfast branch netted A$67 million in bank notes. The raid involved the raiders being admitted to the bank’s vaults while the families of senior staff were held as ransom. Northern Bank was in the process of being sold to a Danish bank. The serendipitous capital gain from sale provided an upbeat background for the NAB’s claim that the loss from the robbery was inconsequential.
NAB owns two northern British banks, Clydesdale and Yorkshire. In 2005 Ann Davies was lured to NAB Europe from Price Waterhouse Coopers to assist in post-Enron compliance procedures. Within a year she had been sacked for ‘behavioral’ reasons. Ms Davies fault was to have discovered a discrepancy of £178 million in ledger transfers between the two subsidiaries. Although initially offered full support by senior management, within a month she was removed from the investigation. When she continued to discover further discrepancies incidentally, she was sacked on the spot.
NAB’s reporting of financials for 2006-07 neglected to account for off-balance sheet exposure. Pressure from an unknown source had NAB belatedly issuing an announcement via the Australian Stock Exchange on 15 November. Total off-balance sheet exposures at September 2007 were almost A$33 billion. NAB net equity is under A$30 billion. This announcement is not available on NAB’s own website.
Small business depredation
NAB malfeasance against small business borrowers keeps appearing, mostly under the radar but occasionally given publicity. Two dramatic examples follow.
In 1984 A semi-retired couple, Ned and Joy Somerset, moved to provincial Queensland after a lifetime of successful broadacre farming. They were talked into purchasing a strawberry farm by the local NAB manager. The property was a total lemon; the then owner faced impending foreclosure but he was a friend of the manager. The manager misrepresented the fecundity of the property to the Somersets. He also revalued the property three times, from A$210,000 to A$575,000, presumably to achieve a loan to valuation ratio that fitted within his Delegated Lending Authority, thus escaping the necessity to submit the proposal to higher management for scrutiny.
The Somersets duly purchased the property, partially funded by an NAB loan, and were bust within a year. In the subsequent court case, NAB chose to protect rather than expose its corrupt manager. The court was presented with falsified documents and false statements by bank staff, but the Queensland Supreme Court judge found bank staff to be more reliable witnesses. The Somersets went to NAB with net assets of A$700,000 and were left penniless. They now live in rented accommodation on a veterans’ pension.
Sante and Rita Troiani came to Australia as penniless Italian migrants in 1956. By the 1980s the Troianis were in possession of substantial property, of which the centerpiece was Wide Bay Brickworks in provincial Bundaberg, Queensland, with Sante as dominant owner and manager. Troiani was an innovator and had a keen eye for quality local materials. Business was booming and he was exporting to the region. In 1993, NAB assiduously sought his business, at the same time finessing him with receipt of a national ethnic business award.
Troiani eventually moved his business to NAB in late 1993, but not before being given assurance that NAB had no relations with Boral. Boral was WBB’s giant building supplies competitor, but also monopoly supplier of gas to WBB’s kilns, gas of perennial contaminated quality that impeded WBB’s brick production. It turns out that NAB and Boral had directors in common. Troiani was introduced to a person described as a Boral representative when he attended the opening of Boral’s gas supply depot in Gladstone in 1984. In a 1987 mediation over gas quality in the Queensland Premier’s office, after which Boral admitted fault, the same individual was again present as a ‘Boral representative’. The individual in question was NAB’s then Credit Bureau General Manager and shortly to become NAB’s CEO.
One can infer from bank documents, released (after being jumbled) by the receivers to Troiani post bankruptcy, that NAB had set out almost immediately to divest the Troianis of their considerable assets and of WBB itself. Troiani was a good craftsman but left the accounts and financials to others. What has the hallmarks of a sting operation could only have been achieved with the assistance of some WBB insiders, with Troiani’s signature being forged on some documentation. Troiani was foreclosed in 1998 and bankrupted in 2002. Assets worth well over A$50 million were appropriated, and the Troianis left penniless. Sante, in his mid-70s, died of a stroke in October, product of long hours growing flowers to put food on the table.
Troiani publicly accused NAB of colluding with Boral to destroy his business, first via speeches by a Queensland State Parliamentarian in November 2005, the substance reproduced in the Member’s local paper, the Fraser Coast Chronicle; second in a television network current affairs program, Channel 7′s Today Tonight, in various States in April 2006 and January 2007. NAB chose to privately harass both media outlets, but the claim remains in the public domain.
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Financial deregulation in Australia in the early 1980s saw the strand of caution in banking culture jettisoned. The dash for market share was coupled with the slashing and unstable placement of front-line lending staff. The small business lending model becomes one of ‘easy in’ at the front end with any problems that arise to be sorted out at the back end at the borrower’s expense, with foreclosure as a key option. What matters is the securing of the borrower’s assets, especially the family home or, in the case of farmers, the entire property.
As the largest small business lender in Australia, NAB has exhibited a cavalier streak. Over 1999-2001, in the context of a sugar industry crisis and dairy deregulation, NAB put a swathe through Queensland farmer borrowers. A Legal Aid advisor, charged with the job of moving traumatized farmers onto public welfare, was queried by one NAB agent ‘Why do you bother yourself with this rabble?, or words to that effect. In 2002, NAB put a heavy-handed swathe through its small business loan book on the grounds that 9/11 was likely to induce a global recession!
NAB’s often brutal foreclosure of small business and family farmers has been facilitated by a permissive Australian culture – a bought legal fraternity, bought receiver/manager and valuer sectors, a compliant judiciary and a fragmented and lax regulatory environment.
Market analyst pressure on the banking sector’s cost/income ratios has hit lending office staffing, but hasn’t touched the fat elsewhere. NAB has one of the largest public relations outfits of any Australian company, devoted to countering adverse publicity while fostering an image of the soulful corporation at large. NAB sponsored the 2006 Commonwealth Games in Melbourne. It sponsors the National Press Club. It sponsors Professorial Chairs of Banking/Finance and other bodies at prestigious universities. Moreover, NAB has 100 in-house lawyers, the largest contingent of any Australian company (an honour shared with the Commonwealth Bank of Australia), dwarfing even the mining behemoth BHP Billiton with 30 in-house lawyers.
Public relations and litigation are NAB’s comparative advantage. And the basic skills? In the Investor Presentation document on 29 November for the GWB takeover, NAB claims ‘relationship management expertise’ on small business banking capability and systems. NAB contrasts GWB’s ‘basic regulatory and risk management processes, reflecting community bank’ with its own ‘advanced regulatory and risk management capability’. How do these claims mesh with the accumulated evidence outlined above?
The NAB takeover of Great Western as a great leap forward? On the contrary, the US farm belt needs the National Australia Bank like it needs a hole in the head.