Dr Evan Jones 26 October 2013
The document below was written to provide a backdrop to the revelation that the CBA had engaged in a mass default of BankWest customers soon after it acquired BankWest in December 2008.
The document was addressed to the defaulted BankWest customers to highlight that their experience was not unique, but that the CBA had been acting unconscionably towards borrowers for decades.
The crucial lesson for CBA senior management has been that it has got away with malpractice in the past, so it has carte blanche to carry on in the same vein.
The version below has been slightly amended from the original.
This article has been previously published in instalments at Independent Australia.
The Dark Side of the Commonwealth Bank
Dr Evan Jones
CBA Large-Scale Default of BankWest Borrowers
The Commonwealth Bank of Australia has been in the news recently, and not for good reasons. Business customers of BankWest are complaining of criminal fraudulent treatment by the CBA.
The CBA bought BankWest from its struggling British parent bank, HBOS, in October 2008. The offer received rapid approval from the Australian Competition and Consumer Commission and the office of the Labor Government Treasurer, Wayne Swan, and the deal was consummated in December.
The ACCC and Government approval process was, in my opinion, corrupt – as was the ACCC’s approval in August 2008 of Westpac’s takeover of St George, ratified by the Treasurer’s office in October. Indeed, in late 2009, the ACCC’s Graeme Samuel admitted that the approval of both takeovers was probably a mistake. So why did Samuel participate in the charade?
The exact figures of the deal remain cloudy. It appears that the CBA bought BankWest at discount for a nominal $2.4 billion (raising all the capital on the markets), 80% of 2007 book value, with a price actually paid of $2.1 billion – the adjustment accounted for in 2008-9. In the 2008-09 financial year, the CBA recorded a $612 million capital gain from the discounted purchase price (saying to the markets, ‘aren’t we smart little chappies’). Yet, at the same time, the CBA claimed that BankWest’s commercial property portfolio was potentially riddled with bad debt scenarios (saying to the markets, ‘we were duped’) – revaluing its charge for BankWest’s impaired loans to $825 million for calendar 2008 (from $88 million in 2007).
Now a phalanx of BankWest customers are complaining bitterly that they have been wrongly defaulted and foreclosed, with claims of over 1000 businesses involved. The customers claim unconscionability; the CBA/BankWest claims the numbers are exaggerated, that the defaulted customers were unviable (the GFC supposedly lowered the tides and exposed the cracks), and that its personnel is working responsibly with troubled customers. This is familiar language, a time-worn dog-eared script from well-oiled bank spokespersons. Aggrieved customers are pushing for a Senate inquiry through sympathetic National Party Senator John Williams, which push gained approval on 14 March. BankWest, acting for its parent, was furiously attempting to prevent it happening.
Who to believe? The answer can be found in a brief history of the Commonwealth Bank over the last 30 years, the period following deregulation of the financial sector in Australia. It turns out that the CBA has been engaged in fraudulent and unconscionable practices perennially over the entire 30 years, which includes (shockingly) a period in which it was still in public ownership. Although specific instances have been given publicity, nobody has noticed the continuity of practices over time. In the late 1980s, the National Australia Bank was establishing itself as a prime mover in corrupt practices against its small business and family farmer customers, a standard that it has maintained to the present. But, with the BankWest imbroglio, the CBA appears to be aiming for the top spot in bank unconscionability in Australia.
The Dark Side of the CBA first exposed
The dark side of the CBA first gets exposure when Democrat Senator Paul McLean (the unwitting Democrat spokesperson for small business) made his first of many speeches in Parliament on bank malpractice on the 8th (and 15th) December 1988. The speech begins:
I am obliged to advise the Senate of a very serious allegation of corruption which has been made to me by three constituents and which is the subject of two affidavits and other relevant documents which convince me that there is substance in the allegations that I am about to outline.
It is alleged that senior officers of the Commonwealth Bank have in the past colluded in a corrupt practice by which businesses receiving funds from the Bank have been deliberately manipulated into bankruptcy and then acquired by other predetermined parties. It is further alleged by these constituents that these allegations have for several years been known to the Australian Federal Police and that the victims of these practices claim that the Federal Police have failed in their duties in these matters.
By chance, the story is elaborated on in a document accessible on the web, dated 30 January 1989, and written by lawyer James Renton (subsequently collaborator with McLean on bank malpractice)[https://ihatethenab.files.wordpress.com/2012/01/senatormclean-cba-afp-must-read.pdf]. The AFP closed down an impending television current affairs program on the affair, and apparently closed down the entire investigation, so that the activities were never exposed to the light of day. The Renton document highlights elements of the scam, almost all of which happen to be still in use today.
Over the years 1988-91 Paul McLean had complaints from 600 aggrieved bank customers and he tabled details of over 80 cases of bank malpractice before his resignation from the Senate in August 1991. But there were three cases with which McLean began his exposé and which were central to his arguments thereafter. All involved the CBA. They were: Tony Rigg, metal fabricator of Nowra NSW; Donna Batiste, would-be Huon Valley mineral water processor in Tasmania; and Wilfred Taylor, of Cambewarra NSW, manufacture of microwave cookware. Their cases are summarised by McLean in the Senate on 23 August, 1990, the speech reproduced in McLean & Renton’s 1992 book, Bankers and Bastards. For hardy souls, the three cases are pursued in minute detail in a 340 page submission (Vol.13) to the 1991 Martin Banking Inquiry.
The cases disclose not merely corruption amongst bank officers in the instigation of malpractice against these customers but added corruption in the bank’s cold-blooded attempted destruction of said customers and the obtaining of uncritical support for their actions from officialdom. The then National Party Senator John Stone denigrated McLean’s efforts and attempted to sully his integrity, tabling letters under the signature of then CBA CEO Don Sanders as statements of indubitable truth (5 April, 1989). As McLean noted, these letters did not accord with the contents of what bank documents the customers had managed to extract from the bank. Stone, as Secretary of the federal Treasury, had been an ex-officio member of the CBA Board for 5 ½ years – I know the bank intimately, implied Stone, and McLean is an ignorant mouthpiece for ne’er-do-wells and dangerous crackpots. However it is entirely natural that bank Board members would be oblivious of instances of malpractice or of the culture that generates them, as these matters were kept from Board member’s attention. That’s still the case. The typical bank Board member is there for a free meal and a pay cheque and the lines on their CV. They have no idea what goes on inside the business, and it would be counterproductive for them to bother.
The Foreign Currency Loan Scandal
Behind these specific cases was the contemporary large-scale foreign currency loan debacle. With Westpac and the ANZ, the CBA raced into unknown territory, marketing loans to small businesspeople and farmers denominated in foreign currencies (typically the Swiss franc, but also the US dollar), with the carrot of lower interest rates. Bank staff had no experience in foreign currencies (the dollar was deregulated in December 1983), and the result was a fiasco. A customer borrowing $1 million in 1984 (a representative loan) would by 1986 owe a principal of over $2 million, against which a lower interest rate was irrelevant. Thousands of businesses were destroyed, families torn apart. (The farming family of current National Party Senator John Williams was a CBA victim.)
The banks, but especially the CBA and Westpac, set on an aggressive course of blaming the victims, in the process managing to win most cases that came to court, with a succession of bank counsel displaying unscrupulous bastardry and of learned judges exposing their prejudices and ignorance of banking practices. The CBA was more successful than was Westpac, save for the celebrated and instructive appeal of Quade against an adverse Trial judgement (FCA, 14 February 1991). There the three judges, atypically, had actually read samples of CBA documents (titled the ‘G’ documents) which implicated the bank. More, Burchett J had previously seen the whites of the CBA’s beady eyes in litigation involving Donna Batiste, as above.
Pertinent was G 170, written by long-time employee Max Dodd, May 1989. In pressing his bosses to attempt at all costs to save the borrowers from ongoing calamities, he noted:
‘In carrying out this task we should keep in mind our litigation experience but acknowledge privately that all of the problems we are experiencing are essentially of our own making. Broadly speaking they stem from …’.
In March 1998, in support of a CBA borrower in litigation, Dodd wrote an affidavit excoriating the bank for its corrupt denial of responsibility. But by that time the offending banks were home free.
The CBA heavies, with the other guilty parties, were having none of this contrition stuff from the odd whistleblower. On the contrary. The then Labor Government duly obliged. In October 1990, the Treasurer, Paul Keating, instigated a Parliamentary Inquiry into the banking system. The object was to bury Senator McLean’s incessant claims of dysfunctionality and corruption. And this the Inquiry and the subsequent Report proceeded to do. Lacking panache, it achieved its unsavoury objective by wearing everybody out. CBA staffer appearances before the Inquiry (22 May 1991) and submissions (especially Vol.10, May 1991) played their prescribed part and dissembled mightily. The banks were simultaneously in Canberra, lobbying furiously. The Report was a whitewash. It gave the green light to the banks (essentially the Big Four), and the banks read the wind. Since that time, the banks have been able to get away with almost anything.
A banking ombudsman with a very restricted brief and a Banking Code of Practice, to be honoured thereafter in the breach, was the whole system’s concession to ‘reform’.
Privatisation, David Murray, and the Elevation of Profit over Customer Service
Simultaneously, after having extinguished the Light on the Hill and having bludgeoned the True Believers into submission, Treasurer Keating set about privatising the Commonwealth Bank, in three tranches in 1990-1, 1993 and 1995-6.
Insider David Murray, who joined the bank as a teenager, was Keating’s chosen successor, becoming CEO in June 2002. Murray’s Wikipedia entry has Murray as a financial wunderkind, but the truth is more pedestrian. Murray got the bank cheaply and inherited a cash cow, sourced from deposits and savings of thousands of low income earners, kiddies, members of the armed forces, and social security recipients. He acquired the goodwill of the Commonwealth Bank for nothing. (Previously, privatised entities were denied the use of the word ‘Commonwealth’ – thus the Commonwealth Handling Equipment Pool became Brambles’ CHEP; the Commonwealth Serum Laboratories became CSL.) In the ensuing decade, Murray would sack 15,000 staff and close 600 branches (many in low income suburbs, many of which, like Erskineville NSW, have since been gentrified and lack a bank). Upon acquiring Colonial Limited in 2000, Murray immediately closed 250 Colonial Bank branches. No financial genius here.
A measure of the calibre of the man is that he dismantled the bank’s library at Martin Place because the embodied historical intelligence wasn’t worth the ‘true’ value of the floor space. Murray also owned a property near Wee Jasper. He apparently bought the general store in 1998 and the store’s role as a community focal point was alienated. There is no such thing as community, a Thatcherite axiom Murray must have picked up from his latterly acquired degrees in business administration. More, Murray’s general pronouncements on the economy, diligently reported by a reverential media, have generally been rubbish.
Of substantial significance, Murray’s early priority was to dismantle the CBA’s small business/farmer specialist lender, the Commonwealth Development Bank. The CDB was created by the Country Party in government in 1960, formed from an amalgamation of a rural lender (Mortgage Bank Department) and an industrial lender (Industrial Finance Department) created by Curtin/Chifley Labor in 1943/45. The CDB regularly made a profit (albeit, like all banks, it was hit by the early 1990s ‘recession we had to have’), but because it was a public service entity with specialist staff and elaborate customer support procedures it didn’t return the profit rates beloved of commercial bankers. In 1992/3, Murray started corruptly either defaulting CDB customers or bringing them onto CBA contracts on stiffer terms. One victim that subsequently acquired a high profile was the couple Bruce Ford and Wendy Murray, NSW horticulturalists. Their pursuit of bank records on their case exposed the bank’s use in default of a parallel accounting system, the ‘shadow ledger’ accounts, for which there was no accountability. Another CDB customer victim was Port Macquarie developer Claude Cassegrain. The bank promised Cassegrain superior facilities if he were to move his loans to the parent bank. But the bank, on a Friday, ordered Cassegain’s overdraft repayable on the Monday, making refinancing impossible. The bank then immediately defaulted Cassegain on his term loan.
In the meantime, Murray’s CDB, in supposed bad straits following the late 1980s boom and bust, found the resources to lend several millions to a piggery co-owned by Treasurer Keating, complementing a sum already lent to the piggery by the parent bank. Also in the meantime, now Prime Minister Keating oversaw the granting of capital injection of $30 million and an annual government subsidy of $20 million to Murray’s bank to underpin CDB operations – i.e. Murray had effectively blackmailed the government for handouts to up his balance sheet. Immediately following the full privatisation of the CBA in mid 1996, the CDB was abolished. The now moribund ex-Country Party National Party sat on its hands, enjoying the perks of power. Small business and family farmers now had nowhere to go but the private banks.
Garden Variety Corruption re Individual Borrowers
Meanwhile, the garden variety corrupt defaults continued, facilitated by a complicit judiciary if litigation ensues. South Australian farmer Steve Heinrich was a victim of fraud by his local branch manager in the mid-1980s.
As with the NAB, head office steps in to destroy the customer victim rather than to clean out its stables. After all, the manager was pursuing business aggressively, merely following the rules and the culture dictated from head office. After interminable litigation, the bank sought ‘vexatious litigant’ status against Heinrich and the judiciary complied.
Then there were Anastasia and Brian Timms, lent on a dud furniture business in 1991 which the bank was looking to offload, given that the existing owners were facing inevitable foreclosure by the bank and with no residual assets for the bank to commandeer. Add the case of Bernie Madigan whose attempt to close out a paid-up mortgage involved demands for further unwarranted and substantial payments, with Madigan’s costs escalating dramatically with punitive charges and expensive battles through the court system. Incidentally, the Timms and the Madigan cases were the last to be reported on in detail by the Fairfax press, via veteran banking reporter Anne Lampe (Timms, Sydney Morning Herald 25 February 2004; Madigan, SMH, 10 November 2004). Henceforth bank malpractice has been deemed a subject not fit for consumption by a public known to possess a delicate constitution.
There is a mid-1990s Queensland case of a Dr Robert Cooke, proprietor of three medical emergency centres whose modernisation was being funded by the CBA under agreement, with the bank subsequently reneging on that agreement and foreclosing on the centres. An independent valuer put the value of Cooke’s three medical centres in 1996 at over $10 million. The Bank sold the three centres for a total sum of $705,000. And the bulk of that reduced figure was never credited to Cooke’s account.
Add Ian and Ellen Clapham, from the mid-2000s onwards. The Claphams pursued the rural dream but, thanks to the CBA, woke to a nightmare. Their macadamia farms were hit with a market downturn, par for the course on the land. They had the assets to weather the downturn. They needed forbearance and short-term cooperation from the bank, but instead faced predation. The bank smells blood, goes in for the kill and initiates a sting operation (the NAB is a past master at this game). The simple vehicle for the operation is draconian penalty interest rates, which CBA continued to charge despite the fact that after only 3 months the Claphams made good on interest and penalties in arrears and repaid approximately $1.5 million of principal. Such penalty rates should be illegal, but nobody in officialdom gives a damn. So the CBA cleaned the Claphams out.
All so unnecessary; and all quintessentially corrupt. Garden variety corruption, but corruption nevertheless. And because it is under the radar, the practice continues unrequited.
And so on, and so on. Bruce Ford’s dogged attempts to get to the bottom of the CBA’s convoluted default accounting system led to a small-scale Parliamentary Inquiry and October 2000 Report on ‘Shadow Ledgers’ and the Provision of Bank Statements to Customers. The CBA’s Chief Financial Officer Michael Ullmer dissembled before the Committee, claiming that the reason that the bank did not provide the customers with statements was because there was only a handful of them and, besides, they were effectively lost causes.
Ullmer also claimed that
… the Commonwealth Bank may cease to issue further statements as in the past there has been little purpose in providing information that the customer may perceive as incorrect and may further inflame the dispute that may well be in place between the customer and the bank. (!)
Ullmer dissembled again on a follow-up ABC program on 27 July 2001. (Ullmer’s courage in the face of enemy fire led him to be subsequently hired by the NAB, an appropriate marriage.) The Committee Report gave the CBA an imperceptible rap over the knuckles and the bank promised to start sending out statements to defaulted customers.
Rather, the bank carried on with business as usual. The aforementioned Timms family provided confirmation that nothing had changed with respect to the bank’s secrecy. Ditto the case of Lana and Alexander McLean whose dispute reached the courts (CBA v Aspenview, 2001) just after the Shadow Ledgers inquiry. Under pressure from the same Parliamentary Committee’s revisiting in 2007 of the issue of non-provision of bank statements and the McLean case being raised by their local MP, Treasurer Peter Costello, CEO Ralph Norris noted that “Ms McLean had complained to ASIC, APRA and the Victorian Attorney-General, but her issue had not been taken up.” (Richard Gluyas, ‘Lawful and appropriate, says CBA’, The Australian, 30 June 2007). Well, that’s all right then. Regulatory inaction legitimises the bank’s disinclination to abide by demands from a Parliamentary Committee. ASIC has never investigated complaints brought before it in this domain, and Norris clearly discerned the implications of ASIC’s invisibility for his bank’s freedom of action. This $16 million man was worth every cent. Business as usual.
The Arm’s Length Rip-off Scenario, Perfected Through Repetition
The Gold Coast two-tier marketing scam
Another scam happened in the early 2000s, of significant import. The phenomenon, colloquially known as a ‘two-tier property scam’, involved spivs marketing Gold Coast properties at vastly inflated prices to ill-informed out-of-town would-be investors. Banks would provide the loan funds, aware of the real valuations and the scam involved. In this instance, the ANZ was apparently the main bank culprit, but the CBA was also involved. The great advantage of such a scam is that the banks could ply a corrupt trade behind other players in the front line. In 2001, the Australian Competition & Consumer Commission (under chairman Allan Fels) took the CBA and various front line spivs to court, charging them with ‘unconscionable, misleading and deceptive conduct’. From Courier Mail journalist Hedley Thomas (29 November 2001):
The case turns on a Cairns couple, Marie and Stephen Gleeson, who were tele-marketed, flown to the Gold Coast, shown a $164,900 investment property and subjected to intense pressure. They were referred to solicitor Greg Pointon and arrangements were made by a finance broker for funds to be made available by the Commonwealth Bank. The ACCC said the bank got a valuation for the property of $100,000, but did not reveal this to the Gleesons. The bank knew the marketeering techniques were misleading and known for achieving selling prices well in excess of local value.
Kiefel J found against the spivs but ignored the integral role of the banks. (Is it pertinent that Kiefel, like many of her peers, had acted as counsel for banks on her way to the bench?) Tim O’Dwyer, solicitor for many victims, noted (Thomas, CM, 19 December 2003):
An awful lot of banks are no doubt now breathing a collective sigh of relief. … If a properly researched and prepared course-of-conduct case were brought against any one of them, it should not be too difficult to prove that the bank lent money over and over again to similar investors in similar circumstances for similar overpriced properties where similar real estate scamsters and their mates were involved.
Storm Financial Unlimited
Breathing a collective sigh of relief indeed. Fast forward to the splendid if ephemeral phenomenon of Storm Financial Limited. The utterly unsophisticated – ‘Mum and Dad’ investors, the precariously employed, those on disability pensions, etc – were seduced by Storm principals, Emmanuel and Julie Cassimatis, and staff to sign up for a package comprising a home mortgage loan taken on the client’s residence (occasionally investment properties), complemented by a margin loan, the total to be placed into an indexed fund, with the loan quantum to be further enhanced if customer asset re-valuations looked rosy. The court labelled the Storm Model as a ‘standardised leveraged investment programme’ and summarised it thus (ASIC v Storm, FCA, 2 August 2011):
(a) to make leveraged investments in index share funds by investing:
(i) money available to the Investors from their existing resources, including in many cases money borrowed by way of a loan secured on the Investor’s home; and
(ii) money borrowed pursuant to a margin loan secured against units acquired in index share funds;
(b) to retain some investment funds in a cash account known as a ‘cash dam’ for servicing the cost of the loans and, if required, living expenses; and
(c) to receive from Storm ongoing monitoring and management of their investments and loans.
This was intrinsically a ‘dodgy brothers’ scenario, guaranteed to fail.
The Storm Financial model represents variations on a theme of the two-tier property marketing scam. The model would have been impossible without bank funding, especially from the CBA. Without the CBA, other lenders (especially Bank of Queensland, Macquarie Bank) could not have joined in as marginal vultures. I have a colleague who is of the opinion that the CBA was the driving force in the transformation of Storm Financial from a two-bit provincial outfit to the large-scale ‘get rich quick’ enterprise; this is a not unreasonable proposition.
As I have written elsewhere:
“The bank had been involved with Storm since 1994, but the transformed Storm was evidently viewed within the bank as a profit bonanza. The CBA fuelled Storm’s fantasy – home loans, margin loans through subsidiary Colonial Geared Investments, and ‘wealth management’ of the loans into index funds through Colonial First State. … The CBA’s desktop ‘VAS’ remote valuation system, introduced in March 2008, gave increasingly generous valuations of client property [albeit vigorously denied by the bank], readily leveraged into a higher margin loan and more fees for Storm. The CBA extended Storm clients’ loan to valuation ratio to an unprecedented 80% plus 10% ‘buffer’, and a unique office outlet was established in Townsville to service Storm business. The Colonial arms even paid for a ‘gala ball’ in Italy in 2008 for the smooching of clients. Such was the success that the CBA yearly raised sales targets of the Storm-servicing cell, including for 2008-09.”
The CBA effectively defaulted the whole Storm apparatus in late 2008 (Storm went into administration on 9 January 2009). It sold many Storm clients’ portfolios without them receiving a margin call (the haggle over who was responsible for the margin calls is an irrelevant diversion). It unilaterally dropped the loan to valuation ratio on Storm loans from 80% to 70% in early December, triggering margin calls to clean out any remaining Storm clients. On 10 December the bank unilaterally shut down all Storm-badged products. Yet as late as 29 October, the bank lent Storm a further $10.165 million to pay out a debt to Macquarie Bank and ‘provide funding for further acquisitions’ (Ripoll Storm Report, p.200). As the dominant lender, the CBA was ultimately in control of the whole Storm apparatus, indifferent to (benefiting from?) the loose cannon that was the Storm’s modus operandi.
The CBA has (atypically) acknowledged some culpability regarding its involvement, which has performed valuable service in quelling any potential political hostility. In June 2009 this:
The Bank acknowledges that the position in which some Storm Financial clients find themselves, while not caused directly by the Bank, involves the Bank to some degree. … Said CEO Ralph Norris: "In some cases we have identified shortcomings in how we lent money to our customers involved with Storm Financial … We are not proud of our involvement in some of these issues and we are working toward a fair and equitable outcome for our affected customers.”
Well might the bank acknowledge culpability. But the CBA has claimed responsibility for some ‘irregularities’, nature unspecified, with promises to make amends, details unspecified. Townsville-based economic consultant Carey Ramm told ABC Radio:
“Certainly I haven't seen all 2500 clients of Storm [the number was closer to 2800] that are held by the Commonwealth Bank but in the vast majority of the loan documents I have seen out of the Commonwealth Bank, I have been amazed at just how bad the loan documentation has been and a vast majority of those will have to be written off.”
Simultaneously, CEO Ralph Norris claimed:
"The bank is not responsible for the financial advice provided independently by Storm Financial to the bank's customers. That was clearly the responsibility of Storm Financial, a licensed financial advisory company."
The CBA’s David Cohen (appearing before the Ripoll Storm Inquiry in September 2009) maintained the mantra:
“… it needs to be recognised that there are other parties significantly involved in the hardship suffered by Storm clients. CBA is not responsible for either those parties or their contribution to the hardship being experienced.”
The CBA’s Matthew Comyn at the same hearings:
“It was not a relationship that ran to the highest levels of CBA. It was an association whereby Storm did refer customers to the CBA … The relationship was no more than a referral of business to us, and we in turn serviced the business".
Journalist Ben Butler noted comparable disavowals in ASIC’s pursuit of the CBA in the courts (‘CBA links to finance group under scrutiny’, The Age, 6 September 2011):
… ASIC alleges CBA, together with Macquarie Bank and Bank of Queensland, were involved in running managed investment schemes, which are required to be registered with the regulator, in partnership with Storm. In a bid to show a managed investment scheme existed, ASIC alleges in its statement of claim the banks ''had a close commercial relationship with Storm'', and then goes on to list three pages of dealings and contact between the banks and Storm.
“The meaning of the term 'close' is unclear,'' CBA says in its defence.
Your Honour, we might have had several thousand children together but, really, there was nothing to it. On the contrary; the meaning of ‘close’ is utterly transparent. All power and no responsibility – the two-tier property marketing scam revisited.
Seasoned journalist Alan Kohler claimed, at the height of the dénouement in February 2009:
“Storm Financial in Townsville was not so much a Ponzi scheme … as a scandalous partnership between spivs and a bank, that should have known better, to place ordinary people in harm’s way.”
A bank, that should have known better, placing ordinary people in harm’s way? Unthinkable? Rather, Storm Financial was a scandalous ‘close’ partnership between low level spivs and high level spivs, with the latter institutionalising the spivvery on an industrial scale.
The CBA’s formal apology is just words. The Ripoll Committee swooned in gratitude:
“The committee certainly welcomes the CBA's readiness to admit its mistakes in the way it transacted business with Storm and Storm's clients who are also clients of the bank. The committee appreciates the bank making the effort to establish an innovative and fast-tracked resolution scheme for affected clients [par.3.118].”
Craven. A few shekels aside, the bank has declined to give substance to the words by stymieing Storm clients’ claims. Witness the bank’s fight against two Sydney doctors, Mark Irving and Anthony Oliver, in the courts during 2011, with the bank arguing that margin lending falls outside the consumer credit code and so anything goes.
The regulators and the political class oblige. The Australian Securities and Investments Commission had earlier audited Storm Financial and given it the OK. ASIC’s submission to the Storm Inquiry was a shocker. It generalises ‘that the current standards in the advice industry are adequate’ (p.37). More, the submission tacitly acknowledges the retail investments sector as corrupted, yet it refers merely to ‘potential systemic issues that have arisen in relation to the role played by lending institutions in recent retail investor losses’ (p.87). Potential? Disgraceful. ASIC has since lifted its game, but many Storm victims remain disgruntled by the impasse.
As for the politicians, the November 2009 Ripoll Storm Report gave the CBA yet another imperceptible slap on the wrist: “The committee is concerned that close relationships and integrated systems, at least at the branch level, and perhaps in combination with bank sales and lending targets discussed at paragraph 3.54, may have caused some bank staff to lose sight of who their true customer was and to fail in their obligations under the Code of Banking Practice to exercise prudence and diligence in their lending decisions [par.3.52].” And that’s it. Margin lending per se is fine, buyer beware, but advisors and lenders should display professionalism in their relationships with clients. It will be business as usual. Fairfax journalist Michael West noted accurately that “This report carries all the weight and ferocity of a wet lettuce.”
Colonial First State
If the CBA had really meant business, it would have acted to clean up the culture of its Storm agent, ‘wealth manager’ Colonial First State. No such house-cleaning has taken place. Journalist Colin Kruger elaborates on the essential character of CFS (Sydney Morning Herald, 21 February 2011), a piece that demands to be quoted at length, and the story is not pretty.
The Commonwealth Bank-owned Colonial [First State] has collected more than $17 million in fees from the Mortgage Income Fund since it was frozen more than two years ago, locking up $852 million of investor's money. A year ago, rising loan losses led Colonial to wind up the fund as it could no longer pay distributions to investors. … In a statement the company said: … “The steps taken by us in managing the fund are in the best interests of investors as a whole.” …
The financial statement shows the fund's income of $14.8 million for the year was wiped out by a $17.2 million write-down in the value of its loans. Adding in $7.9 million worth of management fees paid to Colonial last year, the fund made a loss of $10.3 million. The losses decrease the chance of investors getting back their initial investment.
The accounts show the fund's investments are worth $509.7 million, less than the $518.2 million needed to pay out investors in full. … Colonial has said it may take four years to wind up the fund and return money to investors. Until then, Colonial will collect a management fee of 1.15 per cent of funds under management.
Veteran journalist Robert Gottliebsen (Business Spectator, 28 October 2008) expressed shock that the “Commonwealth Bank [had] stepped back from the undertakings of one of its wholly owned subsidiaries.” Quite.
“Among the likely consequences of the CBA decision is that all bank owned operations that are not directly part of a bank, including their finance companies, will be questioned.”
Not quite. The discretion available to Head Office with these ‘arm’s length’ relationships appears to be well understood upstairs. Nobody who matters, especially prospective customers looking for integrity in the financial services sector, has yet to join the dots.
The only thing that CFS has done since the Storm fiasco is to up its advertising budget, falsely and ludicrously claiming expertise in funds management.
Commonwealth Financial Planning Limited
Then there is another related subsidiary, Commonwealth Financial Planning Limited. More incompetence; more corruption. Potential clients were going to CFPL with considerable sums, hoping for comfortable returns but seeking safe investments, notably for retirement purposes. Instead, the sums were ploughed into high risk outlets. Said a Maurice Blackburn partner, pursuing a class action:
"Their money was placed in geared share funds and overseas shares without sufficient diversification, and they've lost millions from their retirement nest-eggs.''
How could this be? You’ve guessed it – a ‘rogue adviser’, in this case Chatswood NSW-located Don Nguyen. The rotten apple defense. In this case the somnolent ASIC came to the party, and drummed Nguyen out of the trade. But Maurice Blackburn was only on the case because ASIC was slow to the job and because it was tolerating a joke ‘compensation arrangement’. Also confidential, of course, which is how banks prefer the resolution of any conflict. Choice, consumer advocate, expressed dissatisfaction with the practice, as nobody knows whether justice has been done and no precedents are established; but confidentiality in these cases remained.
But then, along came another CFPL adviser to be belatedly let go, Simon Langton of Western Australia. Another rogue adviser. But how do these transcontinental rotten apples get rotten? Is there possibly something rotten in the barrel itself?
I am aware of another very unhappy former CPFL client couple, Jenny and Greg Cadwallader. The Cadwalladers invested their savings, previously in cash, with CFPL in 2007, electing for what CFPL’s Product Disclosure Statement claimed was a ‘100% medium risk option’. Belatedly and accidentally, they discovered that 60% of their funds were placed in a ‘high risk option’. Greg Cadwallader sought satisfaction from ASIC, the Financial Planning Association, the ASX, the Commonwealth Ombudsman and the Financial Ombudsman Service. He notes: “Everyone has treated me like a pariah.” It happens that the Cadwalladers were advised by a Sydney-based Mr H (as the FOS referred to him), CFPL ‘representative’, of whom there has been no media exposure. It also happens that the FOS devoted considerable resources to a 28-page document claiming to prove that the Cadwalladers, who had no idea, were consummately knowledgeable and intimately involved in the direction of their funds into a high risk option. The innately compromised bank-funded FOS refers to the CBA as ‘the member’ – the member, that is, of the FOS. The FOS Cadwallader deliberation is dated July 2010, right in the middle of media exposure of the rogue adviser Don Nguyen. Mr H’s practices paralleled that of Mr N, yet the Cadwalladers are found guilty of self-consciously throwing their hard earned nest egg into high risk options and down the drain.
Mr H no longer ‘represents’ CFPL. But the CBA is still hawking its financial planners, possessing ‘extensive knowledge’, forming ‘trusting relationships’, ‘insights into clients’ personal circumstances’, etc. Where do I sign? The relevant website does carry ‘Important information’, namely: “Commonwealth Financial Planners are Representatives or Authorised Representatives [are they employees? are they perhaps independent contractors? and what are their terms of remuneration?] of Commonwealth Financial Planning Limited, a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia [emphasis mine].” Consumer Credit Code or not, it’s still a regime of caveat emptor. And if you can’t understand Latin, don’t go near CFPL for advice on quarantining your nest egg from predation. The fact that CFPL has not been closed down by the authorities highlights the success of the ‘rotten apple’ gambit.
Shakedown at the BankWest Saloon
After a long diversion into pertinent background, we return to the current BankWest imbroglio. A case study provides representative details on the CBA strategy.
Ken and Noelene Winton, through their company Paoli P/L, have been developers active on the NSW north coast. Ken Winton was no fly-by-night operator, having been President of his local Chamber of Commerce, member of Local Government committees and a Federal Government committee, and perennial media interviewee. The Wintons (hereafter Winton) obtained BankWest loans totalling almost $4 million for two apartment blocks in Nambucca Heads, one in September 2005 and one in March 2007. Partial security was on the family home, with the loan balance (as is typical) to be reduced with apartment sales.
The CBA bought BankWest on 8 October 2008 (though of course not finalised until December following ACCC/government approval). Soon after, Winton received a call from their branch manager at Coffs Harbour (who had approved the loans), Mr Jim Williams, applying pressure to effect property sales. Winton already had a marketing strategy in place. Unbeknown to Winton, Williams had sought a valuation of Winton properties from Coffs Harbour firm, Magann O’Rourke Property Consultants. The valuation was received on 19 November. The next day (note: the next day) Winton was issued with a default and demand notice from Middletons Solicitors acting for BankWest. Middletons describes itself as a ‘progressive and innovative national commercial law firm’. Progressive and innovative indeed. Middletons refused to answer the stunned Winton’s calls. From that point, effective intelligent communication with BankWest officials ceased. The valuation process was improper; the valuation itself was inaccurate, flawed, corrupt. The new valuation triggered the Loan to Valuation limit, and draconian penalty interest rates (as per usual, not in the contract) were applied to the loan balance.
Bizarrely, Winton received a letter from BankWest head office on 19 December informing them that the CBA had purchased BankWest and that “There will be no disruption to your service” and “there will be no changes to your relationship manager”! On 28 January 2009, ‘relationship manager’ Williams ‘resigned’ and was replaced by one Philip Alcock. This is standard fare for banks when a manager is in the hot seat – sack them or move them out of reach of a potentially litigious defaulted customer. Williams had also approved the second 2007 loan, even though there had been then no sales from the 2005 development and no pre-sales on the 2007 proposal. If the Williams approval was formally loose, it was nevertheless an adherence to the cultural guidelines (not merely at BankWest but sector-wide) – Williams noted to Winton that he was receiving bonuses for generating loans and had to meet a target each month to receive the bonus. Williams was merely doing his duty both in getting Winton’s business and then in destroying Winton’s business; but having done his duty it was time for him to be moved out.
In September 2009, Alcock ordered Winton to sell their house immediately, and it was sold under value for $750,000. Immediately afterwards, the bank sent in an administrator, Rodgers Reidy. The reason for the timing is that BankWest would not have been able to touch the house (in the Wintons’ names) once the administrators had been sent into the company. At the time the administrators were installed, debt had been reduced to $1.8 million, and remaining units to be sold included high end attractive properties. There was no problem.
In the 18 months before they were removed, Rodgers Reidy principals managed to range across the various unconscionable practices that characterise the rogue administrator – refusal of any consultation with Winton as owners; excessive fees; vastly inaccurate figures submitted to ASIC; neglected responsibilities to the Tax Office; vehicle for sale of properties under value (facilitated by a flawed building report); etc. Winton sought action from ASIC on grounds of unconscionable conduct and breaches of the Corporations Act (also pointing out that ASIC had previously found against this same firm in 2007 for comparable practices), but ASIC declined to pursue the matter.
At the end of this farce, Winton belatedly discovered bank figures for debt owing to be $790,000. The sum of $900,000 had been debited to the Winton account for penalty interest owed and fees. Ergo, in spite of the residual Paoli developments being sold under value, subtract the fraudulent rip-offs and Paoli P/L ended up in the black. How many of the other 1000 plus BankWest defaults are in this category?
It is highly relevant that Winton’s attempt to engage with the CBA has met with a response through the Customer Experience Specialist (sic) in the bank’s Customer Relations section of Group Sales and Service Support. The Customer Experience Specialist has instructed Winton that his case is a matter for BankWest and that he should he should direct his attention to that entity. Ah, it’s déjà vu, all over again. The CBA is directing proceedings, but attempts to deflect the string-pulling to the puppet. All power and no responsibility.
Dodgy devaluations of customer assets, penalty interest rates, foreclosure. It’s as simple as falling off a log; so simple that banks have become habituated to its practice. It gives new meaning to the concept, much loved by libertarian defenders of the free market system, of the sanctity of contract. Unfortunately for the victims, however, the bulk of the learned judiciary thinks that the world operates according to the textbook. It’s a racket, but because it is perpetrated by suits, it is a racket granted de facto legitimisation. It is in this context that the Commonwealth Bank top brass could endorse the cleaning out of myriad BankWest customers as banking best practice. In God’s name, what is all the fuss about?
The Valuation Industry
Here are bank customers claiming that valuers, at bank behest, are providing corrupt assessments of the market value of their assets. Outrageous? The desperate ploy of failing businesses seeking scapegoats? For perspective, here is an excerpt from finance sector newsletter The Sheet, 18 February 2008. The context was industry concern about improper valuations arising from banks attempting to cut costs in assessment of residential property values by using ‘Automated Valuation Techniques’ (bypassing inspection of the relevant particular property) or ‘drive-by’ valuations. In the process, another dimension of the bank-valuer relationship was given a rare airing. The Sheet:
When evaluating the methods of house valuation, the general consensus with market participants from valuers to banks to software vendors is that a full valuation by an experienced and qualified valuer will yield the most accurate result, but a systemic risk still remains on the upside. Full valuation property valuers are routinely pressured by lenders to inflate the value of the property to aid in the bank approving the loan. The property valuer does not profit from the transaction, except potentially from the higher levels of business generated.
Brendon Hulcombe, CEO of Herron Todd & White, agrees “Yes there are, of course”, when asked if any of his valuers are pressured. “Valuers are pressured quite routinely. The lender has sales targets to meet, (the individual person), and their bonuses are based on those sales targets and so it is in their interest to not necessarily look at the creditworthiness of the loan application, but more so to get the deal through. The easiest way to get the deal through is to get a higher valuation.”
So when pricing a residential mortgage backed securitisation for risk by valuing the underlying asset and loan quality, the process essentially is flawed. At times electronic values use questionable data, although the canvassers will tell you another story, and the most accurate technique of full valuations is fundamentally flawed as individual lenders chase bonuses, or the property valuation is dated, yet compared to the current loan value.
‘Full valuation property valuers are routinely pressured by lenders to inflate the value of the property to aid in the bank approving the loan.’ What? Though presumably this unsavoury practice does not occur on the down side. And pigs might fly.
HTW would know all about the issue. HTW, with the other major players, would be on bank panels as priority firms for valuations. Professionalism is inevitably compromised given that valuers need bank business. For example, HTW was the valuer when Queensland farmer Lynton Freeman was taken down by the NAB in 2000. Freeman’s property was valued (in NAB’s books) at $2 million in 1992; it was devalued to $1.75 million in 1996, then to $1.4 million in 1998. This latter lower value provided the ‘base’ for bank insiders to arbitrarily knock off another $600,000, add foreclosure costs, and facilitate the bank selling Freeman’s property for a contrived $770,000 to a selected buyer (with higher bidders ignored). Freeman ends up, by design, with a residual debt, and is forced into bankruptcy to inhibit litigation against the bank. The Queensland courts approved the sleight of hand. Ambrose J opined that that one could hardly countenance Freeman’s claims against ‘bank officers of their experience and holding the offices that they did’ (NAB v Freeman, QSC 295, 11 October 2000).
Banks have their corrupt practices. Many cognate professions rely on banks for the bulk of their incomes; some hardy souls amongst these professions might rely on advising disgruntled bank customers for their incomes. As I have written elsewhere (‘Banks: still the untouchables’, Canberra Times, 13 December 2011),
“The banks buy or warn off law firms and others. Bank corruption thus poisons the cognate professions – the law, receivers, valuers, real estate agents, bankruptcy trustees, etc. In particular, the courts are the banks' best friend.”
No profession dealing with banks is immune from being corrupted.
The Rise and Fall of the Commonwealth Bank of Australia
The Commonwealth Bank is exactly 100 years old. It was created under the Commonwealth Bank Act 1911 by some visionaries to complement existing State government publically-owned banks in filling the void left by the private banks. The CBA website proselytises the bank’s glorious history.
The bank, affectionately known at ‘the People’s Bank’, performing both central banking and commercial banking functions, was gradually taken over by private banking interests to be run in the interests of establishment banking circles. The bank’s acquiescence to establishment verities with the onset of the Great Depression exposed its mindset. Labor MP Ben Chifley, sometime locomotive driver, got particularly steamed up about this state of affairs and, by force of personality, improbably became Prime Minister in 1945. His government’s two-pronged Banking Act and Commonwealth Bank Act aimed to recover the People’s Bank for the people.
After David Murray had affirmed his control of the CBA by the late 1990s, he and Les Taylor (Chief Solicitor and General Counsel, and majordomo in screwing foreign currency loan and general customers from the late 1980s) funded an in-house biography of post-War bank executive Alfred Norman Armstrong. Armstrong, then little known, was put in charge of the bank’s war-time capital issues control section which rationed the credit advances of the trading banks, thus facilitating the acquisition (as the government approval of his appointment puts it) of a ‘wide knowledge of industrial matters’. In 1945, Armstrong was thus installed as head of the newly created Industrial Finance Department, the nascent small business bank. He put the IFD on the map, and was thus promoted to head the Commonwealth Trading Bank when the Commonwealth Bank complex was refashioned in 1953. The Commonwealth Bank was for the first time liberated to compete for business, and this Armstrong did with relish. So much so that the private banking cartel took umbrage at being aroused from its clubby ways (the cartel had been institutionalised in the formation of the Australian Bankers Association in the late 1940s to fight Chifley’s bank nationalisation Bill) and it lobbied the Coalition government incessantly to separate the commercial from the central banking activities in the Commonwealth Bank, which combination the club opined was giving the Commonwealth Trading Bank unfair advantages (it wasn’t). Thus the Reserve Bank, pretty much as we know it today, was hived off and created in 1959, a phenomenon for which Armstrong could inadvertently take some responsibility.
This seemingly irrelevant diversion into Alfred Norman Armstrong is desirable because Murray and Taylor saw in Armstrong the genesis of their own era, in which a vibrant and innovative commercial orientation had seen off public service stodginess. Not quite. Armstrong was a man about town, but he was straight up and down. The genesis of the new era is to be found in financial deregulation, fostered by the 1979 establishment of the Campbell Committee Inquiry into the ‘Australian Financial System’ and its 1981 Report. That inquiry was presided over by a private sector cabal and an ideologically-driven Secretariat. Financial regulation had to be re-fashioned but, for this crowd, the past was a foreign country. There is no history in the Campbell Report; the Australian financial system was to be re-built from the bottom up on a clean slate. The very first paragraph of the report reads:
‘The Committee starts from the view that the most efficient way to organise economic activity is through a competitive market system which is subject to a minimum of regulation and government intervention.’
Holy moley – a crystallised encapsulation of self-interest draped in ignorance. There is no point examining the rest of the report’s 838 pages because the first paragraph contains, a priori, all one needs to know. The whole point of deregulation, always obscured, was not ‘greater competition’ but to facilitate a resurgence to dominance of the private trading banks in the Australian financial sector – and what a brilliant success.
Thus began the rapid transformation of banking culture in which the rapid and rabid pursuit of market share and the bottom line saw the embedding of incompetence and corrupt practices, right across the banking sector and including the soon-to-be privatised Commonwealth Bank. Herein lies the roots of the CBA’s current large-scale takedown of BankWest customers.
The scale of the loss of a one hundred year heritage has yet to be comprehended. The current Commonwealth Bank colossus contains a panoply of previously independent publicly-owned banking institutions. In the early days, the bank absorbed the state savings bank of Tasmania (1912), the state savings bank of Queensland (1920), the savings bank business of the Savings Bank of NSW and the State Savings Bank of WA (1931). Post-deregulation, the bank absorbed the separate Commonwealth Development Bank as a subsidiary (late 1980s?) which it then subsequently destroyed. It absorbed the hallowed State Savings Bank of Victoria (dating from 1842), it having been debilitated by deregulation (1992). It absorbed the Rural Bank of NSW (takeover of Colonial which took over the State Bank of NSW, the Rural Bank’s later incarnation)(2000). Finally, it absorbed the WA Rural & Industries Bank, via its privatised incarnation as BankWest (2008).
The bank has embodied, catered to, then vanquished the hopes of those who wanted a public institution that served the broader public purpose and which accommodated commercial imperatives to an extent but transcended private sector constraints (or what the pundits quaintly call ‘market failure’). The Commonwealth Bank is not an institution committed to the commonweal, and its name is a flagrant misnomer.
Apparently the Commonwealth Bank has recently pursued an enlightened hiring agenda for revitalising its senior management ranks. It has taken to employing personnel sourced globally, and with formal tertiary education across the spectrum rather than purely with business/financial degrees. Well and good. But the bank has developed over the years a heavily centralised culture in which feedback from below is impossible. And the appetite for corrupt practices is in the upholstery. As with the NAB, senior management come and go, but the dysfunctional dimensions of the bank’s corporate culture get reproduced across the generations regardless.
The Commonwealth Bank, and its siblings amongst the Big Four, now dictates policy to governments and regulators, rather than the other way around.
The outcome of BankWest’s victims’ struggle for justice against this integrity-free elephant is of enormous significance to the prospects of a functioning financial system in Australia in the immediate future.
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