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The South Sea Bubbles Again

The South Sea Bubbles Again
by Malcolm B Duncan

There is nothing new for Australians in what is happening in the rebel colonies in relation to their banking system.  Remember the Farrow Group? It was one of the pioneers in lump securitisation.  When it was going bad, the then Premier of Victoria, John Cain, came out publicly to support the Pyramid Building Society to assure Victorians it was solvent and the Government would back it.  That was done to avoid a rush on deposit withdrawals at the same time as the directors, unbeknown to the Government, were bundling their securities and selling them off in huge lumps.  The ultimate cost to Victorian taxpayers was enormous and a fuel levy was introduced to cover the losses.  An inquiry was conducted: D. J Habersberger: Farrow Group Inquiry: Final report Govt.  Printer; 2nd ed edition (1996) ASIN: B0006FB4D6.

For historical background, the Wallis Report contains an interesting summary of Australian banking regulatory history.

The Davis Report considered the possibility of introducing a government guarantee scheme following the collapse of the HIH Insurance Group, a saga that is by no means over but has, so far, seen Rodney Adler serve time.  The further fallout is due to be heard in the life of this Federal Parliament which could, conceivably, affect the leadership chances of at least one prominent member of the Opposition.

Albeit that that is history, Australians should get ready for the crunch here.  The massive write-downs on balance sheets by the big banks and enormous provisioning for bad or risky loans is not over by a long shot.  From my experience, and I do a lot of banking cases, we have our own sub-prime crisis that hasn’t even begun to surface yet although the first bubbles are about a millimetre below sea level.  Maybe you global warming enthusiasts will keep things going a bit longer if the sea levels start rising.  Nevertheless, the bubble will burst and it is going to be another one right here in the South Sea.

The principal problem as I see it is that with de-regulation two things happened.  First a lot of non-bank lenders got into the market.  Secondly, a lot of fairly cretinous bank managers got the sack.  Not knowing anything else, they drifted into mortgage broking.  Then we got low doc loans.  I don’t want to tell people how to suck eggs but basically a low doc loan is one where there is little scrutiny or investigation of the income of the borrower and money is shovelled out just on the basis of a valuation proffered by the borrower.  Part of the problem is that the mortgage brokers were being paid on commission when they wrote the business not when the loan was repaid.  Often the broker’s commission was factored in as part of the borrowing.  I know of at least one instance where the allegation is that the borrowers had never seen the completed loan application but had simply signed a document which, when produced in court, recorded nothing like their available income.  There are only three possibilities: the borrower forgot (right, I’m buying a $1.5M property and I forgot what I put on the form); the borrower was lying; or (my preferred likely scenario) the ex-bankie forged the information to secure his commission.

Now all that doesn’t matter all that much to the general economy while the boom lasts and prices keep increasing but the position we are now in is different.  Negative equity sounds such an innocent term but the reality is that you have an asset you can’t sell for more than you owe on it.  Either you make up the shortfall out of other income/assets or you default on your loan.  The position at the moment is that there are properties out there (lots of them) that the lenders simply cannot sell because there is no market.  Ultimately the big four don’t care because they can write the loss off against tax (and they do every 30 June).  For the smaller lenders, however, it could lead to insolvency.  We face the real prospect of a number of mortgage originators going to the wall (taking their shareholders with them) at the same time as a lot of borrowers, ordinary punters, not only go bankrupt but have nowhere to live.  This is going to be a major social problem over the term of this Government.

As an addendum, there is one thing that disturbs me about the way the system functions.  For non-bank lenders, the following system has evolved.  I am a cashed-up super fund or trustee fund.  I want to lend on real property.  You are a punter who wants to buy the dream home.  I don’t lend directly to you.  What you do is go to (or more likely are approached by) a mortgage broker.  You may think it’s Kangaroo Home Loans or somesuch (we wouldn’t mention any real names of people living in Darling Point mansions would we?) but you are actually dealing with an individual sub-contractor who (if he’s obeying the law) should be separately insured.  He then deals with a Mortgage Originator.  The Mortgage Originator borrows the money from the lending fund but gives your property (and probably your personal guarantee) as security for the loan.  The Mortgage Originator is not liable to the lending fund.  When the whole thing goes pear-shaped and you default on the loan, the lending fund takes action to take your house away and bankrupt you.  No matter what frauds may have been perpetrated by the Mortgage Broker or Originator, the lending fund will say: “Nothing to do with us old fruit – we just lend the money” and you end up well and truly up shit creek in the proverbial barbed-wire canoe without a paddle.  That doesn’t matter at the moment because there’s no water in the creek anyway and petrol is too expensive to give you a tow.  Your only recourse is against the Broker.  If you are borrowing, please make sure the broker (a) is insured, (b) has unencumbered assets in his own name and (c) don’t sign anything without legal advice.

Meanwhile, wait for it.


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The top of the market

Malcolm, on 14th August (aeons ago in market terms) I said, apropos house prices: "The very top of the market is OK".

Well, reporting again from the trenches of looking at 20 or 30 houses per week, I can tell you that the top of the market (I can't say we're looking at the very top) is pretty damn soft. Houses and units on the lower north shore are being withdrawn before auction for lack of a buyer, or being sold before auction for less than the target price. An agent said to me yesterday that  the market was " down between 5% and 9%" since the summer, and he was presenting that as a more optimistic view than mine ...


David Roffey you are looking at the North Shore not the top of the market. Come to Sydney and look - 7 miles from Manly and full of care and share. The top of the market is still fine - more sperm than you can point a DNA tester at.

I understand you got an absolutely obscene price for your recently divested hovel. Why not donate it to charity? it would save all that soulless house searching. I'm sure someone could find public housing for you - you just need to donate to the right charity - the NSW Labor [sic] is a bit short at the moment I hear.

David R: well, a large chunk of it is being 'donated' to Westpac just because they donated half the purchase price ... and NSW Labor not only doesn't have charity, it can't demonstrate any of the seven virtues. PS: (shameless plug) if any of you out there are members of Oxfam Australia, you soon get to vote on whether or not I join the national Board.

A little testy, are we?

I found your original input most interesting, Malcolm B Duncan, and look forward to any further (apparently weekly) posts.

More a table than a platter, surely Kath Farrelly

And is that you with the sate stick?

Congratulations with the luncheon, so much more satisyingly, decadently luxe than a dinner....and it sounds as if the food may have been fresh: an unusual plus when one is buying food.

Richard:  Yippee! This could be it!  A piece expanding on your philosophy of food would make for an interesting read?

I'm a ditzy blonde!

No, not me F Kendall. I'm a somewhat younger  ditzy blonde.

Found the pic with a google search. The platter looked almost identical though.

Richard:  Now where the hell did I put that thread topic?  Seem to have lost it.  Please, Kathy, could we try and stick a little closer-to-thread?

ABC programming strikes again

I try to put up a serious discussion about the financial perils we face in order to stimulate some creative solutions and Kathy Farrelly and F Kendall try and turn it into another fucking ABC cooking show. Sheilas - I ask you.

I borrrowed to buy a house...

In 1980: a housewife's hobby. It was an undervalued terrace, which I happened to know had large rooms and high ceilings. My offer of $24000, - obviously dead cheap - was accepted, and I had no money at all. I wangled 18 from the building society, 4 from worstpac as a personal loan, and was freely lent 7 by my Mum, to do it up - which I did, (painting 12 foot ceilings while keeping an eye on the toddlers is not easy), with the help of a mature-age university student who came from a farm and could do everything. I rented it initially for $65 a week, so the rent paid it off while repayments rose. 6 or 7 years later, when renters wanted to buy, I offered it to them for 40...but they wouldn't go above 35. Two or three years after that I sold it to a friend who loved it, for $75000 - hardly a fortune ...(it is probably now worth over 400). But, I had turned nothing into something. The sale was mutually beneficial and satisfactory - she adores the place, and she still lives there with her family.

To those who see that price as excessive: the point I am making is that prices rise in fits and starts.

The fixed interest personal loan was paid off in 4 years: the 18000 floated, and, after 10 years, I still owed most of it.

They are the kinds of reasons that I have found the advice offered as prudent in the last 5-10 years, by people known to be disinterested - the ABC, smh etc, to be iffy, and sometimes just plain wrong. That property goes up 10% a year, for example. Repeated ad finitum. That "after a few years you will have "built up equity". Don't you need to have lived long enough, to know that these mantras are not true, when trusted sources constantly tell you that they are the reality?

Ditto with margin loans, except that such as Opes shows how even astute and experienced investors can be caught out by the nano-print.

People buy things because they think that they will improve their lives - and whatever they see that to be varies from person to person. I rarely enjoy eating out, Justin Obodie, I find the atmosphere artificial, the food overpriced (whether or not I am paying for it) and in spite of what they claim, poor ingredients disguised under various sauces. None of it tastes as delicious or bounteous as really fresh food, or home cooking. Hey, but you may well patronise better restaurants than I do.

I have financial concerns: I don't want my children to sign their lives over to a bank for 25 years in order to get a roof over their heads. The alternative to that is not pretty for my financial outlook, although traditionally farmers have always housed their children; an unrecognised oddity in the scheme of things. Somewhat Italian, rather than Anglo, in fact.

I too congratulate you, Eliot, on your financial management. If you ever decide to buy a house and in time start a family, I hope that your wife will be given the (nowadays becoming rarer) opportunity of working in the home and rearing her own children: something that some dislike, but that many of us knew at the time was, and remember, as a state of bliss. Something that, if there are any such things as "human rights" - which I'm not sure there are - must loom rather large, towards the top of the list: a woman's right to rear her own children.

But, I still feel a great deal of sympathy for those in trouble. Yes, they made foolish mistakes: I am sorry for them. Yes, they believed what they were told: I feel sorry for them. I have everything that I need, and more - but it was not always thus. To scorn people for not having financial experience or acumen is, to me, equivalent to deriding people because they are young, or because they can't spell, or do higher mathematics.

Kathy Farrelly, I have passed your comments on to a few young, and I can't describe the rage. You perfectly describe the way things once were, and the opportunities that were once available.

Eating out

F Kendall: "I rarely enjoy eating out, Justin Obodie, I find the atmosphere artificial, the food overpriced (whether or not I am paying for it) and in spite of what they claim, poor ingredients disguised under various sauces. None of it tastes as delicious or bounteous as really fresh food, or home cooking. Hey, but you may well patronise better restaurants than I do."

You make a good point, F Kendall. On the very rare occasions that my husband and I get to dine out, we are often disappointed with the quality of the food. Hence we are extremely cautious whenever we venture out. Because we both cook - me Monday to Thursday- he Friday to Sunday, we are particularly fussy. (We hardly ever eat take-away.)

Last week, however, we enjoyed a wonderful seafood platter at a neighbouring seaside restaurant. Gorgeous succulent seafood and salad, washed down with a nice bottle of Alkoomi Chardonnay. It was a lovely lunch, made all the more enjoyable by the fact that these precious moments alone are far and few between.

Here is a picture of the platter that I managed to find.

Reverse equity

Jenny, you're right about reverse mortgages. When they first appeared I did the sums. Seemed like a good way for the bank to acquire one's home.

If you're lucky you will die before the bank gets the lot; if you're not so lucky , and live a bit longer, you will die broke. And if you're really unlucky and live to a ripe old age then you could well do it in a smelly old nursing home.

A long life and reverse mortgages don't work.

Best of luck to Mr & Mrs Ramsey and tribe

Eliot, you appear to be a sensible money manager; life ahead should be free of unnecessary financial stress. I've always stayed away from loans myself but did get a mortgage once. Sold the house after 5 years and moved state.

Otherwise you could call me a debt phobic; just hate the thought of owing money. This, of course, is a little extreme, for borrowing money in a sensible and prudent fashion is a good thing. But one has to do the sums first and manage the debt properly.

Sadly, many impressionable and ill-informed people (and hungry lenders) don't follow your approach; if they did we'd wouldn't need to spend your (our) taxes helping them when things go pear shaped.

I appreciate that you find it hard to understand why people want so much; however (basic) human nature is easily exploited, don't you think? Not everyone is like you, Eliot, and  these days your sensible approach to financial reality is something others choose to ignore at their peril.

Anyway, glad to hear you and the mrs. plan on having a family, you'll have a ball, find ends hard to meet sometimes and all that but hey, what is life all about. Kids are great.

My young bloke left home a few months back, he was the last to leave. I've enjoyed having my kids and niece around for over thirty years now and all of a sudden - no kids. It took me a few weeks to adjust and I felt an emotion I have never felt; can't describe it really, maybe I just missed them. I'm over it now and enjoy catching up over lunch and stuff like that.

I eat out heaps (daily) and have no financial worries. For me, being a debt phobic means no financial stress and most of all freedom. My life has been wonderful.

PS. Remember one for your dear wife, one for you and one for Peter, er, Australia.

Cheers old mate.

Reverse mortgages

Justin, your comment to Eliot is so true: "Sadly many impressionable and ill informed people (and hungry lenders) don't follow your approach..."

I find it hard to understand how people could have been so imprudent in running up so much debt, much of it on plastic.

It is a wonderful feeling to be debt free, especially if you have struggled with debt much of your life. I guess there are not many farmers who have not been up to their eyes in debt for much of their lives and many only escape once they sell out like our family did - though we still hold one property on the plains.

A lot of people are taken in by shonky deals, and not just by loan sharks. The big lenders can be pretty unscrupulous. One of the issues that has come up for one of our friends is that of reverse mortgages. She has a paid up house but low income and sees this as a way to improve her lifestyle. She is in her early seventies. I have tried to counsel her against this, while understanding her needs - but I can see the traps. It seems that if you do not have negative equity protection in your contract (ie to protect you when your  mortgage has compounded to exceed the value of your house) then you can be called on to meet the equivalent of a margin call in share contracts - and we know the pitfalls of that. And if your house was the only thing you had you would be in real strife. Then there is the situation where if you lived long and needed to go into a retirement place you may well not have the equity left to do so and finish in one of those nursing homes from hell.

It would seem to me that if you have a million plus debt free house as many inner Sydney houses are now worth, then it would surely be better to sell and invest the balance to generate extra income. You could even buy a mortgage belt repossessed McMansion for around half your capital and put the rest into an allocated pension or whatever.

I am trying to advise this friend of the pitfalls and have listed a whole lot of questions to put to the adviser. I would think one would need to first calculate what one's debt was going to be at 10,15,.20 and 25 years at least before rushing in. The interest rates on these mortgages are variable and compounded  and are above the normal rate, which probably means they are currently around 11%. If rates settle to a long term average of around 7-8 then I can see equity vanishing pretty quickly if the initial mortgage sum was greater than 100 000.

It is a dilemma for older people with low incomes whose main asset is their home,  and I can see why they find these loans attractive in principle. But there seems to me that the risks are pretty high. What to do? Take a risk with your future for improved financial capacity in the present or play safe? I think I would be playing safe myself.  But I wish I could get my mind around this a bit better so I could counsel my friend from a stronger understanding. Financial advisers of course often have a vested interest in the client's decision and few realise that, particularly the vulnerable who see only easy options but not the traps.

What do people want?

Justin Obodie: "Loans became free and easy and the have it now thing was exploited. Human nature doesn't change and even back in the old days most of us would have liked to have things now, but we couldn't, so we saved."

I've never had a loan, though I own a car outright, have put my wife through university, and we've never gone without anything. I don't have a credit card.

We'll take out a mortgage probably on a home eventually, though I've stashed away about $50,000 for a deposit. I've got about $6,000 in my ATM account.

And I pay a little bit more than the minimum super contribution.

And when my wife is working, that will ad about $50,000 to our combined income.

We're insured for health, disability benefits, and the car is fully comprehensively covered.

Now, we don't take overseas holidays or have a plasma television. The car's a second hand Camry and not a Hummer. We only occasionally eat out. But we both have mobile 'phones.

I have about 300 hard-cover books and a lap-top computer. And the flat is comfortably furnished.

My salary is just a tad above the national average.

Sure, we don't have kids, yet. But only one of us has worked for pay in the last four and a half years. And when we do have kids, we'll be eligible for some support.

Like, I just don't get the personal consumer credit crisis. What do people want so much they need to run up such massive levels of personal consumer debt?

Don't trust banks - but we know that, don't we?

Jenny's view about debt may be simplistic but it carries weight, at least from my observations.

When Hawke/Keating deregulated banks in the eighties it was obvious the old style prudent approach to saving, personal money management and debt was going to change fast.

Loans became free and easy and the have it now thing was exploited. Human nature doesn't change and even back in the old days most of us would have liked to have things now, but we couldn't, so we saved.

It took me 12 months to save for my first mangle (bike), and when I got it, at least, I felt I had earned it. Boy, did I look after it.

The (intelligent and prudent) expansion of money supply and easier credit is not necessarily a bad thing, it helps businesses to grow (sooner than later), which creates employment and, yes, allows people the pleasure of immediate satisfaction; capitalism at its finest, maybe. However, for many impressionable, ill informed and vulnerable punters, with the assistance of unethical bankers, marketers and the like, it could be bankruptcy or debt slavery.

There will be more of this to come.

Of course, for very big financial institutions bankruptcy and debt slavery may not be a problem when things go belly up; the punters will bail them out.

Early in the piece when this subprime thing started to go pear shape I mentioned we could expect a little bit of corporate communism; we have and we will see more.

The punters are stuffed; at least the vulnerable ones.

Don't trust bankers.

Over the past few weeks I have listen to the recently departed CEO, John Stewart, of the NAB bank and read the following in today's SMH by Sean Moore Chief administrative officer, Lehman Brothers, Sydney, implying nobody could see this (subprime - CDO) thing coming:

As you have been reporting for over a year, the extent of the collapse of the subprime market and the global credit crunch was unforeseen and has affected millions of investors worldwide.

In short, these guys are trying to cover their greed or their total incompetence. There were warnings years ago (conveniently dismissed) of this very thing happening, and if any bankers worth their multimillion dollar pay cheques didn't understand the structure and risk related to subprime mortgage based derivatives then what the hell are they being paid millions for?

The only thing that made the subprime model work was bullshit risk algorithms based on an ever increasing market and ever increasing prices - fairyland and these highly paid fuckwits bought it, or ignored it for reasons of greed.

Don't trust banks: the more they say they care the more they don't. Once upon a time if your cheque was about to bounce your local bank manager would call you to make sure you would cover the O/D. Now they just hit you with heaps of penalties while saying they care and will provide you with excellent service etc etc etc. Bullshit.

Remember: in general the more businesses promote something the less you can expect it.

My old bank manager never told me he cared; just behaved though he did.

Governments promote greed

Strong leadership would warn against such greed, Kathy Farrelly, but instead we have had a PM and Treasurer who have been belting us over the head for the past 11 years that the good times would roll on forever and, even worse, that they were personally responsible for those good times.

Odd for a supposed conservative government that produces nothing that will generate business, apart from a muddled tax policy which it claimed was reducing taxes despite it being the largest taxing government in history.

Responsible leaders would warn against foolish greed but the last treasurer who tried such tactics – Paul Keating and his "recession we had to have" – was slated from then until the cows might come home one day.

Either he wasn't telling the truth, which shouldn't have had any effect ,or he was, which the media should have examined prudently but as usual they played the man and not the facts. Hence Keating was one of the most maligned PMs we have ever had, far beyond what he deserved; indeed, there is much he should have been applauded for.

Now we have an Opposition leader who thinks the government is "talking down the economy" – complete hooey as private business will do as it wants and people will spend whatever spare money they have. What would "talking up" the economy involve? Perhaps telling citizens to "spend spend spend" – as the Pools winner in the UK proclaimed she was going to do about 15 years ago, which is what she did until she had blown her 6 million pounds within 5 years.

But a certain number will, if told repeatedly that the good times will last forever, that they have had huge wage rises under a government (wages have always gone up not down – unlike value for money) etc, continue spending even when they don't have spare cash and that is why Australians owe $44 billion on plastic, the third highest personal debt in the world.

Nor will Kevin Rudd be able to do much about events outside Australia that affect us – perhaps at most he can cushion the blow. So much for the last PM who it seems thought his destiny was to leave a record as the second longest serving PM and who terrified his fellow MPs into believing that one man leads the country. Sadly those same nitwits are in Opposition and can't even elect a leader they all agree on. And they believe they will take back government sometime soon!


Fiona, I've been told that in Melbourne one needs to tender for a flat nowadays. Would you know if this is commonplace? It certainly seems extraordinary.

Re: renting

F Kendall, News Corp had an article online yesterday apparently confirming the increasing (illegal) practice of rent auctions.

Discretionary borrowing?

Jenny Hume, back in the early 1980s I acted for the so-called "investment" arm of one of the major banks, and well remember drafting numerous mortgages with interest rates of 21% plus – many of them being to farmers. Those loans were all part of what is a long and dishonourable tradition in banking – that of taking advantage of the most vulnerable. There have been stellar examples more recently. Take, for example, that model of banking rectitude, the Commonwealth Bank of Australia:

ABC TV's Four Corners program has uncovered a spate of unaffordable loans given to Sudanese refugees whose chief income was from welfare payments.

The loans were made by the Commonwealth Bank, and, in one case, a family of nine was given finance that left it with about $3.60 per person, per day to live on.

The aptly rebadged NAB isn’t flawless either. Here’s what a former loans officer of that institution had to say back in March:

[A] former loan officer for the National Australia Bank (NAB) says that it is common for lenders to sell people bigger loans than they need.

Former NAB worker Kim White, now a telephone counsellor for the Financial Services Union, says he often speaks to bank employees who feel pressured to make loans to people who cannot afford them.

Mr White has told Four Corners the pressure has led to several cases of suicide.

He says when he was working for NAB he would routinely sell people loans that they could not afford.

"We would be under pressure to upsell to the maximum that we could," he said.

"I upsold someone to $80,000 on more than one occasion when they only came in for a $20,000 or $30,000 loan."

Jenny, not everyone is as financially astute as you. On the contrary, the level of financial naïvety, to put it kindly, in the Australian community is breathtaking. Many people who fall into that category were deluded by that nice Mr Howard into believing that they could be “relaxed and comfortable”, that they had “never had it so good”, and that the strong economy would continue forever.

I seem to remember, by the way, that farmers can be naïve financially too – remember the Swiss loans of the 1980s? For those who don’t, this was the “affair” when Westpac (and other banks) suckered many farmers (and others) into taking out relatively low interest loans in Swiss francs (at about the same time Jenny and her family were encountering stratospheric interest rates in Oz). Unfortunately, not long after the loans were entered into, the Australian dollar plunged, so the actual interest rates that the borrowers had to pay skyrocketed. The following letter to the Wallis Inquiry into Australia’s financial system is worth reading:

As Chairman of the above Association, I wish to make a submission on behalf of our members to your inquiry.

We are a bunch of unfortunates who were induced by our banks in the 1980’s to take up their offer of a Swiss loan. The borrowers, who are roughly half farmers and half small business people, did not need much encouragement as the Swiss loan was 6-7% interest and onshore loans at the time were 12-14%. We were encouraged to maximise our loans and place the excess on IBD with the bank at 9-10% to generate further income. We did not need to have our arms screwed to comply with that one either.

When inquiring about pit-falls, we were told that there was a potential for adverse parity, but the very most this would be was 5-10% and even with this we would be way in front with our interest saving. Besides, we could always delay termination of the loan until the parity was in our favour. If we “hedged” the loan, the additional cost would negate any benefit of the loan but we could, if we wished, change our currency at “roll-over” (when interest was due) if the bank was given some days notice.

It must be remembered that this was still in the era when bankers held high esteem in the community and farmers and small business people always trusted their advice. However, many borrowers sought and received reassurance from senior officers of their bank. My wife and I (and a business associate) achieved this from the Chief NSW Manager of the Commonwealth Bank.

At this time the two most senior banks CBA and Westpac were vying with each other and heavily promoted FCL’s in newspapers, on TV, and at organised seminars, etc. As well, they gave very firm orders to their Field Officers, mainly the banks’ Branch Managers, to promote them to any client seeking credit (even an overdraft), even to the extent of saying it would be an FCL or nothing. The lesser banks then also had to supply FCL’s or lose their customers who had heard about these new cheap interest loans, (which were unavailable and unheard of before 1982) and in these instances the vital risks and loan administration were never explained.

You may wonder why banks would be clamouring to sell loans with 6-7% interest instead of onshore at 12-14%. At an earlier time I also wondered, but I have been subjected to a very harsh learning curve. The reasons are as follows:

(a) In the early 1980’s the banks were subjected to the much despised “Item 8”. This was the Treasurer limiting their lending to dampen an (allegedly) overheating economy. By lending from, for example, Singapore they came under the law of that country and the sky was the limit to their lending. “Item 8” was terminated in 1984 (I think) after deregulation.

(b) Lending from, for example, Singapore avoided the mandatary (at the time) 3-4% of the loan statutory deposits with the Reserve Bank (it earned little).

(c) At the time, the Australian company tax rate was 49%. In Singapore it was 10% but newly established companies got a tax holiday of five years. So tax was nil.

(d) Borrowers had a legal obligation to deduct 10% of interest on the FCL due the bank and remit it to the Tax Office. The banks offered to do all this for us and charged us extra so they would receive the full interest clear of tax. We have never found any evidence where they actually made this remittance, but we have plenty of evidence where they did not. We subsequently discovered that Taxation Law 261 forbade them to take money from us in this way and their lawful obligation is to return the money to the borrowers. (Their lawyers advised them at the outset they would be breaking the law by taking our money for their tax.)

The ANZ to date is the only bank to return the stolen withholding tax money to their borrowers. With other banks, borrowers must serve a writ (at great cost) on their bank and on the way to court the bank will pay back the tax. There is probably many millions of tax dollars the banks just did not pay, thus making the whole deal tax free.

(e) We subsequently learnt that the Field Officers of banks had little, if any more background knowledge of Swiss franc loans than their clients. They just knew their bank had this cheap loan available and felt they were doing their clients (often their friends) a favour in making it available.

The senior Treasury and International Department people who designed the loan (they called it a product) knew differently. It is reasonable to claim they fully expected to cream 10-20% of tax free capital off their “captive clients” (their term). This was based on the AUD$ performance against the Swiss franc in previous years. They knew that in a given number of the 15 x 5 year loans possible to achieve in the last 15 years (the last of them would be of only 4 years, 3 years, 2 years and one year) one loan would be of benefit, one would break even and the other 13 would be disasters for the client and bonanzas for the bank. This period had seen the AUD$ fall in value from 5 Swiss francs to AUD$1 to 2 Swiss francs to AUD$1.

These senior bank officers also knew when promoting FCL’s in 1984, that although the AUD$ was holding well at that time, all the classic signs and situations that create a fall in a country’s currency, were in place in Australia. They had publications from banking advisory agencies telling them of the inevitable crash of the AUD$ in early 1985. So they pressured staff to write those FCL’s (we see all this so clearly, from discovered inter-bank memoranda from the time. They were jubilantly speaking of anticipated “super” profits - tax free).

What they did not anticipate was the magnitude of the fall when it did come. Apparently an unprecedented period of the AUD$ holding up will be inevitably followed by a fall sufficient to put the AUD$ back on the same decline it has always been on when looked at in 5 year terms.

Those bankers panicked. They were sure clients would be taking legal action and were surprised it was slow in coming. They planned their defence mode, no matter how devious (inter-bank memoranda show all this).

What they had planned for their clients as a “rough patch” had turned into a “super super” bonanza for the bank and utter disaster for the clients.

The loans had doubled and many borrowers were facing bankruptcy. Moteliers, developers, garage owners, solicitors, accountants, third generation farmers were walking away with just a suitcase. Over half the loans ended in divorce, there were suicides and one murder suicide as a direct result of the loans.

Unfortunately the economic lust of these bankers was still not slated. They told the more “astute” (their term) of their borrowers that the banks was now giving them the facility to deal in forward currency contracts and that the borrowers, at only the cost of $10.00 to $15.00 per contract, would be able to “recoup previous losses and mitigate against future losses”.

“What does all this mean,” wailed the borrowers “we have never heard of such procedures.” They were informed not to worry that the bank’s Dealing Room experts would tell them what to do. How and when to buy forward etc.

After many months of losing heaps on deals, the bank’s “experts” advised them to take, probably 9 out of 10 were duds, the borrower gave up in despair. This was probably the worst period of the loan, as we watched our life's work slip away. We were forced into a procedure like backing race horses (a thing we would never do) but unlike the punter we never had the occasional win. Anyone who has never suffered the experience could not imagine the sick despair we felt.

Borrowers were eventually forced to come onshore, to the highest interest rates in Australian history. The CBA calmly asked us to pay 25% interest on a loan that had more than doubled. More than half the borrowers were sold up, others continued to stumble along under great stress. Many are still under the same stress as the burden of debt has just been too great.

Many years ago now, I promoted the formation of our group and have been Chairman almost continuously. In that time, I have come to know hundreds of our members and the constant feature is that they are always decent people prepared to work hard to build a better way of life for their families. Their only failure was to trust their bank, as they trusted their doctor or minister.

The promotion of borrowers dealing in forward currency contracts was the ultimate confirmation of borrowers’ suspicions that their bank had a total lack of integrity. We came to realise (no one told us so how could we know) that it was the “bookie” telling us which horse to back. Every dollar we lost in dealing went as tax free capital to the bank.

A very decent man named Ian McKay, told us he was a 21 year old university graduate who obtained a job in the dealing room for ANZ. He was paid a fabulous wage (many of his work mates were drunk or stoned in the afternoon and could not work) and given a profit quota. He was assured of pay rises and advancement if he exceeded the quota, but was left in no doubt that his job was under threat if the quota was not met on a regular basis. He was instructed how to lie to the unsophisticated farmers and small business people, so they would lose and the bank would gain. His other customers were skilled foreign currency managers and there was only a small margin to be made out of them. I have his sworn statement.

As “captive client” we could not get quotes outside the bank, and we were ultimately to learn that we were not charged the $10 - $15 as promised but secretly up to $12000 per deal, which was just lumped in with our “losses” (bank gain). The CBA stole $120000 from my family in secret commissions alone in just a few months and from another borrower with a similar size loan, $400000 over the same period. God only knows how many millions of dollars were looted from the total of their borrowers in secret commissions alone.

Borrowers were to become very familiar with what banks refer to as the golden rule: “We have the gold so we make the rules”. This rule dominates Australian life today.

Borrowers in litigation were especially vulnerable. They often found that the lawyer to whom they were paying fabulous sums of money was actually working in the bank’s best interests. 50% of cases in the Civil Courts now involve banks and banks never quibble about the size of the account (as we might) because banks are awash with money. They are geese laying golden eggs for lawyers and little bankers are never loathe to spend shareholder’s money putting “recalcitrant” clients in their place.

This was one aspect that people from the land could never come to terms with and were totally bewildered by. They tell me they were taken to lunch and given red carpet treatment, but with the fall of the AUD$ and blow-out of their loan they instantly became the enemy and were treated accordingly.

Various borrowers in litigation with obviously good cases, found themselves abandoned by their legal team on the steps of the court house and had to accept a settlement very much in the bank’s favour (impossible to acquire and brief another team at short order) or face certain annihilation in the court and most likely bankruptcy. No money changed hands here, it was done by the bank saying to the borrower’s legal team: “settle this now or you get no more bank work”.

Judges are also vulnerable. They are notorious gamblers and often have a huge overdraft or a son or daughter seeking a loan. There have been various judgements that defied logic in efforts to exonerate the bank. In our own judgement which favoured the bank, the three Appeal Judges were quick to brand it “illogical and irrational”.

In the recent Drambo judgement handed down in Brisbane, Judge Sundberg decreed that Westpac was legally entitled to take $3M in secret commissions. This practice has been condemned in previous cases and international banking circles regard it as blatant theft.

I have been very saddened by my various forays into Canberra, along with various members of my Committee, seeking some form of justice from elected politicians. Whilst Juniors may have supported us, most Senior Ministers claimed we were “bank-bashers”. Ministers Hawk, Keating and Howard point blank refused to accept or discuss the “Westpac letters”. (No one seriously considering banking practices can avoid reading those letters.)

The National Crime Authority, Victorian and NSW Fraud Squads, the Trade Practices Commission, all refused to handle those letters, because they were irrefutable evidence of Westpac’s theft on the grand scale. All were terrified to move lest they be individually marked for life by the banks.

In Canberra we were soon to learn that the Liberal Party owes $12M to the NAB, the Labor Party $8M to the CBA and at election time, banks hand out very large sums in equal amounts to each political party. This is so it does not matter who goes into power the banks can at a later date say: “if you do not toe the line we will consider withdrawing our support at election time”. The party, of course, knows they are totally dependent on those donations to run the kind of campaign required to get into power.

Our borrowers have been very much disadvantaged by the Martin and Elliott Parliamentary Banking Inquiries. Despite the despair felt by some Committee members, the Inquiry was very much in the bank camp. We assert the banks lied extensively to the Inquiry and we will submit a document which we have compiled pointing out these lies. There are some kilos of documents which are required to support our claims and we are in the process of having a well known firm audit all the material and give us a document which verifies our claims. So, if required, we can also submit that when it arrives.

I will also enclose another document entitled “How they defrauded their Clients”.

Yours faithfully

Ian Fisher

Chairman, Foreign Currency Borrowers Association

One last point, Jenny. People have to live somewhere. The rental market in most Australian capital cities has been tight for a long time. It’s all very well to say that people should save until they can afford to buy a modest place – but where do they live in the meantime, and what if the only affordable (initially) places are of the McMansion house-and-land package that has been the only thing on the market in the new developments on the suburban fringes for an equally long time? A caravan, perhaps? Do you have any idea what the vacancy rates are like in long-term caravan parks?

There has been a great deal of financial imprudence in Australia over the past 15 years, but to attribute it to “purely” discretionary debt and/or to “the greed mentality that wants it all, wants the very best, and wants it now” seems to me somewhat simplistic.

Fiona - have now read all this properly

Fiona, I have now read all this properly, having only skimmed it before we went away. All most interesting and so heartbreaking. Bloody banks - the hide of them my 86 year old mother said on her death bed, and she rarely ever swore.

I was pretty aware of the broad issues outlined in your link concerning the Swiss loans and the behaviour of the banks, but at the time we considered such a loan, I certainly was not but I smelt a rat. I guess I was cautious at the time because I did not understand how it all worked and if I don't fully understand something, I hesitate and urge caution. I am very glad I did even though we remained heavily in debt and ultimately lost the fight. But it would have been ten times worse under that scheme of arrangements. If we had taken that loan the whole family would have been on the street - again - as we had been thirty years earlier.

I can understand though how people did get sucked in. Like many we were absolutely desperate to find a way to lighten the burden on the family as it was taking an awful toll on all our lives.

When we looked at the possibility of the Swiss loan we had just come through four years of devastating drought that had drained us emotionally, physically and of course financially. It can be very tempting to grasp at straws in that situation in the hope of at least alleviating the financial burden.

I still have nightmares quite often where I am back wrestling with all that, seeing cattle die, working 18 hour days seven days a week, arguing with family over what to do, preparing endless applications till all hours of the night for financial assistance, arguing with bank managers in favour of them. In the end we got relief from Citibank - its first rural loan and I must say it acted with integrity. It allowed us to buy time but in the end it all came to naught as we ran into another big drought before we could get back on top, Then tragedy hit the family and there was nothing left to fight for anyway.

I do sympathise with people caught in debt traps through no fault of their own, and I just this week helped out an old couple with a 1000 dollar cash gift (a former employee and his wife) who I know are struggling through ill health, but I have little time for those who incur debt as a result of the greed mentality. I would nonetheless help there too if I saw real distress and had capacity to do so. I may judge but I am not heartless.

Where does a family live if it cannot afford to rent or buy a home you ask? Well if my daughter and her husband and two children could not afford to do that I would allow them to live in the family home, and would probably finance an extension at a fraction of the price of a new home to enable privacy for all of us. Many baby boomer parents are not exactly poor and many rattle around in quite substantial houses way beyond their needs. In times of hardship, everyone has to make sacrifices. Trouble is many of the current generation do not want to do just that. They want it all, McMansion, Plasma, the lot and now they are in trouble with huge credit card debts on top of large mortgages.

Many of them will probably finish up having to move back in on the parents. That may not be so disastrous. Debt causes a lot of stress in a family. Living back at home with the oldies may not be easy, but it would probably be cheaper.

Incidentally my family had several families over the years living in the old home with us because they could not afford to rent. They would do a couple of days work per week in lieu of board and lodging and it worked well for all parties, most of the time.

I think we need to see more development in the inner rural areas with better transport links to the City - a VFT which would allow more people to commute and break out of the high cost housing of the cities. As I said, even in Goulburn homes are so much cheaper and distance to commute is not great.


Fiona, I don't have much time today as we are on the road for the next few days, but thank you for your input here.

I of course know and accept that every cap does not fit all and that this it is not a simple issue. Having gone from a shack in the bush to an old McMansion, from deep in debt to debt free over the course of my long life, I at least do know that. I have seen and done it all.

Society has many layers with varying degrees of financial capacity for whatever reason, as has always been the case. Overlaying that is the individual's ability to make good financial decisions over the course of a lifetime. Some can do it, others are hopeless at it, including some of my best friends. I wrote earlier that simple budgeting is something that maybe they should start teaching in school in year 11 and 12.

But there will always be those who can never afford a home of any kind for whatever reason, and the failure of successive governments to provide sufficient low cost public housing for low income earners is to me quite scandalous.

Another issue for me is the failure to follow up on the initiative of the Whitlam government to develop regional areas - Albury Wodonga type development. That has meant that population has continued to concentrate in the large urban centres with ever-increasing demand on housing and transport at high cost. Much white collar work these days can be done from a distance - my nephew works on contract for a state government while living in the US for three years. But even if that were not so, instead of moving offices to the country, those that were there have been closed down over the past ten years or so, and the services are concentrated back in the cities. So country towns, even the large ones, are stagnant, while the cities burst at the seams with housing and rent unaffordable as a result.

Take Goulburn for instance. It is close to Canberra, commuting distance in fact, and also to Sydney. It takes less time to commute to the City from there than from some of the outer suburbs of Sydney. Houses are affordable - we just sold my sister's lovely little place to a single mum with a child. Many people now commute from here to Canberra where housing and rents are just as unaffordable as in Sydney. Of course fuel prices are an issue, but to Sydney there is the train commute, and a bus to Canberra. Car pooling could also work.

Of course, further out in the smaller towns where the farm is you can buy a house for $70 000 on a big block or rent for $100 a week, both in town and around it on farms. There is local work, yet no one to do it. Header drivers are brought in from Denmark. But even if there was no labouring type jobs, if white collar work can be done from the US then it can be done from the rural areas in Australia. It may not be everyone's cup of tea, but it does offer options for some to escape the mortgage belt and stress. We are desperately short of doctors and teachers and other professionals in all those towns, and we offer a good lifestyle.

I am most certainly aware of the level of financial imprudence by the banks such as the Swiss loans affair (remember the TV series The Farm?). We even looked at that when we were so desperate in the big eighties drought. My brother wanted to go that way, but I said no because I always believed that if a financial problem has an easy solution as the banks were expounding in regard to those loans, then there had to be a catch somewhere. I could not see the catch at the time - the papers we have did not spell out the risk - but I was wary, thankfully. Instead we got into Citibank with the big back breaking load around at 17% fixed rate for five years which was better than the 24% the other banks were demanding, at the time. I do not like large fixed rate loans but I figured we would be ahead even if rates fell in that time. 24% was just crippling. If farmers whinge F Kendall, then they have a right to at such exploitation.

I do not attribute the financial problems people face solely to imprudent overspending on non-essential goods. But the notion that good times will go on forever was never true, and the failure to save by those who could have done so, has been very foolish and has in certain instances cost people their homes. I agree with Kathy; the greed mentality has played at least some part, probably quite a large part in some instances, for at least a percentage of the people in trouble. If you spend all you earn, and beyond that to accrue high interest credit card debt on homes that were beyond your means, and on non-essentials, that is not naivety, it is just plain folly. The materialism of society these days is totally unsustainable and now we are seeing the result. Many people built these McMansions themselves. They chose to do that, when they could have built a more affordable and modest home.

But no, no issue has one face and only one face. I agree.

Better get on the road. Cheers.

Whinging cockies

Having been one for many years, I know that what they might lose in interest rates, they more than make up in tax breaks.

24% would have been 1990 ish, no? We all paid it. Dreadful and difficult.

But, we owed money because, for whatever good reason, we were spending more than we were earning.

That's why I have pity for the people caught these days. You don't? OK.

A very brief lesson

Michael de Angelos: "What we are seeing are two things: the result of a George Bush led attack on all government controls in his "small" government crusade which simply meant shifting government funds from regulators, and starving them of the power to control private corporations who are responsible for the current debacle, to other government areas like the purchase of weapons."

All modern day bubbles are created top down, and so are the bursting of them. This particular bubble isn't any different. Actually, this one began way back at the end of the Dot com bubble. Which btw was at the time Clinton was President - not that it means anything in particular.

Loose monetary policy creates an artificial situation of money being cheaper than it otherwise should be. This in turn allows for, and gives incentive for, overly speculative investment. The average man in the street calls this the "good times". As with all bubbles they eventually burst - and this one isn't any different. Hence, we have the boom bust cycle.

Actually the Australian Government is running about madly trying to begin another boom, after amazingly not only talking themselves into, but actively cheering on the sidelines for a bust. One of the most bizarre actions of any government in the western world. Shameful really.

Expansion of money is the reason for house prices doubling. Expansion of money is the reason for commodity price records. It logically follows that contracting supply will cause a reduction in these values (which you are currently seeing).

I understand this, and most people don't. That's why I am wealthy, and most people aren't.

Bullshitting and blame shifting (even to ones self) may be the successful political route. In finance it is, though, the equivalent of cutting your own throat.

PS The Australian Fed will cut interest rates. Banks will be very loath to pass those cuts on. That may just be the thing that saves Mr Rudd's political ass. That is indeed the market in action. The Australian Government should've cut taxes much more in the last budget - and it didn't take long to prove me absolutely right!

When you cheer on (and you will), the rate cuts, you'll be cheering on the makings of the next bubble - which you can complain, and blame, in about, oh, ten years.


It is confronting to attempt to understand your attitude, Jenny Hume, of tolerance towards your own family's reliance on borrowings and credit, compared to your attitude to those doing the same at present.


F Kendall, what I wrote was: The young ones gripe about their mortgage. We had fourth and fifth...

You find an attitude in that that is confronting. Oh well, so be it.

There is discretionary debt and there is non discretionary debt. None of ours was of the latter. But there is an awful lot of mortgage stress out there now due to the former, and to the greed mentality that wants it all, wants the very best, and wants it now - from McMacMansions to plasmas. Why did you take so much credit? was asked of a family losing its McMansion and all that it contained.  Because it was offered. Well spare me the tears.

We had to battle with interests rates imposed on farmers of 24% when housing rates were around 14-15%.  Farmers have always been slugged the hardest because banks seem to think they are a bad risk, so they get hit with the top rates, forced into second, third, fourth and fith mortgages. We found that confronting, I can tell you.

It seems to me that the historically low housing interest rates and low unemployment that John Howard and Peter Costello delivered simply led many families to be complacent. They spent up big, borrowed big, and when things went pear shaped they found themselves in strife. Surprise surprise.

But you will no doubt find such statements confronting. Well you might just have to live with being confronted F Kendall because that is your problem and I do not intend to own it for you.

Over and out.

Jenny is right.

I think Jenny is quite right.

When I first married at 19 (oh foolish me) I worked very hard  as did my husband .Though he was a gambler and a bit of a drinker, I managed our funds. We paid off our house in five years. Of course most of my friends and acquaintances had big mortgages. Brand new houses with four bedrooms and a study. Games room to boot.

My husband and I had an old war service home, two bedrooms and a sleepout. It was, however, astutely placed  6 km's from the CBD on a 1127 sqm block.

We later sold it for three times what we paid for it.

My memories back then, were of people wanting more than they could afford. Nothing to do with governments.) Consequently they overstretched their budgets.

Remember, I was only nineteen (there's a song in that  somewhere) then hubby was twenty-one. Shit wages, old black and white television, hand me down second hand furniture, no nightclubbing and pub life. Spent time with family and friends. Still managing to have a good time though....

The greed mentality is certainly a factor. So is this:


Safer super

Jenny, one can always transfer one's super into a pension saving account. The interest rates are usually a couple of percentage points less than usual but at least the fund does not go backwards.

Too slow Justin

Justin, I am too slow to keep up with it all. I never really understood investment, and least of all superannuation, and never had enough spare cash to really bother trying. I do not even know what a pension saving account is.

But I do have a PhD in Debt Management - well, enough experience to warrant one. I managed the family's huge farm debt portfolio for a good 30 years. It is a pity the crops could never grew like the debt did; we would have made a fortune.

The young ones gripe at their mortgage. We had fourth and fifth mortgages, numerous bank cards to shuffle to deal off the deck to pay each other, personal loans unsecured - the whole box and dice. I got to be good at juggling debt.  Roll the Debt was the family motto.

Finally my mother and I decided after the big drought of the early eighties to roll it into one big back breaking load and did. It made life a bit simpler. It was the first rural mortgage Citibank ever allowed, and probably the only one.

I talked them into it. So I have one claim to fame I guess.

Thanks for the tip anyway. Will bear it in mind if I win the lottery which I won't as I am too lazy to buy a ticket.

What some people could ponder

What Is The Predator State? By James K. Galbraith - August 11, 2008, 11:32AM

Richard: Hi Bernd.  Normally we wouldn't let a post like this through as it has no content.  However, I'm interested to know why you brought this link here.

I'm correct, Paul

What we are seeing are two things: the result of a George Bush led attack on all government controls in his "small" government crusade which simply meant shifting government funds from regulators, and starving them of the power to control private corporations who are responsible for the current debacle, to other government areas like the purchase of weapons.

Plus the inevitable gullibility of people to believe that rapidly rising property values will continue and constitute real wealth. It's Robber Baron stuff and what will always happen when capitalism is not controlled by strict corporate laws.

The title of the thread The South Sea Bubbles Again is apt and the capacity of the general public to fall for this hype is amazing.

In the 1970's a huge chain of jeans stores in the UK built quickly by raising funds from retirees etc via the stock market (promising huge returns). Extraordinarily, it was called the South Sea Bubble Company!

One would think the name was a clue – apparently thousands of small investors didn't and when the crash came and the money evaporated, hundreds of pensioners were left scratching their heads as to where their pension funds had vanished to.

Needless to say, the operator of that crash fled to Australia with a small fortune and found a friendly home here.

Taking Michael de Angelos' a little further

As far as regulation goes, I'm in favour of it if it is simple, clear and comprehensible. The regime we are left with is none of those. I can actually sit down with the Companies Act and giggle, it is so farcical. The regulators pay lawyers straight out of law school peanuts and they get monkeys. I've always been a pretty savvy advocate with more wrinkles than a walnut but my knowledge of the corporate world on graduation was minimal (it was still better than most of my contemporaries). I have learnt heaps about how the Robber Barons work over the last 25 years and there is still plenty I don't know in many areas (although I'm pretty good with banking and complex fraud.)

I am a firm believer in regulation but I accept that that puts constraints on a free market.

One issue I should like to open up though, and I expect immediate disagreement from a laissez-faire doctrinaire like Paul Morrella (and he is entitled to that view) is superannuation. That dill Keating was on the other night pointing out that (and I have no reason to doubt this) Australia has the fourth largest superannuation pool in the world. Naturally, in the style of the truly inadequate, he was dishing that out as an accolade for his prescience. Beware the oracle. I think that prescience is going to come back and bite not just him but the ordinary punter. While the boom has lasted (and it lasted a lot longer than most thought it would but not as long as the snake-oil salesmen said it would*) profits have been huge and that has enabled a new industry of managerial parasites to flourish. Combine that with the fact that a noted nitpicker like myself could not even begin to understand the complexities of the law in the area, and the general downturn which is now causing negative returns on investments for the first time, and I think we may be in for the possibility that the whole lot gets pissed up against the wall unless strict, simple, compliance regulation is introduced and the fund managers get their fees cut to a very small fixed percentage of return. A particularly nasty regulator might make them contribute top-ups if their management led to a negative return. That should get unemployment up.

At the same time we see huge profits in the telecommunication and banking sectors (often despite disastrous losses from buccaneering ventures into the big wide world outside - look at some of the dodgy banks NAB has bought in the UK and it still makes a profit - from whom and how one wonders). Cross-city tunnels make huge losses but the builder still gets his money.

It is high time that the amigos of this world had their salaries statutorily capped. If that means we can't compete for the best executive in the world, it might also mean we don't get executives who seem to be best at losing huge amounts of money and driving share prices down.

Paul Morrella won't like it but I would re-introduce a State Bank (purely for State banking), a Commonwealth Bank (with limited power to enter the international market) and a Rural Bank tomorrow. We could also do with a Government Insurance Office that did not insure third-party motor vehicle risk.

All of those would be immediately viable by paying Government money exclusively through them and they would be designed to give real competition to the existing entities. (If you properly reconstituted the insurance arm of the NRMA you would solve the third-party problem as well, particularly since the old rorting system in the legal game has now been dismantled.)

Why would I do that, Paul Morrella? 1. It would work, and 2. it would provide a real safety net for those poor bastards who are being thrown out on the street.

I think now is an important time to have this debate as we stand once more at the precipice and, for my money, its a far more important policy issue to sort out before we start faffing around with carbon taxes.

Over to you.

*One of my favourites is being introduced to some dapperly dressed Yank at the American Club at the height of the Nasdaq boom. He was confidently predicting that the market would not only go up but keep going up for ever. I don't know but I assume he's bankrupt by now.

Superannuation fun and games

Malcolm B Duncan, as I recall during the last big share slump superannuation funds posted negative returns then as they are doing now.

When that happens the whole system is geared to disadvantage the vulnerable most, particularly those on allocated pensions because they are forced to take minimum drawdowns. If their fund is making a loss, that drawdown is simply topped up out of the capital. Nothing can reduce your investment quicker than that.

I remember looking into my late sister's allocated pension fund for her back then and soon got the picture. I also looked at the fees (colossal) and saw she was going downhill fast. I got onto the fund manager and told him she would be better to draw down the lot and put it in the bank and live on the interest. He said: Oh but most of her allocated pension is untaxable - she will lose that and pay full tax on interest. He was also her tax agent. I pointed out that she was on such a low income, got the senior's discount and therefore would pay no tax no matter what she did. He then switched tack and said it will cost her to buy back in when the market went up and she would lose the benefit of the expected upturn, when, and if, it happened.

Though he was her adviser it was clearly not in my sister's interest to rely on any ifs and whens as her capital was falling rapidly. Of course he did not want her to bail out, and it is not hard to know why. So we overruled him and it was the right decision. She would have lost half of her small investment had she stayed in, something she could not afford to do.

I wonder just how many other vulnerable people have been caught in the same web. Annuities are another trap - the incentive to go there being that the capital is not counted as an asset under the assets test, whereas it is with money in allocated pensions, or it may be the other way round, forget now and don't care.

The complexity of superannuation law puts it well beyond just about everyone I suspect, including me. Something to stay away from if possible. It offers very little to those with only small amounts of capital and on low incomes as far as I can see. It is better to pay a little more tax on your income than grab that 15% lower rate on some of it, only to find your capital decline in the fund.

That's life

Michael de Angelos: "Welcome to rampant and uncontrolled capitalism! And the peasants are revolting!"

What utter bullshit. Capitalism had nothing to do with the bubble. Greed and speculation are a part of the capitalist system. That's not though, true capitalism. A person's house (unless Jed Clampett), doesn't double price in one year. What do you think is happening?

There will be blame on the burst bubble, there's always blame. Do you really believe anyone will learn a lesson? What'll happen in ten years time? Of course people will ask for "regulation" - anyone ever thought the "regulators" were the beginning of the mess?

No matter how much people like to look down on those that failed - or pretend to sympathise with them - for many of these people this was their shot at the title, and some will come through this. That really is all a person can ask for.

So Michael, you can pack that sham away.

BTW very good article and worth reading. I'd advise any person to read this.

PS The United States and UK are taking a pounding in property - it now is starting to spread. Australia has an advantage in bankruptcy law, and belief in owning one's home. The market still has "at least" ten per cent to decrease.

Gloomy stuff

According to Bloombergs, foreclosures in the US are up 55%. A property crash in America will be a disaster. Property prices already coast along in Middle America but have been artiicially boosted over the past few years.

Now banks are finding in depressed areas like Detroit, already a disaster zone for unemployment with the oil crisis and auto factories laying off thousands, houses can't be shifted. They are selling them for whatever they can. One apparently changed hands for a token $1 last week and a new problem is arising. They are finding that if they displace the occupants and a house is seen to be empty it will be completely trashed within a week.

Welcome to rampant and uncontrolled capitalism! And the peasants are revolting! How odd that the same things happened to economies under George Bush, Tony Blair and John Howard.

As the Iraq War and the "war on terra" lose their significance, a new Cold War is needed to divert attention. How opportune for Georgia and Russia to be at each other's throats!

It's curtains for some home owners

I remember when I lived down the south coast at Shellharbour about five years ago.  There was a development boom similar to western Sydney. Lots of McMansions sprouting up all over the place, in this new development called Shell Cove, on the promise of a new marina, ideallic lifestyle, beach side living (it wasn't actually next to the beach) etc etc.

One thing that struck me was the number of these impressive looking homes that had sheets or blankets for curtains. The owners were obviously extended to the point where they couldn't afford decent fittings.

Well the marina is not a goer, the idyllic lifestyle is wearing thin, as is the two hour trip to Sydney by train, and the sprawl that was once  farming land now extends from Shellharbour to Kiama.

When the For Sale signs start going up en masse, I'm guessing there will be a mad rush to get out, pushing down prices and generating a selling frenzy similar to that which is now occuring in the US.

Richard:  It leaves a mighty question, Ron.  When they get out, where do they go? How are the rental vacancy percentages?  In Adelaide it's one.  I'm looking for one in Brompton, if anyone's got it.

Could you please change your registration to Ron Sands? It would be much appreciated.

The market is still patchy

I'm not sure you're right about the 'Gong, Ron Sands. Some years ago I acted for the developers that built that estate south of the city on the eastern side of the highway where they had to fill the land because it was in the tidal floodplain. It was a goer because of the geography o f the 'Gong - it's really just a narrow coastal strip with not much room for expansion for housing (hence all the recent Unit development).

Here in the Cross the market is all over the place and, generally, prices are falling, but in our building they are still at ridiculous levels. Nice building, nice views, but it is Meriton built and the flats are relatively small. Pity we only rent.

What I see happening in Sydney is that the collapse is largely happening from the outer fringe and moving in. The very top of the market is ok and there will be some real bargains at the bottom from mortgagee sales if you are cashed up but, as Richard rightly says: where do they go? If it gets bad enough, the banks may just have to remain in possession and rent them out to other people who have lost their houses. It looks very grim from where I'm sitting especially with the price increases in petrol and food and groceries, not to mention taxes and charges and the insane road fine system.

Harbourside pads

Spending Wednesdays, Thursdays and Saturdays looking at places to buy on the Lower North Shore, it is interesting how prices are coming down really sharply, and almost nothing is going to auction. When we bought this house in '99 you could only buy before the auction if you offered over the odds. Now agents seem to be advising to accept the first firm offer they get that's over their reserve ... all of which suggests to me that renting and waiting for the fall to run out may make more sense. 

Lots of properties coming off the market unsold. Lots of others where the glossy handed out says "expressions of interest by 6 July" or similar.  

Right now we've seen units on Balmoral slopes that would sell for $3M+ and rent for $1450pw. $3M in a term deposit account will get you $3352 per week after 30% tax. Rent and bank nearly $2K per week. Does not compute unless prices are going up more than 4%pa, which they aren't.

According to some woman on the radio yesterday - I didn't listen long enough to get her name, because I couldn't take the "um, yes, no, well, you know" twice in every sentence - 28% of Aussie families own an investment property. Negative equity on your super isn't a good look, either. 

Agree with all of that

I can see it all about to hit the fan. Those ridiculous prices being paid for harbourside pads must end in tears. Sadly then it flows to the hardest working Aussies on mortgages.

Banks are out of control. My dad was a bank manager all his life – in the days when they still retained employees for that long and gave them generous superannuation benefits. He became a manager early in his life because he convinced the bank to lend to those who had the greatest problem getting loans – new immigrants from Italy and Greece. When they succeeded and became established businessmen they didn't forget – some even came to his funeral.

When I was young I discussed with him the possibility of joining the same bank. "Good God no !" he replied, "find an honest job".

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