Bailouts are out, so tap liquidity

"Let me say a little about this facility. It is not a 'bailout' fund for banks. 'Bailouts' usually mean stumping up public funds to inject capital to an institution whose solvency is in question. The CLF does no such thing." Glenn Stevens, governor of the Reserve Bank, on Tuesday.

"Let me say a little about this facility. It is not a 'bailout' fund for banks. 'Bailouts' usually mean stumping up public funds to inject capital to an institution whose solvency is in question. The CLF does no such thing." Glenn Stevens, governor of the Reserve Bank, on Tuesday.

There you have it - Glenn Stevens doesn't think it's a bailout fund. It's a Committed Liquidity Facility - the $380 billion in Reserve Bank rescue money, sorry "liquidity" that is, which the banks can access should they find themselves in strife.

Under this thingamajig then, one must select one's words with care, if you are a bank and you are about to bite the dust then you can forget about a bailout.

If you are even tempted to whisper the word bailout, snap out of it! Off you go to Anthony Robbins and awaken the giant within. You are not wanted at the RBA.

If, however, you encounter "an acute stress scenario", why not shimmy on down to Martin Place - but only if you need a little something to facilitate your liquidity in a committed kind of way - flop out the old paw for a spot of lazy taxpayer liquidity, say $20 billion, shucks make that $50 billion, and Bob's your uncle.

Or rather Glenn's your lender. This is no freebie. Not on your Nellie. You will pay dearly for this liquidity - a heinous 40 basis points over the official cash rate.

Wait! Before you nip back and flog that 3.4 per cent money to your home loan customers at 6.4 per cent, you must lodge collateral. Duh, it's not a bailout you know.

So now you have a unique opportunity to get your most gnarly car loans off the books, not to mention that toxic derivative stuff those dastardly investment bankers sold you. (Under the terms, the type of collateral pledged is at RBA's discretion, and there is no maximum term on borrowings yet.)

Yes, you can only access this exciting opportunity if you are a bank and you are "illiquid", but not "insolvent".

It is beyond this mere chronicler to explore the fathomless schism between a bank which finds itself illiquid and one which finds itself insolvent. Is it that one has greater difficulty in meeting its liabilities than the other?

Beleaguered victims of Peter Drake's LM Investment Management would love to get their hands on some of that government liquidity.

Alas, what is left of their savings is being eaten by the insolvency people at the rate of $30,000 a day. And the plan seems to be to deliver the funds back into the hands of Peter Drake via a deed of company arrangement (DOCA).

That would mean LM investors had no chance of recouping the $25 million Drake took out personally in cash last year while their funds were frozen - or any other voidable transactions for that matter.

You see, the beauty of a DOCA is that you and your voluntary administrators can gift indemnities to directors against legal claims. Directors can wipe out their financial liabilities and their legal liabilities at once.

By the way, the administrators from FTI Consulting told financial planners last week - those who put their clients into LM in the first place and banked hefty commissions - they would be counted as creditors. The actual investors, though, are not deemed to be creditors; those, that is, whose savings were frozen while the advisers continued to pick up fees.

Meantime, FTI is charging $30,000 a day. We get to this figure by dividing the mooted $300,000 in fees over 10 business days of appointment through to the first creditors' meeting on April 2. They intend to extend for three months. So this is just the aperitif.

As all the LM funds are closed these monumental fees have to be snipped from unit-holders' funds.

Rubicon finally made it to court this week. Liquidator Paul Billingham of Grant Thornton scraped inside the statute of limitations with a potential claim against KPMG and kicked off an examination in the Supreme Court of NSW on Monday.

Connoisseurs of cutting edge financial engineering will recall Gordon Fell, with a little help from David Coe, built the $5 billion empire of debt, property and more debt in three years, then flogged it to Allco - where they were directors - for $260 million.

Allco was shortly flattened in the financial crisis in 2008. Many believe Rubicon was the Trojan Horse which brought Allco unstuck. It certainly expedited its demise. That Trojan Horse, you see, was chock-full of hairy mezzanine loans - the dodgiest of all debts - which were already headed for oblivion the year before, when the credit crisis hit.

Anyway, KPMG was the "independent expert" that approved a transaction just before Christmas in 2006 whereby Rubicon America Trust (RAT) spread its wings into mezzanine loans.

"Fair and reasonable," said KPMG, as you do in independent-expert-land.

Anyway, we have done a bit of digging into the annals of RAT which we shall share with you on Monday. For those interested in sophisticated sharemarket plays it promises to be a rollicking good read.

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