Bailouts are out, so tap liquidity
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.
Frequently Asked Questions about this Article…
The Committed Liquidity Facility (CLF) is a Reserve Bank of Australia (RBA) program that provides banks with access to liquidity in stress scenarios. The article describes it as a facility (not a bailout) worth about $380 billion of RBA liquidity that participating banks can tap if they become illiquid.
No. According to the article and RBA governor Glenn Stevens, the CLF is not a bailout. Bailouts normally involve public capital injections to rescue insolvent institutions. The CLF is a committed liquidity backstop for banks that are illiquid (short of cash) but not insolvent, and it requires collateral and a fee rather than free public funding.
Banks that are deemed illiquid—but not insolvent—can access the CLF. They must lodge eligible collateral (the type is at the RBA’s discretion), they will pay a premium (the article notes a charge of 40 basis points above the official cash rate), and currently there is no stated maximum term on borrowings under the facility.
The article suggests banks will pay for CLF liquidity (40 basis points over the cash rate) and could be tempted to pass on extra funding costs to borrowers. However, any actual change to mortgage rates depends on individual bank pricing decisions and how they manage collateral and funding costs.
LM Investment Management (linked to Peter Drake) had its funds frozen and entered insolvency processes. The article reports that what remains of investors’ savings is being reduced by insolvency and administrator costs (estimated at about $30,000 a day), and administrators have proposed arrangements that may channel recovered funds back via a deed of company arrangement (DOCA), which could limit investors’ recovery of certain sums, including amounts taken out previously.
A DOCA is a formal insolvency arrangement that can set out how creditors and stakeholders are dealt with. The article warns that a DOCA can include indemnities to directors against legal claims, potentially wiping out directors’ financial and legal liabilities and reducing investors’ chances of recouping funds or pursuing voidable transactions.
Administrator and liquidator fees are paid from fund assets as part of the insolvency process. The article cites FTI Consulting’s estimated fees of about $300,000 over the first 10 business days (roughly $30,000 a day) and notes those fees will be taken from unit-holders’ funds as the LM funds are wound up, reducing what investors might ultimately recover.
The article reports that liquidator Paul Billingham of Grant Thornton has commenced an examination in the Supreme Court of NSW and has lodged a potential claim against KPMG within the statute of limitations. KPMG previously acted as the ‘independent expert’ approving a Rubicon America Trust transaction into risky mezzanine loans. Investors following historical corporate collapses (like Allco) should watch court outcomes and any claims against advisers or auditors that could affect recoveries.
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