If it looks like a duck and quacks like one . . .
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, 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!
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, and Bob's your uncle. Or rather Glenn's your lender. This is no freebie. You will pay dearly - 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 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 that finds itself illiquid and one that finds itself insolvent.
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.
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.
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 that brought Allco unstuck.
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 CLF is a Reserve Bank facility that provides committed liquidity — effectively access to funds banks can tap if they face acute stress. The article describes it as a $380 billion liquidity backstop (not a capital bailout) that banks can use if they are illiquid but not insolvent, subject to collateral requirements and a penalty-like cost.
According to the article and Reserve Bank governor Glenn Stevens, the CLF is not a bailout. Bailouts typically inject public capital into an institution whose solvency is in question. The CLF provides temporary liquidity against collateral and charges banks a premium (about 40 basis points over the official cash rate), so it is designed as a lending facility rather than a capital rescue.
Only eligible banks that are deemed illiquid (but not insolvent) can access the CLF. The facility charges a penalty-style fee noted in the article as 40 basis points over the official cash rate. Banks must lodge collateral — the type and terms of that collateral are at the RBA's discretion and there was no maximum term specified in the article.
The article suggests banks accessing the CLF must provide collateral, which means they could theoretically remove assets from their books to obtain liquidity. However, the facility is intended for liquidity support rather than to rescue insolvent institutions, and the RBA controls acceptable collateral at its discretion.
LM investors saw their savings frozen while the firm faced insolvency. The article explains a proposed DOCA could return funds into the hands of Peter Drake and grant indemnities to directors, which can wipe out directors' legal and financial liabilities. That outcome would make it hard for investors to recover amounts such as the $25 million reportedly taken out personally by Drake.
FTI Consulting, the administrators, are charging substantial fees — the article cites a working figure of $30,000 a day based on a mooted $300,000 over early appointment days — and they plan to extend for three months. The administrators told financial planners they would be counted as creditors; however, the article states the actual investors whose funds were frozen are not being treated as creditors in the same way.
Rubicon reached the NSW Supreme Court in an examination launched by liquidator Paul Billingham of Grant Thornton, with a potential claim against KPMG for its role as an 'independent expert.' The article recalls that Rubicon’s deals and related transactions were tied to the build-up that later contributed to Allco's collapse. For investors, the case highlights risks around due diligence, independent expert opinions and connected-party transactions in complex corporate structures.
The article suggests several practical takeaways: central-bank liquidity backstops like the CLF are lenders of last resort, not free bailouts; collateral and costs matter when assessing bank stability; when funds are frozen in insolvency cases, administrators’ decisions (including DOCAs and fees) can greatly affect recovery prospects; and independent expert reports and complex corporate deals can carry hidden risks. These are reminders to scrutinise counterparty risk, liquidity exposure and adviser or product conflicts before investing.
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