Lenders learn to duck and cover

"You've got to love the Yanks – if they have to eat a shit sandwich, they just pick it up with both hands and bite down hard”. My investment banker friend then held up his hands in front of him, in a fashion reminiscent of the Hungry Jacks Whopper ad, indicating the size of the sandwich in question.

We had been discussing the $US700 billion bail out fund now being mooted in the US as a solution to the current financial mess. I had observed to my friend that the only way the fund will work is if the banks burdened with bad debt portfolios are willing to sell off debts at deep discounts, and crystallise significant losses in the process.

The Feds will no doubt be demanding significant discounts on any portfolio they acquire, hence my friend's colourful metaphor for writing off bad debts in painfully distasteful portions.
In the US, attitudes towards business failure are very different to those elsewhere. The country is the home of "Chapter 11” – arguably the most progressive and forgiving corporate reorganisation regime in the world.

This reorganisation-friendly regulatory environment is conducive to "distressed investing” and "distressed debt trading”. These are common usage terms in the in the US business lexicon, where there are well developed active markets for all classes of distressed debt – including secured and unsecured. The new bail-out fund managers will easily find the requisite experts in both distressed asset pricing and distressed asset management to put the idea of a bail-out fund into action.

Distressed investing and distressed debt trading are anathema to Australian banks however. While unsecured creditors in Australia regularly agree to have their trade related debts "compromised”, secured lenders (banks) are loathe to let distressed files go for anything less than 100 cents in the dollar.

Banks in Australia are talking up the quality of their loan books. But in the current environment, and in the current financial year, surely local banks would be forgiven for any lending misdemeanours they may wish to bring to account?

The current maelstrom engulfing finanical markets gives our local banks the perfect cover to face up to any "toxic debt” they may be holding. All they have to do is confess their sins, and bite down hard.

Nick Samios has nearly 25 years of experience in banking and finance. He is currently the NSW State Manager for Cash Resources Australia, and a casual academic at the Graduate School of Business – UTS.