ANZ chairman Charles Goode and CEO Mike Smith are facing the same trap that ensnared Westpac in the infamous "Westpac Letters" affair of the late 1980s and early 1990s. If ANZ makes the same mistakes as Westpac then the Opes stench will almost certainly have the same disastrous results.
In the case of Westpac, the awful PR created by letters affair lowered public confidence in Westpac management. It was followed by a series of financial disasters which created a situation which could easily have seen control of Westpac pass to Kerry Packer for a song. If an Opes PR disaster is followed by serious ANZ losses in the next year or so, then, like Westpac in the early 1990s, ANZ will be vulnerable to a change in control.
The parallels between the Westpac letters and the ANZ–Opes case are remarkable and show banks have poor corporate memories. In the case of the Westpac affair, the bank loaned money to farmers in Swiss francs – the fall in the Australian dollar wiped out the farmers. The legalities of the Swiss franc loans seemed fine but as the court cases dragged on leaked letters and internal correspondence within Westpac (and between its associate Partnership Pacific and the clients) began appearing in newspapers. They revealed a cavalier attitude to the risks the farmers were taking. The Westpac public relations situation was made worse because bank executives were advised by Westpac lawyers to say nothing for fear of contempt of court. The bank's reputation was ripped to shreds in the media.
The simple fact was that farmers earning Australian dollars should never have been offered loans in Swiss francs. Eventually the bank settled with the farmers, which is what they should have done on day one, because irrespective of the legalities and the small print risk warnings, Westpac's conduct breached community standards.
In the case of Opes, ANZ effectively gained its security by a scrip pooling arrangement which meant that if ANZ had to exercise its security all the Opes clients would lose, even though their loans were not in breach. Again, leaving aside what the lawyers might say and the small print warnings, in the public eye, Opes will be portrayed as an agent of the ANZ bank (and Merrill Lynch). In the long run-up to the court cases, almost certainly a series of documents, let's call them the "the ANZ letters", will be revealed which will make the bank look very bad. Once again contempt of court issues will make it hard for the ANZ to counter with a PR blitz.
The simple truth is that like the Westpac Swiss loans affair, the ANZ should never have loaned on a business model that relied on such an unfair security. Again, like Westpac, they will come to understand that when you breach community standards there is no certainty you will win in the courts – no matter what the QCs say.
Whenever you find yourself caught in a situation like that, the best loss is the first one. Drag it out like Westpac and the PR damage to the ANZ may be as big as any loss they will incur.
At this point huge legal fees are yet to be invested so losses can be shared. If the ANZ goes down the same path as Westpac and decides to fight, they, like Westpac, will eventually settle. This will cover most of the Opes client's loss because the PR damage will be too great. If the ANZ suddenly encounters big unexpected losses (a risk in tightening times), then because of the effect of the Opes stench on public confidence, it will be vulnerable to a low cost control attempt. Westpac lost its CEO and chairman over the combination of the Swiss loans affair and related losses, even though the fateful decisions were made by the previous CEO.
All ANZ directors and senior executives need to study the Westpac letters affair. Once they find a solution their dilemma will be clear, albeit painful in the short term.
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