THE DISTILLERY: Full of holes

Switzerland is a land of spotless city scapes that are crisply framed by geometric peaks. Nonetheless it has a dark underbelly, a pulsing scene of raves, drugs and street culture that can make an innocent Australian blush. It is the perfect illustration of the split personality of human beings: rationality versus desire.

How appropriate then that it is also home to the city of Basel, after which our global banking rules are named. Today Stephen Bartholomeusz of Business Spectator and Michael Stutchbury of The Australian take on RBA governor Glenn Stevens' recent comments on the evolution of those rules. 'Take on' is perhaps the wrong word. 'Agree with' would be more accurate.

Stutchbury studiously avoids offering his own argument, instead reporting faithfully that "Reserve Bank governor Glenn Stevens is resisting the push to rope Australia into much tighter global financial regulation.” He goes on: "The argument is that tailoring the new Basel rules to the 30 to 40 global banks whose reckless behaviour produced the crisis risks imposing excessive costs on countries such as Australia, where prudent supervision application of existing rules has worked well.” This column wants to know what Stutchbury – a leading proponent of 'free market' ideas – thinks about the new Basel rules. He has, to date, followed the orthodox line outlined by Stevens. The unquestioning tone of this report suggests he still does, but this subject is far too important for doubt. What does Stutchbury think should be done about the patent failure of financial markets that caused the GFC?

Barthlomeusz, on the other hand, delivers praise to Stevens, arguing that the RBA chief "provided both a highly sophisticated analysis of regulators' response to the global financial crisis and an equally sophisticated critique of the shortcomings of any regulatory efforts to prevent another crisis ... Stevens ran through the long list of regulatory responses in train. More and higher quality capital are a given. There may be an additional capital surcharge for banks deemed too big to fail. There are proposals that would require banks to further increase capital and provisioning in good times to run down when conditions deteriorate. Banks will also be required to have more and higher quality liquidity”. All things this column can agree with. However, his for praise Stevens' thoughts on preventing another crisis should be qualified. He quotes Stevens directly "'A possible outcome is that the harder we regulate a set of institutions as a result of the last crisis, the more likely it becomes that the next crisis occurs in the hitherto unregulated part, perhaps even among institutions that do not yet exist. If conditions are such that people want to take risk and gear up, they will find a way''.

This column can only answer 'so bloody what'? The Great Depression was sufficiently awful that such excuse-making was ignored in the drafting of Glass-Stegall. There is no doubt that had governments not bailed out banks and credit markets globally that a second catastrophic depression would have engulfed the globe. New regulation should proceed from this knowledge, not from technocratic insight into the possibilities of regulatory arbitrage. The poles of human behaviour apparent in Switzerland mean that, of course, this round of bank regulation will ultimately fail, but let's set it up to fail in decades, not the next cycle. Moreover, Australian banks and non-banks were little different from their global cousins. They borrowed heavily in global capital markets, inflated local assets (so did we, the borrowers) and clipped the ticket with nice, fat bonuses. Yes, the scheme was managed a bit better, but differences were a matter of degree not kind, and when the ponzi was discovered they too were bailed out. It's as simple as that and re-regulation should treat it as such.

This columnist is immensely relieved to find a kindred spirit in Michael West of The Sydney Morning Herald and his view of Australian banks, most especially after yesterday's volte-face by John Durie. According to West, the new Macquarie Infrastructure Group (MIG) deal "locks in this year's profits and provides breathing space for its bankers to get out and spend that $20 billion or so in sovereign-guaranteed funds raised this year to generate the next round of profits – and bonuses. Thank you, Kevin Rudd. Thank you, taxpayer.” QED. And we want to be careful we don't overdo regulation? On the specifics of the deal, West reckons " ... under the demerger of MIG, Good MIG will have no Macquarie management. The fee is a one-off 1 per cent of market cap for advice and a $50 million kiss-off in return for the management team, their accrued profit share and entitlements, and 'support services' ... The quantum hinges on Good MIG's market cap after the demerger, so we can assume $3 billion and so a $30 million fee ... Bad MIG needed management badly, Macquarie committed to stay and was therefore able to argue for a higher fee, that is, 2 per cent of market cap ongoing. Indicative market cap is $1.4 billion.” This column wonders, conversely, if the moniker 'Bad MIG' shouldn't apply because Mac management remains engaged.

Getting back to John Durie of The Australian, he continues his bearish tone today, extending to commercial property this column's own argument about a developing rate-shock. According to Durie, "a third of the corporate property loans on big bank books are up for refinancing in the next 12 months. Forget the departure of foreign banks. The big question is whether the locals will be happy to refinance and on what terms, raising questions about the property sector and the banks. Westpac and NAB have the biggest relative exposures to the commercial property market and hence face the most questions.” Durie's line is debunked by economist Frank Gelber in his weekly column at The Australian, who argues "This is the time to take a position in markets on the threshold of a strong upswing, often at prices below replacement cost, which will set up returns three to five years hence.”

Durie also offers a useful canvass of equity gurus. "Three strategists – UBS's David Cassidy, Goldman's Chris Pidcock and Macquarie's Neal Goldston Morris – are tipping the market will sail through the barrier over the next 12 months, with Pidcock the most bullish, tipping a market trading at 5700 points this time next year.” Durie is sceptical and so is this column. But if the surge does transpire, this column advises you too consult just one chart, the Nikkei since 1990. Big rallies, big sell-offs, tight cycles amidst structural decline. That is what this column sees ahead for western stock markets. In the new era of balance-sheet repair, buy and hold is dead. For the view that the bear market is in fact about to resume its mashing fury, try Albert Edwards.

For those of the less bearish persuasion, David Bassanese of The Australian Financial Review's Market Wrap makes a solid case for an ongoing v-shaped recovery in the the Australian economy. According to Bassanese, the Australian economy is heading into "2010 on a tear”. He predicts "the post-stimulus slumber in retail sales could soon be ending. With household, sharemarket and dwelling wealth rebounding ... then there's the construction sector ... Thanks to the surge in government projects ... the value of non-residential approvals in the five months to October [has] left a nice backlog of work for 2010 ... And the government's first home buyer assistance has helped home construction ... the strong rise in lending for new homes has yet to be reflected in a strong rise in building approvals, though this should not be far away. And I have not as yet mentioned the mining boom.” It's all good, or so it seems.

Other stories today include Matthew Stevens of The Australian who goes in to bat for the coal lobby over the chosen path of Queensland rail privatisation.

Bryan Frith of The Australian looks at the latest blow to ASIC credibility delivered by the dismissal of AWB CEO Andrew Lindberg.

Alan Jury (Chanticleer) of the AFR declares that Tabcorp has abandoned any notion of a demerger of its wagering and casino assets.