THE DISTILLERY: The invisible bail-out

Today, Karen Maley of Business Spectator argues that "... Australian bankers can heave a sigh of relief. The almighty row between the Rudd government and the miners makes it exceedingly unlikely that Australia is going to join the move to introduce a global tax on banks any time soon ... Wayne Swan has also expressed his opposition to a global bank tax. Instead, he's argued that the G20 should adopt a flexible approach that would allow different countries to introduce measures that suited their circumstances. This would mean that Australian banks – which did not need to be bailed out during the financial crisis – would be spared the bank tax.”

This column agrees that the bank tax is a bad idea. Big banks cross-subsidising their gambling losses hardly rates as market discipline. But let's not get carried away. Australian banks were bailed out during the GFC. Policies aimed at boosting the banks' assets were many, but all can probably be passed off as economic supports. On the liability side of the banks' balance sheets, however, one policy stands out as a screaming bailout: the guarantee to wholesale liabilities.

It is a historical fact that leading up to the weekend the guarantee was announced, multiple banks informed the government that without it they would need immediately to begin withdrawing credit from the Australian economy and that they would be insolvent sooner rather than later. This was despite being able to repo any garbage with the RBA (a privilege they still enjoy). This column will point out that you are just as busted if you can't service your debts as you are if your assets drop too far in value. That the government drew revenue for lending out its investment rating doesn't change this. The fact is, no private sector entity was prepared (or able) to offer the same service at the same exceedingly generous rates. The big five Australian banks, with their similar reliance on offshore funding, were, and remain, too-big-to-fail.

To address this we need to dramatically raise capital requirements, regulate derivatives and guarantee that bankruptcy is a real potential outcome. Sadly, the prospects for delivering such reform are nil when we can't even acknowledge the nature of the problem. In the commentary universe, only John Durie of The Australian and Stephen Bartholomeusz of Business Spectator have shown glimpses of the truth of what happened to our banks.

There is a second reason that recognising the Australian bank bailout is vital to the public interest and it is nicely captured by Michael Stutchbury of The Australian. In a comment that attacks Kevin Rudd's placement of the resource super profits tax (RSPT) within the Labor tradition of economic reform, he concludes "... backing down will simply signal to other vested business interests that the old game of political lobbying and campaigning pays dividends.” 

Indeed. But why wouldn't businesses like miners go down this path when the huge bank bailout, as well as the near complete denial that has surrounded it – including by Stutchbury himself – shows just what can be achieved for shareholders through a focus on politics.

Still on banks, Tony Boyd (Chanticleer) of The Australian Financial Review warns of a coming "...drought in the Australia investment banking market”. He bases this on rising competition from multinationals and "...the less-than-rosy outlook for investment banking ... equity market capital issuance in the first half of the year... $7.8 billion, was the lowest half-year volume seen in seven years ... inbound cross-border M&A worth $15 billion in the first six months of the year was a two-year low ... strip out the failed $3.5 billion Macarthur Coal deal, and the rejected Transurban  bid, and the M&A activity this year is as bad as it has been for a very long time ... Outbound cross-border M&A can be counted on two fingers. ANZ has been active in Asia and NAB came close to a deal in the UK, and has done a tiny deal in the US.”

These are useful points. It might also have been worthwhile looking at international trends in cross-border M&A. In 2008, during the GFC, such activity collapsed as risk aversion soared and bank funding dried up. This was the opposite to past cycles which showed that as a country enters crisis, cross-border M&A picks up as international players pick-off bargains. One wonders what international trends are now signalling.

According to Elizabeth Knight of The Sydney Morning Herald, not much, at least in so far as Rupert Murdoch's bid for BSkyB matters. The following is interesting enough, though: "Rather than fund the BSkyB acquisition by raising fresh equity, Murdoch is using the cash he has salted away. Ever since News Corp got into trouble with its bankers in the early 1990s, Murdoch has been averse to risk and debt. Instead he has preferred to keep a portion of cash on his balance sheet and has satisfied his thirst for expansion by acquisition through the issue of (non voting) preference shares. These have enabled him to raise cash without diluting his control of the empire. At the same time he has been able to keep his lenders at least one or two degrees away from gaining any leverage over his company. This deal, if successful, should not put any of this at risk. Even if Murdoch used the majority of the cash News Corp has on its balance sheet to fund the BSkyB play and borrowed the remainder, the company would not be excessively geared. But his decision to use a large proportion of the till float to buy the minorities in BSkyB suggests that Murdoch has finally got over the post-traumatic stress of the '90s and is willing to run a balance sheet like most normal corporates.”

Also riding to the defence of a business leader is John Durie of The Australian who reckons "... Asciano's Mark Rowsthorn is fighting battles on many fronts but is demonstrably gaining coal hauling market share from Queensland Rail, as shown by today's news of a $775 million contract with Anglo American. Asciano's stock price rose 1.9 per cent to $1.61 a share on the news in a down market, continuing a five per cent run on the stock. Rowsthorn, who is on track to haul 14 million tonnes of coal in his first year of operation in Queensland, now has some 42 million in new contracts committed, including the 10.9 million for Anglo. Some 76 per cent of his contract wins are from QR, with the battle now to grab a bigger share of the so-called growth contracts – more work from existing customers who are shipping more coal. Asciano has signed the likes of Anglo on performance-based contracts which means if the service is bad, then it doesn't make any money.”

Also at The Australian, Bryan Frith covers "...the massive $US5.2 billion ($6 billion) Tampakan copper-gold project in the Philippines is under a cloud following news that the provincial government has approved an environmental code that would ban open-cut mining in the region. The implications of this development for the protracted $540 million takeover bid for Indophil Resources by China's Zijin Mining remain to be seen, but it creates uncertainty. The Tampakan mining interests are held by Sagittarius Mines. Indophil owns 37.5 per cent of Sagittarius and the other 62.5 per cent is owned by Xstrata, which is also the operator.” 

Matthew Stevens argues that the RSPT is not responsible for "... investment decisions announced over recent weeks and months by the likes of BHP, Rio, Xstrata and Anglo American [which] are part of years of strategic planning whose starting point is that the next generation of giant, tier-one resources projects.” But he also argues that such projects as Olympic Dam, Wandoan coal, and others are in jeopardy. Nothing new here.