dont bank on anz

  1. 38 Posts.,25197,23493708-23850,00.html

    ANZ'S recent behaviour in relation to the Tricom Equities and Opes Prime scandals and the level of disclosure to investors has put its risk management practices in question.

    Yet less than two months ago ANZ Bank's new boss Mike Smith lambasted investors for selling down the banks on the basis that they weren't discriminating between what was good and what was bad.

    He was referring to the fact that Australian banks are in much better shape than their European counterparts.

    "It strikes me as extraordinary that Australian banks, which in this environment are incredibly strong, are treated with the same sort of discount as European and US banks, which are facing serious financial trouble," he told a conference in Sydney.

    But the actions of the bank in recent months have put its credibility in question, trashed its reputation and left it exposed to big class actions and damages claims.

    Since Smith joined the bank six months ago, its share price has fallen by almost a quarter to the latest close of $23.73 a share.

    While the other big banks have also tumbled, ANZ's fall is slightly worse.

    As Smith prepares to release the bank's half-year results on April 23, investors will be watching like hawks to see what he does with the level of bad and doubtful debts.

    Analysts such as UBS have tallied up almost $3 billion in problem loans for ANZ Bank, which is much higher than the bank is fessing up to.

    The latest mess ANZ has found itself in is the collapse of Opes Prime, which is shaping up as the most dramatic financial collapse in Australia's financial history.

    Before that, it was involved in Tricom Equities as the main banker over its securities lending book, which at the height of the boom was $2.5 billion.

    Just why ANZ would back such flawed models as Tricom and Opes Prime is unclear.

    The decision leaves it open to messy and protracted legal actions and damages claims.

    Opes Prime and Tricom built businesses with tiny balance sheets with the aid of ANZ and Merrill Lynch. They built up securities lending books of more than $2 billion by granting ANZ and Merrill Lynch security in the form of shares that its clients pledged in return for their securities lending lines. The balance sheets didn't rate a mention.

    ANZ may have won a few battles in the courts last week to keep selling shares, but behind the scenes several separate teams of legal experts were working away.

    These include a class action by Gun Capital Management's Leo Khouri and associates, who have between $200 million and $400 million exposed to Opes Prime; a group of solicitors and barristers led by Sydney barrister Charles Sweeney, QC; and a large team from listed legal firm Slater & Gordon will also be seeking damages.

    Already, two ANZ people have been suspended for alleged involvement in the Opes Prime arrangements, and only days before the demise of Opes, ANZ stumped up another $95 million loan in return for registered mortgage debentures over all the firm's assets.

    The success of any claim against ANZ and Merrill Lynch would almost certainly involve a claim that ANZ and Merrill Lynch knew that Opes was telling clients that the clients would retain beneficial ownership of their shares.

    In the Federal Court in Melbourne suggested on Friday, Justice Finkelstein suggested that if the Opes clients proved their case and won damages, ANZ could be forced to go back into the market, buy equivalent amounts of shares and return them to the Opes clients.

    This would cost the ANZ a lot of money, because the market knows which stocks it has sold, and if it has to go back in and buy them up again to give back to shareholders, the share price will go up.

    In addition, damages could also extend to dividend payments the Opes clients might have missed out on.

    Aside from Opes Prime, there is also talk that once the consortium of investors led by Babcock & Brown buys up Tricom, it will launch legal action over the way ANZ handled a $100 million margin call, which included freezing Tricom's assets and forcing the broker to sell down its securities lending book.

    This sort of behaviour has done nothing for ANZ's reputation. Nor has the fact that it failed to keep the market properly informed by failing to lodge any substantial shareholder notices for companies in which it holds more than 5 per cent of the stock, which it may be required to do under the Corporations Act coupled with the terms of its agreement with Opes.

    This perception of poor disclosure from the bank goes back to February, when it shocked the market with revelations that an exposure to US monoline insurer ACA Capital -- designed to neutralise exposure to a synthetic portfolio of corporate loans akin to collateralised debt obligations -- would result in a $US220 million write-off.

    It has a further $667 million exposure for similar transactions with US and European banks and investment banks and derivative specialists.

    The write-down does not currently relate to the potential impairment of these exposures but to the credit enhancement provided by a monoline insurer whose rating has been downgraded to CCC.

    Further losses are not expected on this transaction. However, it revealed it had a further $US667 million exposure to special purpose vehicles that are providing them with credit protection.

    As well the shock that the bank had accepted credit exposure to a number of companies in the US and Europe with which it did not necessarily have a relationship -- and therefore had a limited ability to understand the companies -- it was worrying that Smith took so long to come clean.

    Smith's attitude also didn't help the situation. He referred to the bank's exposure to ACA as merely "immaterial if you look at our market capitalisation".

    What Smith's comment failed to acknowledge was the billions of other potential exposures the Australian banking system has entered since the last banking crisis in the early 1990s, when Westpac and ANZ almost went belly up and some state government-owned banks had to be rescued or otherwise supported.

    ACA Capital's monoline business had its credit rating slashed to junk bond status in December. It took Canadian bank CIBC until January 14 to reveal that it would have to write down its exposure to ACA by $US2 billion, and others, including Merrill Lynch and Citigroup, made similar announcements around the same time.

    It took ANZ until February 18, or more than eight weeks after ACA's original announcement and four weeks after every other bank revealed its exposure.

    This delay sent shivers up the spines of investors, who started to wonder what else was lurking in ANZ's balance sheet as well as what was going on off balance sheet, which has more than doubled to $1.73 trillion during the past three years.

    It is these off-balance-sheet derivative exposures that could open a Pandora's box of potential write-downs, as well as class actions from unsophisticated retail investors who were sold products such as collateralised debt obligations (CDOs) that they thought were fixed-interest products. Local councils are already starting to mount legal action against some of the banks.

    ANZ has also failed to give a full picture of its debt exposure to companies such as Hedley Group, Allco Finance Group, Countrywide and others.

    In the case of Hedley, ANZ was the underwriter for last August's Hedley Group debut on the ASX, and is the lead bank in a syndicate owed $805 million.

    ANZ's mergers and acquisitions unit is now advising the fund on its options.

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