ruinous financial circus

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    Banks the ringmasters in ruinous financial circus
    Ian Verrender
    April 5, 2008

    Bad times always seem to flush out the truth. The soul-searching now under way among our biggest banks - and their counterparts around the world - should have taken place early last year when it was obvious the stockmarket boom was built on a mountain of debt.

    They should have known better. After all, they were the ones lending the money, and it is not the first time this has happened. The difference now is that it appears that they have also been involved in lending out the shares, thereby fuelling the selling that has brought them undone.

    The ANZ Banking Group, in particular, is looking particularly stupid. It is the bank that stood behind Opes Prime and Tricom, two stockbroking firms that until a few months ago appeared to inhabit the financial fringes but in reality were conduits for billions of dollars in loans to fund share purchases.

    The ANZ, as one of the biggest share custodians in Australia, also appears to have lent stock bought by Opes and Tricom clients to hedge funds. And that has sparked massive share runs in the past three months that have led to the demise of the two brokers.

    No one is likely to emerge from this debacle with any dignity. Those who borrowed the money appear foolish. There are claims of negligent and even inappropriate behaviour within at least one of the broking firms. And at the top of the chain are the banks that created this train wreck.

    The 1200 clients of the Melbourne broker Opes Prime have spent most of the past week desperately trying to retrieve their shares from the receivers and administrators now running the firm.

    Many have banded together and brought legal proceedings aimed at either stopping their shares from being dumped on the market or claiming they had no idea that, when they borrowed the cash, they had handed over title of their stock to the ultimate lender.

    Desperate times call for desperate measures, I guess. But surely anyone who has taken a loan for anything at all - a house, say - would realise that if you don't make the repayments, the lender will repossess your home.

    The difference in this case is that the borrowers possibly did not realise they were borrowing from a bank. And the home mortgage analogy is not a bad one.

    Opes, Tricom and a few other stockbroking firms using the same model were merely the middlemen in these loan transactions. In fact, they were very much like mortgage brokers.

    They have borrowed in bulk from the banks, thereby getting a cheaper rate. They have then offered loans at cheaper rates than individuals could pick up from the bank. There was a price for all this, though. And the price was that the shares you bought on borrowed cash through the broker ended up in the bank vaults.

    When the market was going up, it all worked swimmingly. You had borrowed $20 to buy BHP shares at $30 which since had risen to $40.

    The broker was happy to take a slimmer than normal margin on the loan because the loans business was pumping through billions of dollars in stock turnover, so it was earning far more in stockbroking fees than it otherwise would have.

    The bank was happy because it didn't have to bother looking after individuals with complex share portfolios. That was all done by the broker. In any case, it held the shares just in case anything went wrong with the market.

    Go wrong it did.

    Late last year, the stockmarket was hit by massive selling. The banks began calling on those brokers for extra security. And the brokers started calling on their clients to top up their security. Some of their favoured clients had borrowed up to 80 per cent of the value of the shares they had bought. But the banks had loaned the brokers a much smaller percentage.

    So Tricom and Opes had to begin doling out their own cash to the banks to cover the losses. And in the case of Opes and its star client, the former criminal lawyer Chris Murphy, the calls to top up security appear not to have occurred, even when the bank loans over Murphy's shares far exceeded the share prices.

    One of Murphy's big punts was on Challenger Financial, backed by the Packer family. He reportedly borrowed $190 million to buy $250 million worth of Challenger shares. When the share price plunged from about $6.65 to $1.51, Murphy was in deep trouble and the bank began selling his shares, to which he seemed oblivious.

    It appears Murphy and most of Opes's other clients didn't know two things. The first was that the shares they bought were held by the bank and not the broker. And the second was that ANZ, as one of the biggest share custodians in Australia, had been lending out those same shares to hedge funds which have precipitated massive falls on the stockmarket.

    So the ANZ has ultimately been responsible for huge falls on the stockmarket that have jeopardised billions of dollars of its own loans, money it now is trying to recoup by selling the shares and thereby pushing share prices even lower.

    Some of the worst-affected Opes clients had apparently signed up for borrowing agreements and pledged their shares as security but had not drawn down any cash, while others had borrowed minimal amounts and were well and truly in the black.

    Their shares have been seized and thrown into the pool. At last count, they will be extremely lucky to get back 50c in the dollar. Many are facing total ruin. The only winners out of this will be the legal fraternity.

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