Banking Royal Commission a mortgage mushroom cloud

Via LF Economics:

With a Banking, Insurance, Superannuation and Financial Services Commission of Inquiry likely to go ahead, banks and financial regulators will be under the spotlight as never before.

Forensic analysis and research pertaining to the identification of systemic financial crimes is one of the specialties of LF Economics; hence, our insight can shed light on what to expect from Barry O’Sullivan’s proposed Commission of Inquiry, should it become a reality.

The Terms of Reference cover many aspects, with particular emphasis on examining and identifying unethical and unlawful conduct by financial services firms, including investigating the efficacy of the regulators, primarily APRA and ASIC.

Unlawful behaviour in mortgage, business and rural lending should be the focus. We argue that it is within the mortgage markets the Commission of Inquiry will find the most widespread criminal misconduct as our research indicates to be systemic.

A Commission of Inquiry will, for the first time, finally give borrowers a voice as they demonstrate they are victims of predatory lending. They will allege they were issued jumbo subprime mortgages in breach of fair and affordable lending laws that the financial regulators have repeatedly and knowingly failed to enforce.

Interest-only loans are of concern, as interest payments are often barely serviceable for many and there is no expectation the principal will ever be paid off. Upon conversion to principal and interest, predatory loans are entirely unserviceable should borrowers be unable to continually rollover the interest-only period.

A lender approving a mortgage (a financial instrument) that is unaffordable over the expected life of the loan is illegal and in violation of APRA’s lending guidelines including the National Credit Consumer Protection Act 2009 (NCCP).

The issue at play is that lenders have been approving predatory subprime mortgages, yet the law clearly prohibits this. In our experience, the regulators know full well this is occurring but have refused to investigate and prosecute these criminal practices. As has become obvious from media coverage over the years, these financial regulators are not what can be described as ‘tough cops on the beat’.

To illustrate, we know of close to 500 borrowers who approached the regulators over the years, alleging lenders issued mortgages breaching the NCCP and APRA guidelines, yet on every single occasion the regulators responded by advising they would not investigate. Instead, borrowers are given a standard stock letter suggesting they solve disputes directly with lenders by taking them to court – which borrowers do not have the financial capacity to do.

The other avenue is through the Financial Ombudsmen Service (FOS), a dispute resolution service. Unfortunately, this organisation has been purposely rendered a ‘toothless tiger’, is run by ex-bankers and ex-regulators, is funded by banks and always sides with them despite obvious breaches of law.

Like many sophisticated financial crimes, victims only find out they have been defrauded when economic circumstances change for the worst i.e. when house prices decline leaving borrowers unable to sell out of their debts they have no chance of servicing.

When borrowers dispute their mortgages at FOS, they often receive (incomplete) documentation pertaining to their loans from the lenders. In every case we have seen, there are substantial and illegal alterations of borrowers’ financials. Incomes and assets are radically inflated to ‘approve’ mortgages that would otherwise never be legally issued.

Seeking the help of regulators is the equivalent of a criminal gang assaulting an innocent bystander, with the victim approaching the police to report the assault – and then receiving advice the police will not investigate the matter and that they should solve their dispute directly with the criminal gang or the gang’s self-funded resolution service.

Talking to victims of our lenders puts a face to the issues at hand – they merely want their voices to be heard and our regulators do their job as stipulated by law. The government, however, seem content the regulators continue to refuse to investigate cases of financial crimes which long ago became systemic.

The Commission of Inquiry needs to expose the extent of this criminality by forcing lenders to provide borrowers with all documentation, much of which will demonstrate illegal tampering by lenders. Also, the mathematical algorithms in the service calculators used by both lenders and brokers needs to be subject to thorough examination. We believe there is a strong possibility these algorithms have been set up to manipulate borrowers’ financial details to automatically approve jumbo subprime mortgages.

This leads to a number of important points to consider.

First, it means our lenders have issued a vast sum of predatory mortgages, with their loan books infected with toxic subprime junk that cannot be serviced by many borrowers. The problems caused by these mortgages, however, will not surface for as long as house prices in a particular jurisdiction hold or rise. This has not been the case in a host of regional towns where house prices have already tanked allowing us researchers an early glimpse of the systemic lending issues that will certainly come to light in our major cities, indeed this Commission.

Second, given there is no oversight by the regulators, they will have a lot to answer for in the Commission of Inquiry. The social and economic ramifications of the failure of ASIC, APRA and the RBA to inform the public of illegal misconduct by lenders is immoral but perversely understandable given they are the rug with which crimes are swept under. Sweeping financial criminality under the rug in itself is just as dangerous to the financial stability of the Australian economy as the financial crimes committed by the institutions they regulate.

In light of this, a part of O’Sullivan’s proposal suggesting investigations into matters by ASIC do not need to be involved in the Commission should be scrapped on the basis the regulator has a long track record of refusing to enforce the rule of law.

Finally, should the Commission find evidence of systemic criminality in the mortgage market, it will have profound effects upon the banking and financial sector, including the economy. With the frauds uncovered, financial markets will become nervous, wholesale investors may re-evaluate lending and credit markets could freeze. In an economy addicted to rising land prices – inflated by credit – this could spell a lot of trouble.

And via the AFR:

Canberra’s bank inquiry will spook global debt investors, putting a brake on lending to business to grow and create jobs, said the head of business banking at Westpac Banking Corp, David Lindberg.

“The banking system’s strength simply must be maintained,” he said in Sydney on Wednesday, adding that the public and politicians failed to understand that banks imported billions of dollars of capital each year and that required maintaining the faith of global investors.

“When you think about political risk, higher capital requirements, higher taxes, expensive regulation, weak support status from government – all of these things actually put global debt investors at risk, and make them cautious,” Mr Lindberg told the Trans-Tasman Business Circle.

“That puts all of us at risk. And each one of those risks is cumulative and feed off the other. We have to be very careful about global debt investors, because that is where most of the capital comes from.”

…”When credit is constrained, asset prices will fall, businesses will fail, we will be in a recession, and people will lose jobs and their houses,” Mr Lindberg warned. “That’s how high the stakes are – and that is why it is so important to keep in mind the banking system has to remain strong.

“Australia is capital hungry, and when the capital is gone our economy has a very good chance of going into some form of economic collapse.”

If it is fraudulent then it must be brought to an end and the sooner the better.

But don’t worry yet, Do-nothing Malcolm is working hard at nothing, via the AFR:

The Turnbull government is pulling out all stops to try to head off a backbench-led commission of inquiry into the banks, including warning at least one lower house MP intending to cross the floor his actions could help consign the Coalition to opposition.

Efforts intensified Wednesday after Nationals senator Barry O’Sullivan’s private member’s bill received a significant boost when the Greens agreed to support it after backing away on Tuesday. The Greens came back in after Senator O’Sullivan agreed to their demands to expand the terms of reference to include and examination of executive remuneration, the too-big-to-fail guarantee and the vertical integration of wealth and financial services.

Greens Senator Peter Whish-Wilson, who has long advocated a royal commission into the banks, said now-former chairman of the Australian Securities and Investments Commission Greg Medcraft, just before he retired earlier this month, told him that “nothing in my opinion has changed the culture of the banks”.

With the Greens back on board, the bill, which is also backed by Labor, One Nation, NXT and other crossbenchers, will easily pass the Senate, and then needs just two lower house Nationals to cross the floor. Queensland Nationals George Christensen and Llew O’Brien have already pledged to cross the floor but on Thursday, the government went to work on Mr O’Brien with Treasurer Scott Morrison and Nationals Infrastructure Minister Darren Chester trying to talk him out of it.

Senator Christensen wrote to MB yesterday to pledge his support for the inquiry:

Hi Leith,

I just saw your comments on the Greens not supporting the bill Barry has come up with.

Curiously, the terms of reference have been run past a key group that is seeking a RC or CoI and they have advised it is a better terms of reference than the Greens’ proposal, the Katter proposal or any other proposal.

There is no desire amongst those supporting this in the Nats to make it “watered down.” In fact, we have beefed up previous terms of reference by keeping the broader picture there but also by asking for specific matters to be looked at with small business and farming enterprises which is where a lot of the complaints to do with the banks come from.

I hope that whatever it is the Greens are now threatening to hold out on can be addressed and so does Barry. I certainly hope that no one has gotten to them to scuttle what will be the only opportunity we have to get this done.

Regards,

George Christensen

The Greens are now on board.

Comments

  1. reusachtigeMEMBER

    We do not need a banking royale commission. Our banks are strong and have proved themselves to be anchors for our economy time and again and should be respected as such and left to make profits – which we all benefit from via the well known “spirted over effect”.

  2. we know of close to 500 borrowers who approached the regulators over the years, alleging lenders issued mortgages breaching the NCCP and APRA guidelines, yet on every single occasion the regulators responded by advising they would not investigate. Instead, borrowers are given a standard stock letter suggesting they solve disputes directly with lenders by taking them to court – which borrowers do not have the financial capacity to do.

    Outrageous!

    Besides corruption, the RC should look at peer to peer lending and allowing Japanese banks to operate in AUS.

  3. Tassie TomMEMBER

    Who are “LF Economics”? That was brilliant! Especially this line:

    “when house prices decline leaving borrowers unable to sell out of their debts they have no chance of servicing.”

    I hope there’s a financial services industry royal commission, I hope its terms of reference are wide, I hope it is well funded, and I hope that it investigates how the financial services industry has (probably corruptly) influenced public policy.

    • reusachtigeMEMBER

      LF Economics are commies that have been trying to crash the Australian economy for years so as to bring about a pro-Islamic Marxist totalitarian regime. They are always wrong and fail.

      • Would love to see you make a how to vote card on all candidates at the next federal election. We could all chip in for the design and printing costs..:)

      • @Ryano

        Reds under our beds? Come on man – is that really all you can draw now?! Entire f*cking tracts of land and suburbs are red! Hell – Syno Sam is red inside and out… and you’re waving the old tired and outdated “reds under our beds” slogan? Pull the other one!

      • Go even further back to the MORIARTY TRIBUNAL. That is a long, very long eye opener in exquisite forensic detail about the interaction between banks, property developers, politicians and offshore banking. The mechanism behind the magic is revealed through the use of small offshore banking corporations.

        TL;DR, wikipedia has a summary

  4. “…weak support status from government – all of these things actually put global debt investors at risk, and make them cautious,” Mr Lindberg told the …”

    Shameless. If global debt investors want any kind of “suppprt” from government, they should buy government bonds. If they choose to buy bonds issued by our mega-building-societies they should get no support.

    What and Entitled pr!ck!

    • @ Peachy – lol… you have the causality backwards. What he was saying, quite literally, that global investors are the pillar behind gov debt markets. What he is saying is, come after us, and the global democratic order gets it. And he is right.

      When did the banks become so powerful? This kind of power has always been the definition of a sovereign. Think about it this way, why would any sovereign give away this kind of power to bankers. The answer is that they would not. Not willingly anyways. But they have, so what does this tell you? It says that there was no alternative, at some point in the past, hence power moved over.

      The only reason that the banks can threaten the sovereign in this way, is because they can. Now if the american empire was not founded by a bunch of ex-puritan religious nuts out of New England, with the penchant for virtue signalling; well then we would also not need the banks to fund an endless welfare/warfare state by debasing the dollar. We especially would not need the banks to be willing participants in a potemkin market for the sake of fictional MTM numbers. But if my grandmother had balls, she would be my grandfather right.

      It means explicitly, that which cannot continue, will stop. And it is stopping. And so we come to this fork in the road.

      • “But if my grandmother had balls, she would be my grandfather right.” Mate, you should’ve started with this – it is by far the most convincing argument.

        I know what you’re saying. I know it very well. But I’m sure that the dropkick reporter taking Mr. Westpac’s statement doesn’t and neither does the person in the street. it would be nice to get the dirty little secret aired out in the street. Bring on the royal commission/COI.

      • T the public clamoured for the right to borrow, in the misguided belief they could manage their affairs as the wealthy have.
        and with some encouragement to find animal spirit from the govt of the day.
        The wealthy couldnt give a rats cheese about the newly indebted nor the banks, as long as their wealth is secure
        hence we are seeing 100yr bonds at 2.25%.(this is not much, but it is secure)

      • @ P – my bad. sorry.

        @ WW – and 450m for da vinci’s. could not agree more.

        @ tonyDD – yeah, its a solid book isn’t it. Its a bit slow in places though. For style points, must confess prefer ascent of money style, and for gossip/networks prefer lords of finance. Niall Ferguson is a bit of a showman though.

    • He just needs some behaviour adjustment. Manual labour does wonders. It has been generations since people like mr Lindberg had to do any real work.

      Work, Mr Lindberg, will set you free.

  5. Those quotes attributed to Lindberg are classic banking sector obsfucation

    “…Canberra’s bank inquiry will spook global debt investors, putting a brake on lending to business to grow and create jobs, said the head of business banking at Westpac Banking Corp, David Lindberg….”

    Our banks have been gorging themselves of hundreds of billions of AUD worth of external liabilities to deliver cheap rates to asset price speculators chasing tax effective gains under Howard and Costello’s CGT discount regime.

    This has inflated the AUD and helped undermine our competitiveness 2 ways. A higher than it should be AUD and higher than they should be land prices.

    The difference between debt driven asset price speculation and productive investment is stark yet you will never hear an Australian Banker or APRA or the RBA discuss it.

    They know that once people start talking about the amount of unproductive speculation funded by private bank credit creation they will start asking the obvious question.

    Why allow our banks a privileged position when any non-bank is perfectly capable of making dud loans and bear the consequences?

    Why infect our public monetary system with that?

    Until we are serious about the fundamental defect, that is the current role of private banks in our monetary system, we can expect the issues to be examined by this inquiry to return every few years.

    A corrupt and dysfunctional model produces corrupt and dysfunctional behaviour.

    • In addition, tragically, royal commissions have a long history of allowing everyone to vent and then letting the recommendations gather dust on a shelf. Laws just need to be enforced. The only way to get that is to vote for people who will enforce them.

      • The last one into banking in 1937 managed to put them on a tight leash but they broke free during the post 1980s deregulation era and started biting people and barking at the dog catchers.

        The lesson of that experience is clear.

        Forget the leash and just defang them once and for all.

        That is what this Royal Commission must do.

      • One Flawse, One Way, No Highway!

        If you’re not with us, you’d better have your emergency exits clear, doors greased and unlocked.

    • They need you on the commission. Put your name forward and see if you get a seat at the bar table.

    • Note – The RBA is at the core of this process. They determine the interest rate as long as US IR’s are lower than ours. The interest rate determines the amount of borrowing (and saving but that is irrelevant to modern economics) The Banks cannot run this model with out the contrivance of the RBA.

      • Yup. You, me and about 3 other members understand this.

        Too much “lower teh rates” and “increase teh macro-prudential” in these parts, for my liking. Hey ho …

  6. “We believe there is a strong possibility these algorithms have been set up to manipulate borrowers’ financial details to automatically approve jumbo subprime mortgages“

    The serviceability calculators are excel files and I haven’t seen any tricks with them. Only way to game it would be to manipulate the inputs (inflate income or deflate living costs).

    • Welcome to the wonderful world of Plausible Deniability and blame shifting: See, the calculator is doing the right thing. Now, what kind of data you put in it, well – that’s not my responsibility, it’s yours – and if you lie, well… sh*t, eh? It’s *your* fault, no?

      • There is a lot of focus on the inputs now.

        If a lender or an aggregator gets a whiff that a broker is cooking their books and it checks out the broker is immediately finished.

        It’s tightening up. Have to get customers personal bank statements for where their pay goes to etc. etc.

        If there was merit in the 500 cases LF refer to it should be a lawyers pick nick. Lawyers are desperate for cases.

  7. “…”When credit is constrained, asset prices will fall, businesses will fail, we will be in a recession, and people will lose jobs and their houses,” Mr Lindberg warned. “That’s how high the stakes are – and that is why it is so important to keep in mind the banking system has to remain strong”

    It’s Wall Street playbook. Protect us or we will blow up the economy.

  8. Waste of time now
    The damage is done
    This should have been done directly after GFC
    Regulators should’ve put stricter rules in place 20 years ago
    Its
    It’s 6 am and the party is over anyway

  9. pyjamasbeforechristMEMBER

    Inquiry Chair – “If the housing market fell 20% how many homes would you expect to call in the loans on?”

    Bank CEO – “Ummm good question”

    Inquiry Chair – “If the housing market fell 20% how many LMI claims would you be expecting? And have you got the reserves to cover that many without declaring bankruptcy?”

    Lenders Mortgage Insurer CEO – “Ummm good question”

    Inquiry Chair – “If the housing fell 20% and your LMI Insurer goes bankrupt, what would you expect the cost of funding to reprice too?”

    Bank CEO – “Ummmm good question”

    Inquiry Chair – “If your cost of funding increased by x% what would happen? Would you still be in business? Would deposits be at risk? Would you expect to call on the Gov guarantee?”

    Bank CEO – “Ummm good question”

    • Great questions. Why do the banks deserve the power to lend money into existence by the fractional reserve system? The power to create money should reside in the public not in the private sphere

      • Essentially it lies with the RBA. If the RBA lowers rates that creates more demand for money. The Banks are just filling that demand. As long as US IR’s are below that the banks can borrow all the money to fill whatever demand there is. IF the Banks are fully covering their borrowings, for whatever term, then they can borrow pretty much, in our terms, unlimited money. If the RBA raises rates, again all things being equal and the Banks fully cover the currency exposure, the final rate at which the Banks actually borrow will be the higher IR set by the RBA.
        So JMO the RBA sets the interest rate which sets the demand for money. The Banks then borrow to fill that demand.
        Note that the money the Banks have to borrow offshore is the amount spent on imported goods. They can ‘create’ but ion the end they have to borrow as the result of the lending heads offshore. In a dynamic situation this is all happening at the same time.

    • Excellent!
      How the program has been designed. The CEO’s and their teams are in ‘production’. The ‘crisis management’ special ops group will be picked from the exec ‘B” team and as no one saw this coming, will be assembled at the latest possible hour.

  10. Message to George Christensen if you are reading MB
    If you truly want to fix the banks then break them up into 20 players of 5% each in the Australian market (and enshrine it in legislation that no one can have more than 5% of the Australian banking market) where they compete vigorously (yes “compete”) and pass on bvenefits to savers/consumers. We are a market based economy are we not, so why the hell do we have 4 colossal banks marauding across our financial landscape. For crying out very loud, all they do is take money from one person and give it to another, how hard is that, they are just intermediaries. Only the market can truly pull them into line to act properly and you can only do that if they have to compete and protect their brands. Because if I was a monoploiy or duopolist or oligopolist I would wreak havoc by charging high prices for my services/goods/access and make huge profits and ensure I kill all competitors. But you and all the other govt people alrerady know this becauses it is economics 101, so get on with it and bust up monoploists/oligopolist across all facets of Australian business. I am sick and tired of being fleeced by business extracting economic rent and then having to listen to some bullshit RC about banks. Guess what, you would not have this behavious if each market player only could have maximum of 5% of any given market so protecting their brand was paramount. But we all know this don’t we

    • Breaking up the banks doesn’t solve the problems.

      Banks don’t just move money around. Google “fractional reserve banking” , it’s not exactly how the system works but it’s a start given your view above.

      • break the cartel up, then we will see how everything changes
        what harm can it do. if it fails let them bulk up again
        whether it is 4 or 20 banks they all do the same thing, ie they are no more than intermediaries doing the “same thing” ie fravtional reserve banking
        give me and a whole lot of other people a bank licence and let us compete and lets see if we can shake things up for the better

      • if you want to have a RC that’s fine, absolutely have the widest ranging one possible and rip their guts out I have no problem with doing that to the banks. its small beer to me, bread and circus stuff, does not change things over long term ie 20 – 50 years and why would it. if you are huge would you not just clean your act up for a while and then revert to mean and start all over again doing everything you can to extract economic rent even if the way you do things is questionable
        I am talking about wholesale change in competition in Australia, breaking up all industries where there is a few players only and re-opening it too true competition again. have your RC but in long term humans don’t change (new humans come in doing same old bad stuff their predecessors did) so thus we will get same outcomes again and again and again and only true competition can clean bad behaviour up
        effectively it is a call to arms to reset “property rights” because it is getting in way of true competition and what is best for consumers, don’t you agree

  11. Guys you need to wise up here, commercial agreements have 2 sets of documents, a copy for 1 party, a copy for the other party. Normally every page is initialled, lower right hand corner by both parties.
    If the documents have been altered by one of the parties it is a black and white case.
    The offending other party will be fined and the relevant portions of the contract will revert to normal, standard, commercial terms and conditions.
    If the agreement is for a loan against an asset that has lost value, too bad for the party with the diminished asset.

    What is apparent from the above statements is the need to back up the truck to short anything financial on the ASX, to the hilt. “Put it this way,” Chanos said. ” If you wouldn’t be short:
    A multi-billion-dollar loss-making enterprise
    In a cyclical business,
    With a leveraged balance sheet,
    Questionable accounting,
    Every executive leaving,
    Run by a CEO (managers) with a questionable relationship with the truth,
    What would you be short?
    It sort of ticks all the boxes.”

      • I think he covered that short.
        Big Day for Tesla tomorrow. Worlds largest Battery on line, an extraordinary achievement.
        Take a tip and use Soros, guidelines for any short opportunity at the moment
        you will find plenty to tick the boxes.
        lemme know what you come up with.

  12. Big 4 have asked far a Royal Commission.

    They must have full control of the current government, and dictate what the terms of references will be, methinks.

    • Calculated risk on their part. They know it’ll happen. 100% without them and under that scenario they have zero control of ToR

      Here, they hope they at least have some control via their puppet Truffles.

      Up to greens, labor and those LNP who were about to cross the floor to keep the pressure up

  13. If we get this CoI prior to the bust it will be a huge win for whoever backs it, sorting those who have the countries best interest at heart (or their own careers, but it’s the execution, right?) from those that are just puppets and shills.

  14. CharlieChaplinMEMBER

    Turnball on ABC news announcing Royal Commision, regrettably to quell the damage by people treating the banks as a ‘political football’ and in order to reassure people and markets of the steadiness of our banking system. Allegedly asked in a letter by the 4 big banks. Already trying to limit terms of reference and predetermine outcome?

  15. TailorTrashMEMBER

    “Australia is capital hungry, and when the capital is gone our economy has a very good chance of going into some form of economic collapse.”

    Capital hungry to lend to local and Chinese house buyers to pump up the most over valued crap houses in the world not to produce any means to actually pay it back
    ………you’d have to conclude this has ” actually put global debt investors at risk ” already …………..subprime Straya is about to take centre stage .

    • ‘Capital Hungry’ Bwahahahaaaaa!!!! We over-consume!!! We borrow, spend and don’t save. It is bloody nothing to do with Capital. These treacherous pricks need to stop calling this ‘Capital Inflow’ or Investment.
      It’s either debt or a sell-out – we seem to be really good at being so extreme we need to do both all at the same time.

  16. As per pfh yesterday – If monetary policy is not included in this the whole thing will be pretty much meaningless. The banks are, in my experience over decades, a bunch of devious p…ks however it is Monetary Policy and the RBA that are at the core of our over-indebtedness problem.

  17. “…and that kids, is how the Great Australian Credit Crunch (GACC) came to pass. Grab your Mum, we’d better line up at the soup kitchen before the lines grow too long.”

      • Great song…close to their best.
        Even without Jello it would’ve been great if they did that one when the others were here a couple of years ago.

        ‘I”m sorry, hate to interrupt, but it’s against the law to jump off this bridge, you’ll just have to kill yourself somewhere else’.