Frydenberg launches the great Aussie bank bailout

Via the AFR comes $2bn for small business from Amateur Treasurer Josh Frydenberg:

The creation of a taxpayer-backed securitisation fund to invest in small and medium enterprise (SME) credit will also potentially expand an asset class for institutional investors such as superannuation funds to invest in.

Treasurer Josh Frydenberg and Small Business Minister Michaelia Cash will announce the small business funding policy on Wednesday, promoting the soon-to-be-established Australian Business Securitisation Fund as a way to overcome banks typically only lending to the self-employed when they pledge their personal home as collateral.

The government fund will buy packages of secured and unsecured SME loans issued by smaller banks and non-bank lenders such as fintechs, boosting funding to these non-big bank lenders to lend to small businesses and potentially lowering SME borrowing costs.

The fund is already being compared with the Rudd Government’s GFC housing securitisation purchases. In time it may well be used for the same thing.

However, the comparison is bogus. RMBS purchases were easily regulated. The government could manage quality control by ensuring it only bought certain levels of mortgage risk, partly determined by which tranches of the bond it wanted to buy.

Exactly what kind of loans are we talking about this time around? Small business is highly risky stuff. How can the underlying loans possibly be scrutinised by the government? The banks are not going to bundle and pass off their best and most profitable customers are they? They’re going to package up the junk and dump it on the taxpayer.

It may help economic growth very marginally through the creation of some “last chance Larry” loans with very high charge off rates. But what this is really about is creating a new profit centre for participating banks to gouge. And where’s the quid pro quo for the tax payer? Why do we get to buy the bank’s worst business loans at inflated prices without so much as a squib of payback? I mean, cripes, talk about moral hazard.

That said, there’s not much point in getting upset at this point. The violations of the public purse ahead are going to make this one look like absolute child’s play in due course.

Welcome to the first little salvo in the great Aussie bank bailout.

David Llewellyn-Smith
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Comments

  1. What’s that saying “Privatise profit and socialise debt”
    Majority of Bank managers will say , if a small business goes bust there is usually very little to sell afterwards.
    That’s why they usually secure small business lending to a property, I believe some banks have even stopped that now, so hard to borrow for small business.

    • Mining BoganMEMBER

      Yeah, I don’t understand this. Like you said, it’s been virtually impossible to get a small business loan without chucking the home in for years. This has got to be about property fears surely?

      • The hole in the story is that there are very few real business opportunities
        let alone effective management of small business
        and a stable business environment to allow time to kick off and develop goodwill.
        HUGE collapse coming

      • boomengineeringMEMBER

        WW That Surflakes manmadewave at Yeppoon. Kudos to you for the engineering part. Not your concept ?

      • that surflakes by any measure is a failure
        Note the name change to 5 breaks or similar
        so the strategy now is to say they have 5 different breaks so they can have 5x the no of people in the puddle
        so the business model now includes for 5x the no of people in the water, like rats in a washing machine.
        but the breaks are hopeless, by no means “surf”
        the energy required to make the current wave immense
        and the energy to make a real sized wave un-achievable for their set up
        all for a handful of people to have a 3 second ride
        I am sure you have undertaken many projects to test the engineering merit before the business merit was considered.
        that is where this mob are
        But, they had a go, we can now cross that method off.

      • boomengineeringMEMBER

        I thought you had input therefore the kudos for engineering but throwing a stone into a puddle concept would not have been pursued by either a surfer or engineer as the great waste of energy to create not much of a wave. No mater how big a rock you can throw into a pond it never creates much of a miniature surf-able wave.
        Not your concept, I wrote for a reason as You or I could easily invent a much better system (bigger wave with less power required to operate).

      • My system is secret. protptype being constructed atm
        the best wave so far is the kelly slater wave, but he cant put enough energy into the wave-pool to get a surfable wave for say more than 5 seconds
        with water waves energy requirement cubes or to the 4th power of wave ht
        I have nothig to do wiht the surflakes concept, but i have reverse engineered their set up, just in case it worked.
        for those guys the end result will be to have a puddle of oscillating water for family entertainment
        that is not a viable business.

      • GunnamattaMEMBER

        The hole in the story is that there are very few real business opportunities

        This is it in a nutshell.  

        Welcome to a nation which has fried the real parts of its economy with a high AUD to fit in a mining boom, while telling the punters to go massively into debt to speculate on housing (which gets business tax breaks) off the back of government redistribution of mining revenues.

        This is when both sides of mainstream politics preach light taxation – which effectively means almost none in the case of gas producers, who essentially have the right to both gouge the Australian public and at the same time amortize some of the greatest white elephants ever created into taxation negligibility.  The big resources players which decapitated the only government which ever proposed taxing them seriously a decade ago transfer price their product through marketing arrangements offshore, and most of their ‘employees’ are contractors deriving most of their real remuneration through avoiding PAYE tax, an approach which also sustains an army of tradies living off the housing construction branch of the population Ponzi, which has Australians paying more for land and housing and feeds into any remaining business in Australia as an undermined competitive position vis land costs and incomes for employees.

        The land is a bubble.  That bubble is fairly easily identified by almost all Australians – and certainly any Australian who has any experience with overseas, meaning that no business idea is ever looking to compete with imports or to export, it is only ever competing for a place on the bubble.  So that brings any real business back to the realms of servicing the most heavily privately indebted people on the planet, with the most parlous competitive position on the planet – and both mainstream sides of politics committed to selling them out through FTAs – being spectacularly gouged by education and energy providers.

        And the door to doing anything about this is guarded by two mainstream sides of politics which cannot acknowledge the above (or any real part of the dynamic), certainly wont do anything about it, and will just exasperate the electorate with their attempts to bridge the gap between the lived experience and what they can acknowledge with ever more ostentatious forms of bullshido.

        The only real business opportunities in Australia start with planning to be somewhere else.

        Of course people go for government gigs. Everybody has a government gig one way or another – its just the government doesnt want them to know and doesnt want the punters wanting government super.

        This is why banks generally arent interested in lending to small business – because the governments (both sides) have led the nation into an economic cul de sac where being attached to government or the population ponzi (which both creams wages and and inglates living costs) is the only real game in town……and it is not in town for much longer.

        All Morrison and Frydenburg are doing with this is opening up another taxpayer teat for the hogs to suckle on

      • Property developers and real estate agents are small business in the most part.
        How mush will go to productive businesses. My guess f all.

  2. How long are these loans typically going to be for?
    About 1/3 of SME’s will fail in their first year; another third of the survivors within 5 and about 2/3’s will be gone in ten.
    That winning 1/3? As written , they’ll somehow magically be with the Bank.

    • I’m not sure where you pulled those figures from – the failure rate is significantly higher than that.

    • If I wanted to magically have the winning third as a bank I would simply keep the loans to long established businesses in house and all the startups get pawned of to the government, Not really magical.

    • 10 Sme’s sitting on a wall
      In yr 1, 3.5 will fall, ie 6.5 remaining,
      In years 2 3 4 5 another 2 will fall, ie 4.5 remaining
      In years 6 7 8 9 10. usually another 3 will fall.
      So 10 to start, 8.5 fail, ie 1.5 remaining.
      This is why most go for the safety -security of govt jobs
      That is where productivity has fallen over.
      So what is gunna turn it around, when many have to repay a huge debt

  3. proofreadersMEMBER

    “The violations of the public purse ahead are going to make this one look like absolute child’s play in due course.”

    The $444m “gift” to the Great Barrier Reef Foundation kicked this off this nicely?

  4. Lordy Lordy Lordy.

    Everyday the absurdity of our monetary model is revealed more starkly.

    So in theory we privatise the power of public money creation because private banks are so skilled and capable of allocating new public money (in the form of Banker Pseudo Fiat aka private bank liabilities) to productive purposes.

    But in reality they prefer to just make fat profits from pumping up residential asset prices secured by first mortgages.

    So the public sector has to enter the market to provide the services that the private banks are too

    Lazy
    Incompetent
    Useless

    To provide at reasonable cost.

    The solution is clear.

    Start winding down the privatisation of the public money power immediately and set up a public home loan option offering very low cost first mortgages of modest size to first home buyers and owner occupiers. This service will not be provided by the RBA.

    https://theglass-pyramid.com/2018/11/11/auction-action-10-11-josh-waves-the-white-flag/

    Leave the banks to operate as simple financial intermediaries like any other investment firm if they are capable of doing that.

    Blatantly bizarre proposal like this one by Josh are only possible because the Australian and the Financial Review completely fail in their role and instead just pander to banking sector interests.

      • Yes,

        If the role of central bank liabilities is expandef from notes and coins to deposit accounts people can then easily distinguish between

        Saving – in central bank liabilities

        And

        Investing – entering into a contract to transfer some of your central bank liabilities to someone else for a return.

        And

        Saving in some other form – assets, gold, cyber currencies, private liabilities, foreign exchange etc.

  5. Will this only fund new lending (after 15 Nov) or will the fund buy already issued questionable loans?

    Is it certain that large banks will be ineligible to participate?

      • I didn’t read your post in detail. Because I didn’t see where your post addressed the question of the value of CC accounts that routinely attract interest. That is – situations where CC is used as finance, rather than just a transaction account.

      • Ouchy ouchy!

        So lay it out simply for me, because I’m the kid in the remedial comprehension class…. how much of the $60bn CC balances represents “finance”, and how much is just people transacting and payin balances off without any interest?

  6. The notion of allocating a greater share of funding to business is a good one. And requiring pretty much any small business loan to be backed by property chokes innovation and distorts investment.
    What we really need is s strong incentive for banks to back businesses & banks to re-skill in the art of business analysis. Instead the gatekeepers of finance simply look at an application and figure out if they can get their money back when it goes tits up. And put ‘business banker’ on their job title.

    • “gatekeepers of finance simply look at an application and figure out if they can get their money back when it goes tits up. And put ‘business banker’ on their job title.”

      Is certainly more efficient than doing the hard work, innit?

    • “simply look at an application and figure out if they can get their money back ” isn’t that the whole point of lending, getting the money back?

      • Not if you’re *the government* looking after your mates… *waves at that great barrier reef foundation*

  7. What is a small business in modern ‘Straya if it is not a soon-to-be unemployed bogan tradie with an ABN and a ute?

  8. What’s stopping Josh to create similar mechanism to buy toxic home loan tranches from the banks?

    • Spot on. That happened in Europe during the gfc.
      BBSW is close to 2% this week meaning margins are being squeezed. Lending rates will be going up soon.

    • It doesn’t need creating. It already exists – AOFM.

      It has been used for this before – buying mortgages around the top of the 2008 boom, when it looked like it
      Might be out of steam.

  9. wasabinatorMEMBER

    As long as the baling is out rather than in, that’s the best outcome of a number of bad options.

    • blindjusticeMEMBER

      Is it really? Does it not doom people to repeat the same mistakes if someone else/taxpayer always takes the punishment? Isn`t this why 10 years after the GFC the global financial system could very well blow up again – the fact that its even a possibility is crazy….

      It truly is privatise the profits and socialise the losses – how is it anything different? Frydenberg says they will be careful to pick the good loans – why bother doing it so?

      • wasabinatorMEMBER

        I agree with you 100%, zero lessons will be learnt but I would rather all taxpayers rather than just savers foot the bill. No doubt neither is a good option, but with a polly holding a gun to my head, I’ll still take the former.

  10. Our government just loves usury. They will do anything for it. Imagine what’s waiting for them on judgement day – they can have it.