6-19-08, 9:21 am
Original source: The Guardian (Australia)
As anxious banks sack staff and brace themselves for the next crash, the question being asked in the financial columns of the media is: who will be next? No doubt a very important question for the banks. But there are some other important questions that need asking: whose money is it that vanishes when companies crash, and directors walk away to set up another company? Who really takes the risks?
The booming resources sector has not given Australia immunity from the global credit squeeze. We have had our share of financial problems, with rising interest rates, soaring petrol prices and corporate collapses. And there is no sign of that elusive pot of gold at the end of the rainbow as families find it more and more difficult to pay their bills and keep up mortgage, rental and credit card repayments. Easy credit has dried up and its repercussions are being felt.
The banks are trying to keep the Allco Finance Group, Centro and MFS in operation rather than let the receivers move in. They have come to the conclusion that they might be better off financially if they can keep them going, rather than carry huge losses with fire-sales on a market which is already depressed and credit expensive and difficult to find.
These businesses that ran into strife are highly leveraged, relying on huge debts to make their investments. Their complex structures made it very difficult for potential investors to really understand what risks they were taking. In the case of the collapsed Opes Prime, there are also allegations of fraud.
Banks and insurance companies are feeling the credit squeeze and are nervously monitoring their loans to the corporate sector.
Speculation is rife that Babcock and Brown (B&B) might be next. B&B manages an estimated $72 billion in infrastructure and real estate assets in Australia and around the world. Twelve months ago it was looking good. Its shares reached a high of $34.78, with its market valuation (based on that share price) peaking at $11.6 billion. That valuation was a far cry from its low of $4.70 last week or the $5.25 per share it later rose to.
When the banks renewed a loan facility of $2.8 billion in March this year, they included a special provision. If B&B’s market value falls below $2.5 billion ($7.50 a share) the banks have the right to review the loan. If it remains at that level for four months then they may seek repayment of B&B’s loan within 90 days.
This is an unusual condition, as banks usually base loan conditions on income flow and the assets (real estate, equipment, resources, contracts, etc) a company owns, not share prices. It is more usual where margin lending is involved, where shares are used as security. If the share value drops too far, then the value of the security falls below the level of the loan, and the banks call in repayment of part of the loan. This occurred with Opes Prime and some of the other crashes.
Share prices continually fluctuate. They can take huge leaps and falls for reasons which may or may not have anything to do with the actual performance of the company. They can fall when corporate profits and business operations are sound and vice-versa.
The likes of Packer, Lowy, Liberman, Smorgon or the Pratt families can afford to lose a few million dollars if B&B crashes or the banks or hedge funds pull the plug on it. As for the banks, their special loan conditions have made sure they will get their money back.
There are other investors whose money is at risk. Most of them cannot afford to lose their money. B&B, Centro and many of the other investment companies rely heavily on savings from superannuation and other managed funds.
Outfits such as B&B and their subsidiaries rely heavily on superannuation funds to make their investments. The usual practice is for directors and or senior management to pocket millions while the going is good.
Regardless of how it looks on the surface, or who says they are taking the risks, it is workers whose jobs are lost, and workers and retirees whose savings are lost. They take the risks, and they wear the losses. Even if the company survives, the value of the original investment by a superannuation fund could be substantially reduced and expected income on that investment not forthcoming.
It is a far cry from the days when banks held savings and banks took the risks while depositors were guaranteed a certain interest rate on their money and full repayment of the amount they put in the bank. Risk is being transferred from the financial institutions and corporate sector onto the backs of workers. As for the profits — the promised investment income — it is a gamble whether it will be there when the time comes to withdraw your savings.
From The Guardian (Australia)
